In Hampton v. Navigation Capital Partners, Inc., C.A. No. 13-747-LPS, the United States District Court for the District of Delaware recently denied a motion to dismiss a putative class action lawsuit against a private equity firm for allegations of violations of the Worker Adjustment and Retraining Notification Act ("WARN Act").
Navigation Capital Partners, Inc. ("NCP"), is a private equity firm that sought to engage in the electricity grid services market by acquiring a series of companies in that sector. NCP was the 68% owner of Metadigm Holdings, Inc., which itself wholly-owned Metadigm Services, Inc., which in turn wholly-owned Metadigm Engineering, Inc. (collectively “Metadigm”). On March 19, 2013, Metadigm terminated approximately 150 workers from employment at two facilities located in Georgia. Three days later, on March 21, 2013, Metadigm filed for chapter 7 bankruptcy in the United States Bankruptcy Court for the Northern District of Georgia. Daniel Hampton, one of the terminated employees, filed a suit against NCP in the District of Delaware contending that NCP failed to give him and the other 150 employees the 60 days’ notice required under the WARN Act.
NCP moved to dismiss the lawsuit on multiple grounds, including that Mr. Hampton failed to allege facts to support an inference that NCP can be held liable for under the WARN Act as a “single employer” with Metadigm pursuant to the applicable regulations issued by Department of Labor (“DOL”). The DOL’s five-part balancing test provides that one should consider the following factors when determining whether a parent company and its subsidiaries are separate employers or single employers for the purposes of the WARN Act: (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. After determining that the first two factors and the last two factors balanced in each party’s respective favor, the District Court concluded that the third factor – de facto exercise of control – tilted the overall balance in favor of Mr. Hampton such that the lawsuit should be able to proceed.
In making its determination, the District Court noted that NCP constructed Metadigm as a brand and used the Metadigm companies as alter egos in order to try to dominate a particular sector of the energy market. Some of NCP’s relevant conduct included hiring an executive to identify acquisition targets, purchasing them and putting them into a single corporate chain; creating a holding company purely to manage those companies; and populating at least one of the Metadigm companies with enough NCP executives to comprise a majority of its board and installing the those executives in the same important positions in the other companies – overseeing the matters of strategy, operations and finances of Metadigm. The District Court determined that this alleged pattern of branding, acquisition and control was sufficient to render plausible the allegation that the relationship between NCP and Metadigm was not at arm’s length; thus permitting the lawsuit to go forward.
While this lawsuit still needs to be decided on the merits, the District Court’s decision to allow the case to proceed on a single employer theory against NCP is another reminder for firms to utilize best practices related to corporate separateness and corporate governance of portfolio companies. While careful planning can mitigate some of these issues, in those instances where a portfolio company becomes insolvent, those claiming harm typically look for the deepest available pockets. The Hampton v. Navigation Capital Partners case suggests that courts are willing to disregard the separate corporate form of a parent and its portfolio companies in assessing liability for employment-related claims.