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HOWARD JOHNSON CO. v. DETROIT LOCAL JOINT EXECUTIVE BOARD

SUPREME COURT OF THE UNITED STATES


decided: June 3, 1974.

HOWARD JOHNSON CO., INC
v.
DETROIT LOCAL JOINT EXECUTIVE BOARD, HOTEL & RESTAURANT EMPLOYEES & BARTENDERS INTERNATIONAL UNION, AFL-CIO

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT.

Marshall, J., delivered the opinion of the Court, in which Burger, C. J., and Brennan, Stewart, White, Blackmun, Powell, and Rehnquist, JJ., joined. Douglas, J., filed a dissenting opinion, post, p. 265.

Author: Marshall

[ 417 U.S. Page 250]

 MR. JUSTICE MARSHALL delivered the opinion of the Court.

Once again we are faced with the problem of defining the labor law obligations of a "successor" employer to the employees of its predecessors. In this case, petitioner Howard Johnson Co. is the bona fide purchaser of the assets of a restaurant and motor lodge. Respondent Union was the bargaining representative of the employees of the previous operators, and had successfully concluded collective-bargaining agreements with them. In commencing its operation of the restaurant, Howard Johnson hired only a small fraction of the predecessors' employees. The question presented in this case is whether the Union may compel Howard Johnson to arbitrate, under the arbitration provisions of the collective-bargaining agreements signed by its predecessors, the extent of its obligations under those agreements to the predecessors' employees.

Prior to the sale at issue here, the Grissoms -- Charles T. Grissom, P. L. Grissom, Ben Bibb, P. L. Grissom & Son,

[ 417 U.S. Page 251]

     Inc., and the Belleville Restaurant Co., a corporation wholly owned by P. L. Grissom & Son -- had operated a Howard Johnson's Motor Lodge and an adjacent Howard Johnson's Restaurant in Belleville, Michigan, under franchise agreements with the petitioner. Employees at both the restaurant and motor lodge were represented by the respondent Hotel & Restaurant Employees & Bartenders International Union.*fn1 The Grissoms had entered into separate collective-bargaining agreements with the Union covering employees at the two establishments. Both agreements contained dispute settlement procedures leading ultimately to arbitration. Both agreements also provided that they would be binding upon the employer's "successors, assigns, purchasers, lessees or transferees."

On June 16, 1972, the Grissoms entered into an agreement with Howard Johnson to sell it all of the personal property used in connection with operation of the restaurant and motor lodge. The Grissoms retained ownership of the real property, leasing both premises to Howard Johnson. Howard Johnson did not agree to assume any of the Grissoms' obligations, except for four specific contracts relating to operation of the restaurant and motor lodge. On June 28, Howard Johnson mailed the Grissoms a letter, which they later acknowledged and confirmed, clarifying that "it was understood and agreed that the Purchaser . . . would not recognize and assume any labor agreements between the Sellers . . . and any

[ 417 U.S. Page 252]

     labor organizations," and that it was further agreed that "the Purchaser does not assume any obligations or liabilities of the Sellers resulting from any labor agreements . . . ."

Transfer of operation of the restaurant and motor lodge was set for midnight, July 23, 1972. On July 9, the Grissoms notified all of their employees that their employment would terminate as of that time. The Union was also notified of the termination of the Grissoms' business. On July 11, Howard Johnson advised the Union that it would not recognize the Union or assume any obligations under the existing collective-bargaining agreements.

After reaching agreement with the Grissoms, Howard Johnson began hiring its own work force. It placed advertisements in local newspapers, and posted notices in various places, including the restaurant and motor lodge. It began interviewing prospective employees on July 10, hired its first employees on July 18, and began training them at a Howard Johnson facility in Ann Arbor on July 20. Prior to the sale, the Grissoms had 53 employees. Howard Johnson commenced operations with 45 employees, 33 engaged in the restaurant and 12 in the motor lodge. Of these, only nine of the restaurant employees and none of the motor lodge employees had previously been employed by the Grissoms. None of the supervisory personnel employed by the Grissoms were hired by Howard Johnson.

