Explore the implications of punitive damages in asbestos claims within M&A deals. Learn from the case of Parker Hannifin Corp. v. Standard Motor Products, Inc.
October 31, 2019
Introduction:
Liability related to asbestos claims is a common concern for manufacturing companies. When sophisticated buyers and sellers engage in the acquisition of such businesses, they typically address this risk in the acquisition documents.
The Deal:
In this case, the seller had a division involved in manufacturing and remanufacturing brake parts for vehicle brake systems, some of which contained asbestos. Before the 1986 transaction with the buyer, the seller faced lawsuits alleging bodily injury due to asbestos exposure from its products. The seller disclosed these claims to the buyer during due diligence, and they specifically accounted for them in the allocation of post-closing product liability responsibilities. Essentially, the buyer agreed to indemnify the seller for certain asbestos claims.
The Lawsuit:
This arrangement worked for 33 years until a California jury awarded $6 million in punitive damages in an asbestos case against the seller. The buyer argued that punitive damages were not covered by its indemnification obligation, leading to a lawsuit in an Ohio federal district court to resolve the dispute.
Interpretation of the Agreement:
The buyer initially claimed that the asset purchase agreement did not mention punitive damages or require indemnification for such damages in asbestos claims. However, the court found that the agreement’s language was clear, stating that the buyer would assume all of the seller’s liabilities and obligations, including asbestos claims, and indemnify the seller against all liabilities, damages, losses, and claims.
Public Policy Argument:
The buyer also argued that Ohio law prohibited indemnification of punitive damages resulting from intentional conduct, as it would go against public policy. The court rejected this argument, explaining that the indemnification provision in the asset purchase agreement only applied to the seller’s past conduct and did not provide insurance for future actions. Therefore, Ohio’s public policy concerns did not apply in this case.
Comment:
The buyer and seller did not anticipate the risk of punitive damages for third-party asbestos claims when they made the agreement in 1986. However, in new deals, they should explicitly decide whether third-party punitive damages will be assumed or excluded liabilities and specify this in the purchase agreement.
Case Reference:
Parker Hannifin Corp. v. Standard Motor Products, Inc., Case No. 1:19cv00617, United States District Court, N.D. Ohio (October 23, 2019) https://scholar.google.com/scholar_case?case=3437809212237959578&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million
Email: jmccauley@mk-law.com
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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