WARN Act Liability: Holding the Parent Liable for a Subsidiary's Failure to Give Notice

March 4, 2010

At a time when many companies are owned or heavily leveraged by private equity firms, a decision by the District Court for the District of Connecticut in Austen v. Catterton Partners V, LP serves as a warning that such entities may be held liable for WARN Act violations by companies in which they have invested. The Federal WARN Act generally requires at least 60 days’ notice prior to a mass layoff or plant closing. In New York, the state WARN Act requires 90 days’ notice of such events.

Catterton Partners V, LP, a Greenwich, Connecticut-based private equity firm, with over $2.0 billion in holdings such as Outback Steakhouse, Breyers Yogurt and Restoration Hardware, also owned Archway & Mother’s Cookies, Inc., (“Archway”) whose companies produced various brands of cookies, including cookies sold under private label programs for national retailers such as Target and Kroger.

Archway filed for bankruptcy protection in October 2008, shortly after it closed its factories and laid off hundreds of workers without notice. In a class action WARN Act complaint filed in August 2009, plaintiffs, who are former Archway employees, alleged that Catterton was an “employer” for WARN Act purposes and should be held liable for the failure to provide workers with notice prior to shutdown of the factories and termination of their employment.

On February 17, 2010, the United States District Court for the District of Connecticut denied Catterton’s motion to dismiss, holding that the private equity firm and the bankrupt cookie company may be considered a “single employer” for WARN Act purposes. In so concluding, the Court adopted a five-part test contained in the federal regulations implementing the WARN Act, which assesses whether two separate entities should be combined for purposes of WARN Act liability. 20 C.F.R. § 639.3(a)(2). The test assesses whether: (1) the entities are subject to common ownership; (2) the directors and/or officers of the entities are the same; (3) the parent exercises de facto control over the subsidiary; (4) there is a unity of personnel policies emanating from a common source; and (5) there is a dependency of operations among the entities.

Notably, the Court concluded that the de facto control prong is perhaps the most important aspect of the test, because it assesses whether the parent was the decisionmaker who is responsible for the actions giving rise to the litigation. Because the complaint alleged that Catterton made the decision to shut down the factories, terminate the employees and file for bankruptcy, there was no dispute as to the extent of Catterton’s control over Archway. Based on application of the test to the allegations of the complaint, the Court’s ruling means that Catterton may be held liable for WARN Act damages for a class of perhaps 600-700 employees. Given the widespread nature of private equity investment in American companies and the ongoing economic downturn, Austen v. Catterton Partners V, LP may be a harbinger of other efforts to reach into the “deep pockets” private equity firms.

Overview