This seems to be the month for class action cases presenting unusual issues in combination. Last week we wrote about a class action disparate impact claim of disability discrimination against the obese in which the court ultimately awarded sanctions against the plaintiff.  (Rare on all three counts).  This week we have a WARN Act class action in which the court both certified the class and held that, at least based on the allegations set forth in the complaint, a private equity company might be held liable for the employment decisions made by a company it owned.  (One simply unusual, the second extremely so).

This will be one of our longer blogs because both sets of issues addressed by the court require a little explanation, and both are worthy of comment.

In Young v. Fortis Plastics LLC, Case No. 3:12-cv-00364 (N.D. Ind. Sept. 24, 2013), the court addressed WARN Act claims arising out of the closing of a Fortis Plastics facility in Fort Smith, Arkansas in October, 2011.  The plaintiff contended that he and approximately 90 other employees were not provided with the 60-day notice the WARN Act required.    He attempted to assert claims on behalf of the affected employees, and also named as a defendant a private equity company that, the complaint alleged, owned Fortis and made employment decisions on its behalf.  The employee sought class certification, and the private equity company sought to dismiss the claims against it. The court ultimately denied the motion to dismiss and certified a class of those who had worked at the facilities in the 60 days before it closed.

Let’s start with the class action issue. If you want to read about the issue of the liability of the private equity firm, just skip over the next few paragraphs.

The Class Certification Issues

WARN Act claims are relatively uncommon due in large part to the very fortunate reason that plant closings affecting over 50 employees, while newsworthy, occur far less frequently than the types of decisions that might be challenged in other class actions (such as pay practices, promotions, etc., that occur every day).  In addition, employers are generally aware of the WARN Act’s requirements, and apart from having the foresight to give 60 days’ notice, the drafting of the notices themselves typically is not a time-intensive process.

WARN Act cases, when they are brought, may be good subjects for class treatment.  They almost by definition meet the numerosity requirement because the Act isn’t even triggered unless 50 employees have been affected.  Further, employers typically give or do not give notice; there are few cases brought in which some affected employees contend that they were not given notice while others were.  And the issues, often, are the same for all of the employees:  whether the employer gave notice, whether the notice was timely, whether an exception applied, etc.

In this case, however, both sides arguably missed the mark in one or more respects.

For its part, the employer raised the right arguments in a sense by challenging commonality and typicality under Rule 23(a) and predominance and superiority under Rule 23(b)(3).  The problem, though, was that while it identified the most likely candidates for challenge, it could not identify why there was no commonality, typicality, superiority, or predominance, but simply asked for discovery to find a basis to challenge them.  There might very well have been a basis – for example different separation dates for employees, unexpected business changes that affected one group of employees versus another, coverage issues, discharge of the lead plaintiff for cause, etc. – but the employer could not identify them.   Further, most would likely be in the employer’s knowledge in any event. Given all this, it is not surprising that the district court rejected the employer’s arguments.

The employee, too, made mistakes, but less serious ones.  First, part of his numerosity argument rested upon a hearsay newspaper article that even the district court acknowledged was not evidence.  The district court, in a questionable holding, relied upon the article on the basis that the plaintiff’s showing need not be of evidentiary quality at the class certification stage.  A better practice might have been to use competent evidence to avoid such a challenge, particularly since the issue was an objective fact (the number of people affected by the closing) one that a different court might well have accepted.

Second, the plaintiff asserted class claims under Rule 23(b)(2), which is easier in some respects than those under Rule 23(b)(3), but such claims must be ones for equitable relief.  The Supreme Court emphasized that requirement only two years ago in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2557-60 (2011), and the relief under WARN is overwhelmingly monetary, not equitable.  While the district court rejected the application of Rule 23(b)(2) on this basis, the plaintiff’s claims still survived under Rule 23(b)(3) because, as explained above, it appeared that superiority and predominance had been adequately claimed.

