When isn’t an asset purchase an asset purchase?  When the purchase of the assets are intended to run the business as a going concern.  So said the Eighth Circuit Court of Appeals on July 5, 2016, in Day v. Celadon Trucking Services, Inc.  So, what’s the big deal?  Well, on a 10,000 foot level, in a typical asset purchase (versus stock purchase), employees may or may not be hired by the new entity. In this case, the buyer, Celadon Trucking Services, Inc., decided to hire 201 of the 658 employees of the seller, Continental Express, Inc.  The rest remained employed by the seller to terminate. Unfortunately, the seller did not provide the remaining employees with the required 60 day Worker Adjustment and Retraining Notification (“WARN”) Act notice for a mass layoff. Thus, the terminated employees sued the buyer (deep pockets since the seller was broke), seeking damages under the WARN Act.

Here is where things take a detour, and to those of us on the employer side, defies logic at first blush.  The asset purchase agreement (APA) specifically provides that the buyer will not assume any liabilities for the seller’s obligations under the WARN Act. It also specified that the seller was to provide the 60 day notice to the affected employees. Seem’s crystal clear right? The seller even accepted this indemnification and took over the defense (until they had no money to pay the attorneys and then it appears that the buyer’s attorneys took over). However, the related non-competition agreement with the seller’s president and vice president stated that the buyer “intends to merge the operation of the business…into Celadon…”. In addition, the APA obligated seller to assist buyer with the transition of the business and to ensure and maintain the viability of its business and its customers.

Under the WARN Act, an employer, under certain conditions (such as a mass layoff, here), must give employees 60 days notice of the mass layoff so they can plan to seek other employment.  There was no dispute that the WARN Act applied. However, the WARN act also states that, in the case of a sale of part or all of a business, the seller is responsible for the notice up to the effective date of the sale, and after that, the purchaser is responsible. Of course, there is no definition of the “sale of part or all of an employer’s business”.  However, the courts have interpreted this to mean that in an asset purchase, the seller is responsible because they are terminating all the employees. But, when its a “sale of a business as a going concern”, the buyer is the employer for WARN Act purposes if the seller still employs its employees on the day of the sale.

In this case, although the agreement was styled as an asset purchase, the Court held that those terms don’t alter the actual nature of the sale for purposes of determining WARN Act liabilities.  Thus, the Court looked at the actual transaction and determined it was more than just assets, but the buyer’s intention to continue seller’s business indefinitely (as noted in the non-compete agreement).  Ultimately, in a thorough decision (that would bore most of you), the Court held that because the buyer essentially had every intention of running the business as it was forever (but as its own business), that it purchased the entity as a going concern, and thus had the WARN Act notice liability. Thus, after six  years of litigation, the Court held that the buyer is the statutory employer that caused the plaintiffs’ employment loss and is responsible for the WARN Act notice and all the liability that goes along with it.

As I read it, it seems that it is going to be very hard to pass the liability to the seller in any instance where the majority of assets are purchased.  Accordingly, employers purchasing the assets of a business that desire to pass along this liability (or exclude it) should take measures to ensure seller’s compliance with the WARN Act prior to closing.