February 6, 2023

Volume XIII, Number 37

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February 03, 2023

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Buyer Beware: Tenth Circuit Issues Decision Emphasizing Critical Need for Employment Diligence

recent decision from the Tenth Circuit Court of Appeals highlights some of the pitfalls of entering into commercial transactions without conducting thorough employment diligence – even in the asset purchase context.

In 2009, buyer (Roark-Whitten) purchased a hotel. Following the transaction, several employees of the hotel alleged management had discriminated against them. The Equal Employment Opportunity Commission (“EEOC”) filed a complaint against Roark-Whitten, alleging Title VII violations. During the pendency of the EEOC’s complaint, Roark-Whitten sold the hotel to another entity, Jai Hanuman, LLC, which subsequently sold the hotel to another entity, SGI, LLC. For each transaction, the EEOC amended its complaint to name the new owner. Jai Hanuman and SGI moved to dismiss the complaint, arguing they were not liable for any discriminatory conduct as successors. The district court agreed and dismissed the complaint as against them.

On appeal, the Tenth Circuit Court of Appeals reversed, holding SGI could be liable as a successor for liability stemming from the discrimination claims. The EEOC argued the Jai Hanuman-SGI purchase agreement contained language providing that SGI had thirty (30) days to investigate the hotel’s liabilities. The Tenth Circuit agreed, reasoning because the purchase agreement afforded a due diligence period, SGI should have conducted “reasonable and adequate” investigation during its diligence. The Tenth Circuit reasoned that such diligence would have uncovered the lawsuit and its accompanying liabilities. Thus, SGI had constructive notice of the lawsuit and is a successor concerning these liabilities.

The Tenth Circuit’s ruling is a cautionary tale to buyers. Employment-law successor liability is a risk in asset transactions even when purchase agreements contain protective language. While “retained liabilities” and indemnification language may allow a buyer to recover successor liability damages from a seller, such language does not necessarily insulate a buyer from liability prescribed by law. There are several laws that impose successor liability regardless of the purchase agreement language or whatever ancillary agreements may exist. And, any indemnities are sometimes of no use in the event the seller no longer operates and/or there is no money in escrow to cover such damages. The Tenth Circuit’s decision emphasizes the need for buyers, regardless of whether the transaction is an asset or a stock deal, to thoroughly diligence potential employment liabilities.

Copyright © 2023, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 244
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About this Author

Kevin M. Cloutier, Labor and Employment Attorney, Sheppard Mullin Law Firm
Partner

Kevin Cloutier is a partner in the Labor and Employment Practice Group and co-chair of the firm's Non-Compete and Trade Secrets Team in the firm's Chicago office. He is also a member of the Firm's Diversity and Inclusion Committee.

Areas of Practice

Mr. Cloutier’s practice focuses on all areas of labor and employment law, with an emphasis on employment-related litigation and proactive counseling of management-side clients. He is an experienced trial lawyer with first-chair trial experience before state and federal trial...

312-499-6304
Stephen R. LaSala Partner Sheppard, Mullin, Richter & Hampton LLP
Partner

Stephen LaSala is a partner in the firm's Corporate Practice Group and is the Chair of the firm’s Compensation Committee. He is also the former Managing Partner of the San Diego (Del Mar) office and the former Practice Group Leader of the Corporate Practice Group. 

Areas of Practice

Stephen specializes in mergers and acquisitions and corporate law. He counsels buyers and sellers in M&A transactions on a daily basis. His practice also includes venture capital and private equity financings, joint...

858-720-8987
Shawn D. Fabian Labor and Employment Attorney Sheppard Mullin Chicago, IL
Partner

Shawn Fabian is a partner in the Labor and Employment Practice Group in the firm's Chicago and New York offices.

Areas of Practice

Litigation

Shawn represents management-side clients before federal and state courts across the country and before administrative agencies, including the DOL, EEOC, NLRB and various state and municipal human rights commissions and labor agencies. He also regularly represents clients in arbitrations and other avenues of alternative dispute resolution.

Shawn analyzes the enforceability of restrictive...

312-499-6308
Associate

Umar Sattar is an associate in the Labor and Employment Practice Group in the firm's Chicago office. 

Areas of Practice

Umar has experience litigating before federal and state courts across the country.  He regularly defends against single-plaintiff and class action wage and hour, discrimination, harassment, retaliation and products liability claims.  He also regularly prosecutes and defends against antitrust, breach of restrictive covenant and misappropriation of trade secret claims.

Umar conducts internal investigations and audits on behalf of...

1.312.499.6361
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