Third, the plaintiff offered a convoluted class definition that included date, statutory requirements, and foreseeability limits.  The court rejected this definition in favor of one that encompassed those who had worked at the facility within 60 days prior to its closing.  Incidentally, this, too, might prove problematic in the future if, for example, that group included those who accepted transfers (and therefore never lost employment), who were independent contractors, or who otherwise would have fallen outside of the WARN Act’s ambit, but it does not appear that either side raised these issues if they existed at all.

The court therefore certified a class under Rule 23(b)(3) of those who had worked at the plant during the 60 days before it closed.

Liability of the Private Equity Firm

So, let’s turn to the private equity issue.

There was no dispute that Fortis Plastic was the plaintiff’s employer, but he also sued the private equity firm that, he claimed, was its owner.  The reason for doing so is obvious:  Fortis had closed not only the plant at issue but several others, suggesting financial trouble.  Should Fortis not be able to satisfy a judgment, a solvent private equity firm that was also on the hook might. 

The employment and labor laws are far less respectful of corporate boundaries than many other areas of the law.  Under the WARN Act, a claimant need not establish the high standard for piercing the corporate veil under traditional law, but can claim that the owner of a company is also an employer based upon having sufficient inter-relatedness and control.  More specifically, under the WARN Act’s regulations:

independent contractors and subsidiaries which are wholly or partially owned by a parent company are treated as separate employers or as a part of the parent or contracting company depending upon the degree of their independence from the parent.

 29 C.F.R. § 639.3(2).

 The regulations also describe how to determine whether two entities are sufficiently separate:

Some of the factors to be considered in making this determination are (i) common ownership, (ii) common directors and/or officers, (iii) de facto exercise of control, (iv) unity of personnel policies emanating from a common source, and (v) the dependency of operations.


These are simply a list of factors and a plaintiff need not satisfy all of them.  For those concerned about their liability under Title VII, the FLSA, the NLRA and a host of other employment statutes, there are similar rules that may come as a surprise with those accustomed to the rules of corporate law in other arenas, but we’ll focus on the WARN Act for now.  The district court not only accepted the regulation, but also commented that one purpose for it might be to require those “partially responsible” for the closing  “to assume certain of those obligations.”

The private equity firm moved to dismiss the complaint on the grounds that it was not the employer and could not be held as the employer even under the WARN Act’s regulations.  The court was troubled with some of the allegations made in the complaint but found that, it did allege at various points that the private equity firm: (a) owned Fortis; (b) maintained “a continuous presence” at the plant and “ordered” its closing; (c) “controlled” labor relations at the plant; (d) was paid a $500,000 annual fee to manage Fortis; (e) had employees that supervised the management of the plant.  While the court was unimpressed by the plaintiff’s showing on other issues, such as common officers and directors, uniform employment policies, and interdependency of operations, the exercise of control was by far the most important factor and was sufficiently alleged to avoid dismissal.

The decision in Young as to the role of the private equity firm is rightly of concern.  It not only relates to private equity firm, but will likely be argued to apply to management turnaround firms and potentially others who assist struggling operations return to profitability.

But it also has its limits.  First, the court itself recognized that the case was “a close call” and that it ruled against dismissal only because of the lenient standard the plaintiff had to meet at that stage of the case.  Second, it all but invited the defendant to move for summary judgment at the close of discovery if the plaintiff could not prove the allegations of control it had made in the complaint.  It is difficult to predict whether this will ever happen as Fortis, the undisputed employer, is still a defendant and the opinion does not reflect what defenses might be raised. Still, the Young case makes it clear that.

One issue the court never explains is its reference that those “partially responsible” for a closing might be required to “assume certain of [the WARN Act’s] obligations”.  Would liability be pro-rated?  Would the private equity company only be required to provide part of a notice?  The opinion never says, but the plaintiff, if the issue arises, will certainly argue that if the private equity company is an “employer” it is liable for the full amount of WARN Act relief.

The Bottom Line:  Those owning or working with failing companies or facilities should not only observe corporate formalities, but keep their lines of authority sufficiently separate to avoid allegations of joint control.