Court Articulates Test for Successor Liability Under the FCA

Posted by Ellyce Cooper and Collin Wedel

On August 4, 2014, a federal jury in the Eastern District of Virginia levied a verdict of $100.6 million in damages and $24 million in civil penalties against Belgian shipping company Gosselin World Wide Moving NV (“Gosselin”), based on a finding that Gosselin’s repeated submissions of false invoices for moving services amounted to thousands of individual violations of the federal False Claims Act (a case we previously wrote about here and here). However, the government is seeking to hold a third-party, Government Logistics NV (“GovLog”), liable for the verdict against Gosselin under the theory of successor liability.

Whether and how successor liability can be assessed is a critical issue underlying many False Claims Act cases, especially given the magnitude of the potential exposure FCA cases routinely involve. Courts around the country have split on which rule to apply in the False Claims Act context. As Judge Trenga explained, under the common law (or “traditional”) rule of successor liability, a corporation that acquires the assets of another corporation does not also assume its liabilities unless either: (1) the successor agrees to assume liability; (2) the transaction is a de facto merger; (3) the successor is a “mere continuation” of the predecessor; or (4) the transaction is fraudulent. More recently, some courts in assessing successor liability under the FCA have turned to what is known as the “substantial continuity” test, which had previously been confined mostly to the labor context. Under that approach, successor liability is established based on a flexible, easier-to-satisfy, multi-factor analysis that considers: (a) whether the business of both companies is essentially the same; (b) whether the employees of the new business are doing the same jobs; and (c) whether the new entity has the same production processes and customers.

U.S. District Judge Anthony Trenga ruled on September 12, 2014, that relator may recover from GovLog only if plaintiffs can establish that GovLog is Gosselin’s successor in interest using the more-demanding common law rule instead of the more-lenient “substantial continuity” rule. Although noting that many courts have used the substantial continuity test in contexts beyond labor cases, and even in FCA cases, Judge Trenga reasoned that the Supreme Court’s decision in United States v. Bestfoods, 524 U.S. 51 (1998), states that a federal statute may abrogate common-law corporate-liability precepts only if the statute does so in express terms. Because the False Claims Act contains no provisions that would modify the common law of successor liability, the court held, there is no justification for imposing a less-stringent standard. In the court’s order, Judge Trenga requested that the parties pay particular attention in their arguments to whether GovLog’s acquisition of Gosselin would satisfy the fraudulent transfer prong.

The cases are U.S. ex rel. Bunk v. Gosselin World Wide Moving, No. 1:02-cv-01168 (E.D. Va.), and U.S. ex rel. Ammons v. Gosselin World Wide Moving NV, No. 1:07-cv-01198 (E.D. Va.).