Jottings By An Employer's Lawyer

Sunday, May 23, 2004

After the Sale - Looking Back At the Contract Language When It Really Matters

When a company is selling a business, the existence of a union and a collective bargaining agreement complicates things, as the seller found out in Smurfit Newsprint Corp. v. Southeast Paper Manufacturing Co. (7th Cir. 5/21/04) [pdf]. After Smurfit sold one of its plants to Southeast Paper, the purchaser interviewed each current employee for employment, and having hired a majority of employees represented by the union bargained and entered into a contract on very similar terms to the CBA between Smurfit and the union. Including using the same formula for retirement benefits, which was based on most recent hire date. The result was that employees were not given credit for their prior service in determining their pension.

Although not as dire as it sounds, since most now got two pensions, it did economically impact and certainly ired the union and its members who filed a grievance. At arbitration, the arbitrator found that the plant had been "permanently closed" as for as Smurfit was concerned triggering approximately $3.5 million in severance benefits. Something obviously not planned for by Smurfit, since they then initiated an indemnity action to recover the $3.5 million under the sale contract against Southeast Paper. Although they overcame the hurdle of showing they were entitled to bring an indemnity claim, they ultimately failed on the merits.

Under the purchase agreement, Southeast Paper had agreed "to offer employment to substantially all of the employees of the mill who were members of ... Local No. 60 (the “Union”) on terms comparable with those in an existing collective bargaining agreement between Smurfit and the Union." And since the contract it entered into was almost identical to the one that Smurfit had with the union on how pensions would be calculated, Southeast Paper had kept its end of the bargain. Even if it may not have turned out the way Smurfit had envisioned.

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