Beware Long Tail of Successor Liability: Tips From Recent Victory
Toxic exposure claims involving asbestos, benzene, silica and many other substances present so-called “long tail” risks. Consider this: A recently diagnosed illness is alleged to have been caused by exposures that occurred years or even decades ago. As a result of corporate transactions during that long period of time, a company may find itself named as a defendant in such a case on the grounds of successor liability for products made or sold by an earlier company that no longer exists. We’ve outlined several observations following a recent summary judgment victory for such a defendant.
The deal structure can be crucial. In most jurisdictions, liabilities will pass to the acquiring company as a result of a stock purchase or merger. In contrast, the general rule is that a company that purchases only assets will not be held liable as successor to the seller entity. Therefore, the first step when faced with alleged successor liability is to locate and analyze the acquisition agreement, which can be difficult if the deal happened long ago.
Most states recognize several theories for imposing successor liability on an asset purchaser. Perhaps the most frequently litigated theories are the “de facto merger” and the “mere continuation” rules. These typically involve inquiries into matters such as continuity of ownership between the seller and purchaser; cessation of ordinary business and dissolution of the seller; the purchaser’s assumption of routine contracts and other liabilities necessary to ongoing operation of the business; and continuity of management, personnel, physical location, and general business operation. Consequently, defending against a successor liability claim can entail intensive investigation and discovery.
California is one of a very few states to adopt product line successor liability, potentially imposing liability on an acquiring company that continues to make or sell the same line of products that were allegedly defective. As a defendant, it is important to determine which state’s laws will govern the successor liability issue and that state’s jurisprudence on particular issues, such as the product line theory.
A single case can have long-term and potentially nationwide implications. Even if one court’s decision is not legally binding on another, the imposition of successor liability in one case can spawn many more cases from plaintiffs making the same allegations of successor liability. On the other hand, defeating the allegations in one case can help fend off subsequent cases. Thus, mounting a strong defense the first time can be important.
This was played out in a recent client victory which arose out of the purchase of assets of a company that had eliminated asbestos from its product lines several years earlier. At the time of the transaction, the seller was a defendant in several asbestos disease cases, and it expressly retained those liabilities in the agreement. The asset purchaser continued operating essentially the same business from the same location, using the same trademarks, and hiring virtually all the employees, including the president of the company.
However, there was no common ownership between the seller and the purchaser. The seller continued to defend asbestos cases for about two years before it ran out of money and dissolved. Plaintiffs then turned their attention to the purchaser. In the first major test several years ago, the purchaser won summary judgment in California, where the court declined even to impose the product line version of successor liability. As new cases were filed, that California result generally persuaded the plaintiff’s lawyers to dismiss their claims voluntarily. The notable exception was a new case filed in New York by the same firm that had lost the California case. Once again, the client prevailed on a vigorously contested motion for summary judgment that relied heavily on the win in California, as well as the lack of common ownership.