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Class Action Defense Cases-Phason v. Meridian Rail: Federal WARN Act Applies If Employer Terminates Employees Before Sale Of Assets Closes Warranting Reversal Of Judgment In Favor Of Defense In Class Action Seventh Circuit Holds

Second Circuit Holds in Putative Class Action that Federal Worker Adjustment Retraining and Notification (WARN) Act Applies if Sale of Assets to New Company is Delayed until One Week After Termination of Employees even if Employees cannot Demonstrate any Economic Harm

Plaintiffs filed a putative class action against their former employer, Meridian Rail, alleging violations of the federal Worker Adjustment Retraining and Notification Act of 1988 (WARN) arising out of the closure (through sale) of one of its operations sites. Phason v. Meridian Rail Corp., 479 F.3d 527, 528 (7th Cir. 2007). The district court entered judgment for defendant, holding that the WARN Act did not apply. Based on that holding, the district court found it unnecessary to determine whether the putative class action should in fact proceed as a class action. The Seventh Circuit reversed.

On December 31, 2003, Meridian Rail disclosed to its employees that it was immediately ceasing operations in Chicago Heights, Illinois, and “invited them to apply for jobs with NAE Nortrak, Inc., which had agreed to buy the assets.” Phason, at 578. Nortrak previously had issued an identical invitation in mid-December after “Nortrak and Meridian shook hands on the deal.” Id. However, the sale did not close until January 8, 2004, 8 days after Meridian had “severed all ties to the former workers.” Id. Because the WARN Act requires that an employer give 60 days’ notice before subjecting at least 50 of them to “employment loss,” this class action lawsuit was filed. The district court described the theory behind the class action as “simple,” explaining at page 579: “One statutory trigger is a ‘plant closing,’ which 29 U.S.C. § 2101(a)(2) defines as any ‘permanent or temporary’ shutdown that ‘results in an employment loss at the single site of employment during any 30-day period for 50 or more employees’.”

Defense attorneys argued, and the district court held, that the WARN Act does not apply because Nortrak hired all but about 45 Meridian Rail employees. Phason, at 528-29. Meridian Rail relied upon the last sentence of Section 2101 (b)(1), which provides: “Notwithstanding any other provision of this Act, any person who is an employee of the seller (other than a part-time employee) as of the effective date of the sale shall be considered an employee of the purchaser immediately after the effective date of the sale.” The Circuit Court explained at page 529 that “[t]his sentence is the linchpin of Meridian’s position.” According to Meridian Rail, “It sold the plant to Nortrak, and as Nortrak soon hired many of the workers (leaving fewer than 50 disappointed applicants), no ‘employment loss’ occurred.” Id. Plaintiffs countered that the relevant inquiry was “how many people lost their jobs on December 31, 2003, rather than the difference between that number and how many found work later,” and it was undisputed that if December 31 is the relevant date than over 50 lost employment. Id., at 529.

The Seventh Circuit agreed with plaintiffs’ lawyer. The Circuit Court reasoned that a “handshake” is not a “sale,” so for purposes of Section 2101(b)(1) the sale did not occur until January 8, 2004. Phason, at 529. The Court of Appeals agreed that on that date (January 8, 2004) any employees of Meridian Rail were employees of Nortrak, but Meridian did not have any employees at that time – it terminated all of its Chicago Heights employees on December 31, 2003. Id. The Court held that on that date, an “employment termination” occurred within the meaning of the WARN Act, and that a “plant closing” also occurred on that date because more than 50 workers lost their jobs. Id.

The Circuit Court recognized that its holding might appear to elevate form over substance, explaining at page 530:

If the sale was a done deal as of December 2003, why should it matter that the transaction did not close until January 8, 2004? Nortrak alerted the workers in mid-December to the impending change of ownership; they were no less able to plan (and no less well off economically) than if the sale had closed then-and plaintiffs concede that if it had closed on or before December 31, 2003, then they would have no case under the Act.

Nonetheless, the Seventh Circuit found that such a literal interpretation was entirely consistent with the WARN Act, which the Court of Appeals found “draws a lot of bright lines” and, in fact “is really nothing but lines.” Phason, at 530. The Circuit Court concluded, “The WARN Act draws several . . . lines. Delayed closing put Meridian on the wrong side of one.” Id., at 530-31. Accordingly, it reversed the judgment of the district court. Id., at 531.

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