Successor Liability for Discrimination Claims

Since most businesses are organized in a corporate form, the typical defendant in an employment discrimination lawsuit is a corporation.  If a corporate defendant  is dissolved during the course of the lawsuit and has few or no assets, a plaintiff who is ultimately successful in court may have no way of collecting on his or her judgment. But if a corporation has a successor, the successor can often be held liable for discrimination by its predecessor. In the case of Equal Employment Opportunity Commission v. Northern Star Hospitality, Inc., 777 F. 3d. 898 (7th. Cir. 2015), recently decided by the Seventh Circuit Court of Appeals, there were three corporations: one that operated a restaurant called Sparx, a property company that owned the restaurant building, and a third corporation that operated a Denny’s Restaurant.

All three corporations were owned by the same individual.  Sparx leased the restaurant space, and after Sparx went out of business, the Denny’s opened in the same space and hired Sparx’s former management team and more than half of its employees.  The Court concluded that Sparx and then Denny’s carried on the same restaurant business at the same location, albeit with a different name and theme. While still in business, Sparx was sued by the Equal Employment Opportunity Commission on behalf of a black employee who alleged that he was fired in retaliation for complaining about harassment on the basis of his race.  By the time the EEOC and the employee prevailed in a jury trial, Sparx had dissolved, but the trial court held, and the Court of Appeals affirmed, that the corporation that owned and operated the Denny’s restaurant was Sparx’s successor, and would be liable for the judgment against its predecessor.

The Court stated that the doctrine of successor liability was meant to address this very scenario, so that victims of discrimination can obtain relief when there is continuity between the operations and workforces of the predecessor and successor, in spite of a change in business organization. The Court reviewed the following factors: whether the successor had notice of the pending lawsuit, whether the predecessor could have provided relief to the ex-employee before its dissolution, whether the predecessor could have provided relief after the dissolution, whether the successor could provide the relief, and whether there was continuity in the operations and workforce between the predecessor and the successor.  The Court resolved all factors in favor of the EEOC: because of common ownership, the successor had notice; Sparx could have resolved the lawsuit before the dissolution but not after, since by then it had no assets; the new restaurant could provide relief; and the requisite continuity was present. The obvious lesson is that  employers cannot assume that a corporate change, even with some changes in the way that business is done, will protect a successor corporation from liability for discriminatory acts by its predecessor.