Fourth Circuit To Consider Successor Liability For FCA Violations

The Fourth Circuit will soon have the opportunity to clarify the circumstances under which successor liability may be imposed against an entity for False Claims Act judgments against its predecessor.  Previously covered here, here, here, here, here, and here, the district court in United States ex rel. Bunk v. Birkart Globistics GmbH & Co. held that purported defendant GovLog could be defendant Gosselin’s successor in interest only if the plaintiffs – the Department of Justice and relators – could establish the elements of successor liability under the more-demanding common law rule instead of the more-lenient “substantial continuity” rule.  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 under the FCA 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.

Applying that rule, the district court granted summary judgment in favor of GovLog, holding that the plaintiffs had neither adequately pleaded nor submitted sufficient evidence to establish that GovLog was a successor to Gosselin.  In particular, the district court rejected the plaintiffs’ argument that GovLog’s acquisition of Gosselin was a fraudulent transaction designed to avoid paying the plaintiffs’ False Claims Act judgment.

The plaintiffs (without the Justice Department) have appealed, arguing that the FCA requires successor liability to be assessed under a substantial continuity test, rather than the common law rule.  Under the substantial continuity test, a successor corporation is made liable for the acts of a predecessor if it retains the same business without change in employees, stockholders, directors, management, personnel, physical location, or operations, and whether the successor holds itself out as the continuation of the prior enterprise.  See United States v. Carolina Transformer Co., 978 F.2d 832, 838 (4th Cir. 1992).

The case raises an important question of first impression: as the plaintiffs acknowledge in their appellate brief, no federal appeals court “has decided whether successor liability for an FCA violation may be imposed under a substantial continuity theory after” United States v. Bestfoods, 524 U.S. 51 (1998), which articulated the approach federal courts must take when deciding whether a common law liability rule should be displaced by another, overriding statutory purpose.

The Fourth Circuit will hear argument in Bunk on May 11, 2016.