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WARNing: PE Firm May Be Liable for Terminating Its Portfolio Company’s Employees

PSZJ Bulletin No. 14
June 2013

A federal district court in Delaware denied the motion of a private equity firm seeking to dismiss a lawsuit brought against the PE firm by a putative class of former employees of one of the PE firm’s portfolio companies for terminating the employees without sufficient warning under the federal Workers Adjustment and Retraining Notification Act (WARN Act) and a Nebraska state wage law. Woolery v. Matlin Patterson Global Advisors, 2013 WL 1750429 (D. Del. April 23, 2013).

Private equity firm Matlin Patterson Global Advisors had acquired a majority equity interest in Premium Protein Products (PPP) in 2006. By 2008, PPP’s prospects looked grim. In June 2009, the company furloughed employees “temporarily” on three days’ notice; in November 2009, the company filed bankruptcy and the furloughs became official terminations.

Matlin Patterson argued that it was not responsible for terminating PPP’s employees. The WARN Act imposes liability on a parent company if it is considered a “single employer” with its subsidiary; the U.S. Department of Labor has issued regulations outlining a five-factor test for determining when more than one company constitutes a “single employer.” The factor the district court focused on was whether the parent exercised de facto control (in other words, control in fact) over the subsidiary; it found that the plaintiffs made a strong showing that Matlin Patterson did exercise de facto control over PPP, as well as finding that some of the other factors in the DOL’s test applied. The district court recognized that a parent company often will have some control over a subsidiary, but found that Matlin Patterson’s control of PPP went beyond ordinary control by virtue of ownership. 

In this case, the de facto control factor was not a trap for the unwary. The district court found that Matlin Patterson made PPP’s day-to-day decisions, dealt directly with PPP’s employees, made significant management changes, tasked an existing PPP manager with looking for new opportunities for Matlin Paterson rather than PPP, made the business decision to have PPP market a product it was not previously selling (against existing PPP management’s advice), and, “most importantly,” made the specific business decision to conduct PPP’s layoffs without giving the sixty days’ notice required by the WARN Act. As to this last finding, the district court considered the additional facts that when PPP’s head of human resources advised Matlin Patterson executives not to lay off employees without sixty days’ notice in violation of the WARN Act, a Matlin Patterson executive responded that PPP would not provide such notice because attempts to make PPP’s business profitable were unsuccessful and a bankruptcy filing would make such notice unnecessary. The district court found these were the precise decisions with which the WARN Act is concerned and cited the executive’s scoffing at the WARN Act’s requirements as a reason for finding de facto control. The district court, however, found Matlin Patterson not liable under Nebraska’s wage law because the law does not impose liability on a parent company.

This district court’s holding did not decide the ultimate merits of the case; it was a decision on a motion for summary judgment, which requires the court accept the plaintiffs’ facts as true for that purpose. The district court recognized that the plaintiffs’ complaint “paints the Defendants as Snidely Whiplash,” and stated that “whether the proofs will bear that out is, of course, a separate issue for later.”

This case is nevertheless a lesson of what a PE firm, or any parent company, should avoid doing when one of its portfolio companies will be laying off employees. There is no tripwire established by this case; de facto control requires more than the typical control a parent company exercises over a subsidiary and Matlin Patterson went way beyond what is typical. The case, however, is a WARNing.

Please contact Rob Saunders or David Barton at Pachulski Stang Ziehl & Jones LLP with any questions regarding this case.