On April 5, the Court of Appeals for the Eighth Circuit wiped out a jury verdict in a products liability action and $13 million punitive damages award against a manufacturer and its wholly owned subsidiary on the basis that the parent company manufacturer could assert a successor liability defense. The 8th Circuit ruling, which rightfully reinforced the bedrock principle that parent companies are not responsible for the liabilities of their subsidiaries, provides some valuable lessons for corporations that acquire other companies with potential (or known) liabilities. Of vital importance to this ruling was the manner in which the parent company had publicly described its acquisition in other litigation.
Kirk v. Schaeffler Group USA, Inc., No. 16-3417, 2018 WL 1630005 (8th Cir. Apr. 5, 2018) involves FAG Bearings Corporation, a designer and manufacturer of precision ball and roller bearings that has a production facility in Joplin, Missouri. From 1973 to 1982, FAG Bearings released thousands of gallons of trichloroethylene (TCE), a hazardous substance, at its facility. The EPA ultimately discovered the TCE dumping and litigation determined that FAG Bearings was solely responsible for the TCE contamination in nearby communities. In 2005, Schaeffler Group USA (“Schaeffler”), a large corporation that engineers, produces, sells, and markets rolling and plain bearings, among other products, acquired FAG Bearings and its facility. The plaintiff in Kirk was born in 1987 in one of the communities contaminated by TCE and was subsequently diagnosed with autoimmune hepatitis, which she claims resulted from defendants’ negligent release of TCE.
Now, of course, in most jurisdictions and under most circumstances, the successor liability defense bars claims that arise as a result of a predecessor’s defective product, so it would seem that Schaeffler was in the clear. Schaeffler acquired FAG Bearings Corporation and converted the company to FAG Bearings, LLC as a wholly owned subsidiary. Despite this, the district court denied summary judgment and the ensuing jury trial resulted in punitive damages imposed jointly against Schaeffler and FAG Bearings, LLC because plaintiff argued that FAG Bearings Corporation merged with Schaeffler.
The appeal focused on whether Schaeffler was judicially estopped from arguing the successor liability defense shielded it from liability for FAG Bearings’ pre-acquisition torts. Plaintiff invoked judicial estoppel because, according to plaintiff, Schaeffler took the position in other litigation that its purchase of FAG Bearings amounted to a merger of the two companies and that it is responsible for the actions of FAG Bearings.
In 2006, Schaeffler had filed a complaint against the United States before the United States Court of International Trade (CIT) and filed a 2008 memorandum in unrelated litigation in the District of Connecticut. In the complaint to the CIT, Schaeffler alleged that FAG Bearings Corporation “by change of name and/or merger” was “absorbed into Schaeffler.” Kirk, 2018 WL 1630005, *2. To determine whether judicial estoppel applies the court must determine whether the party’s position in another proceeding is “clearly inconsistent” with its position in the instant proceeding, which the district court ruled was the case. In the CIT litigation, Schaeffler claimed FAG Bearings could claim a share of anti-dumping duties collected pursuant to a Department of Commerce anti-dumping order, and that it was entitled to FAG Bearings’ share of disbursements for the years 2004 and 2005. The CIT denied relief but accepted Schaeffler’s representation that it would have been entitled to FAG Bearings’ share had the claim prevailed. The 8th Circuit disagreed with plaintiff and the district court on this matter, stating that “[a]s a general matter of corporate law, we find no clear inconsistency inherent in an acquiring corporation claiming that it has succeeded to the acquired company’s claim to a government benefit and also claiming that it did not assume the acquired company’s liability.” Kirk, 2018 WL 1630005, *5. It ruled that in the CIT litigation, the successorship issue focused on the production assets and rights that Schaeffler acquired, rather than the liabilities it disclaimed.
The 8th Circuit also ruled that Schaeffler did not take a clearly inconsistent position in the District of Connecticut litigation. In that case, Schaeffler correctly stated that FAG Bearings Corporation does not exist as a separate legal entity apart from Schaeffler – and indeed, FAG Bearings, LLC is now the wholly owned subsidiary, not FAG Bearings Corporation.
After analyzing these statements made by Schaeffler, the 8th Circuit determined that Schaeffler did not take any position to mislead the court or wrongfully benefit itself. Any disadvantage to the plaintiff in Kirk was a result of Missouri law limiting a parent corporation’s liability for the torts of its subsidiary, not from Schaeffler playing “fast and loose” with the courts. Kirk, 2018 WL 1630005, *6.
Accordingly, the 8th Circuit held it was proper to direct Schaeffler’s dismissal as a matter of law. Plaintiff submitted no evidence showing that she may pierce the corporate veil of Schaeffler or that there was a de facto merger (exceptions to the successor liability defense).
Schaeffler’s victory also resulted in a new trial being awarded to FAG Bearings, LLC. The jury awarded the damages jointly and did not distinguish which party owed which portion. Further, plaintiff had invited the jury to base the award in part on Schaeffler’s alleged wrongful conduct and plaintiff’s counsel asked the jury to consider the defendants’ joint ability to pay damages.
The acquisition of other companies with complementary manufacturing practices or products is commonplace today; however, the underlying court decision in Kirk and the subsequent 8th Circuit reversal illustrates a major hazard that must be avoided. In addition to using savvy transactional lawyers to properly structure the acquisition to prevent the assumption of liability, the acquiring company must ensure its deals are properly represented in any public matter. It is important that all in-house counsel be knowledgeable about the key terms of any acquisition. Additionally, outside counsel should be careful and accurate in any instance of describing the nature of the relationships among a family of entities, including how the companies were acquired. Although it worked out for Schaeffler in the end, using the terms “merger” and “absorbed” in other litigation provided sufficient ammunition for plaintiff to drag it to trial. Significant defense costs may be avoided if counsel uses consistent and precise language in public filings.