This is the second of two posts regarding the “troubling” state of multi-employer pension plans. My October post provided an overview of the recently published Teamsters’ Central States Pension “Rescue Plan” and discussed some of its implications. This post will review the recent decision of the Ninth Circuit Court of Appeals in Resilient Floor Covering Pension Trust Fund Board v. Michael’s Floor Covering imposing withdrawal liability on a company which had never previously contributed or been obligated to contribute to the pension fund.
When an employer stops making contributions to a multi-employer pension plan, generally ERISA requires the employer to pay its “fair share” of any withdrawal liability. Often, when the withdrawal liability “bill” exceeds a company’s ability to pay, those costs are absorbed by the plan and ultimately passed on to the remaining employers.
The Resilient Floor Covering case represents a new twist. In 2009, Studer’s Floor Covering announced it was going out of business at the end of the year. As business wound down, one of its sales employees formed his own business (Michael’s Floor Covering), negotiated with Studer’s landlord to lease the same building when Studer’s closed, and hired five former Studer’s employees. Studer’s sold a majority of its equipment and inventory at a public auction, although Michael’s purchased some equipment and inventory, and Studer’s allowed its telephone number to be transferred to Michael’s.
When Studer’s failed to pay $2.2 million in withdrawal liability, the pension fund sued Michael’s under the theory that Michael’s was the legal “successor.” Applying traditional labor law principles, the district court ruled that Michael’s was not a successor and had no obligation to pay Studer’s liability. The Ninth Circuit reversed.
In a surprising decision, the Ninth Circuit held that withdrawal liability under ERISA could be imposed on an unrelated company. The Court held that in determining whether to impose such liability, the “most important” criteria to examine was whether there was a “substantial continuity” between the two entities based on whether the new company served the “same body of customers.” In short, the Court held that because Michael’s in fact ended up earning a substantial portion of its business from Studer’s former customers, this factor alone was sufficient to find that Michael’s was a “successor” for purposes of withdrawal liability.
The impact of the Ninth Circuit’s decision remains to be seen. Arguably, by focusing on whether there is a “substantial continuity” between two manufacturers, a manufacturer seeking to avoid the assumption of another’s withdrawal liability can take steps to make sure there is no such continuity. But the Court’s focus on whether the new manufacturer ended up serving the same “body of customers” injects substantial uncertainty into this analysis. In essence, a manufacturer may not be able to plan what its customer base will end up being. The manufacturer planning to open an entire new market may fall short and the result could be nothing more than the “same old” customer base of the prior company. That fact alone may serve to impose liability.
Furthermore, there is no telling whether pension funds will seek to impose the new standard retroactively on manufacturers. One could see a scenario in which funds reassess collection efforts in light of Resilient Floor — seeking to collect what might not have been previously collectible.