The Union filed this action in the state courts on July 21. Characterizing Howard Johnson's failure to hire all of the employees of the Grissoms as a "lockout" in violation of the collective-bargaining agreements, the Union sought a temporary restraining order enjoining this "lockout" and an order compelling Howard Johnson and the Grissoms to arbitrate the extent of their obligations

[ 417 U.S. Page 253]

     to the Grissom employees under the bargaining agreements. The state court granted an ex parte temporary restraining order, but the Company refused to honor it, claiming that it had not received adequate notice or service, and the order was dissolved after a hearing on July 24.

The defendants subsequently removed this action to the federal courts on the ground that it was brought under § 301 of the Labor Management Relations Act, 29 U. S. C. § 185. At a hearing before the District Court on August 7, the Grissoms admitted that they were required to arbitrate in accordance with the terms of the collective-bargaining agreements they had signed and that an order compelling arbitration should issue. On August 22, the District Court, in a memorandum opinion unofficially reported at 81 L. R. R. M. 2329 (ED Mich. 1972), held that Howard Johnson was also required to arbitrate the extent of its obligations to the former Grissom employees. The court denied, however, the Union's motion for a preliminary injunction requiring the Company to hire all the former Grissom employees, and granted a stay of its arbitration order pending appeal. Howard Johnson appealed the order compelling arbitration, but the Court of Appeals affirmed. 482 F.2d 489 (CA6 1973). We granted certiorari, 414 U.S. 1091 (1973), to consider the important labor law question presented. We reverse.

Both courts below relied heavily on this Court's decision in John Wiley & Sons v. Livingston, 376 U.S. 543 (1964). In Wiley, the union representing the employees of a corporation which had disappeared through a merger sought to compel the surviving corporation, which had hired all of the merged corporation's employees and continued to operate the enterprise in a substantially identical form after the merger, to arbitrate

[ 417 U.S. Page 254]

     under the merged corporation's collective-bargaining agreement. As Wiley was this Court's first experience with the difficult "successorship" question, its holding was properly cautious and narrow:

"We hold that the disappearance by merger of a corporate employer which has entered into a collective bargaining agreement with a union does not automatically terminate all rights of the employees covered by the agreement, and that, in appropriate circumstances, present here, the successor employer may be required to arbitrate with the union under the agreement." Id., at 548.

Mr. Justice Harlan, writing for the Court, emphasized "the central role of arbitration in effectuating national labor policy" and preventing industrial strife, and the need to afford some protection to the interests of the employees during a change of corporate ownership. Id., at 549.

The courts below recognized that the reasoning of Wiley was to some extent inconsistent with our more recent decision in NLRB v. Burns International Security Services, 406 U.S. 272 (1972). Burns was the successful bidder on a contract to provide security services at a Lockheed Aircraft plant, and took a majority of its employees from the ranks of the guards employed at the plant by the previous contractor, Wackenhut. In refusing to enforce the Board's order finding that Burns' failure to honor the substantive provisions of the collective-bargaining agreement negotiated with Wackenhut was an unfair labor practice, we emphasized that freedom of collective bargaining -- "'private bargaining under governmental supervision of the procedure alone, without any official compulsion over the actual terms of the contract'" -- was a "'fundamental premise'" of the federal labor laws, id., at 287, quoting H. K. Porter Co. v. NLRB, 397 U.S. 99, 108

[ 417 U.S. Page 255]

     (1970), and that it was therefore improper to hold Burns to the substantive terms of a collective-bargaining agreement which it had neither expressly nor impliedly assumed. Burns also stressed that holding a new employer bound by the substantive terms of the pre-existing collective-bargaining agreement might inhibit the free transfer of capital, and that new employers must be free to make substantial changes in the operation of the enterprise. 406 U.S., at 287-288.

The courts below held that Wiley rather than Burns was controlling here on the ground that Burns involved an NLRB order holding the employer bound by the substantive terms of the collective-bargaining agreement, whereas this case, like Wiley, involved a § 301 suit to compel arbitration. Although this distinction was in fact suggested by the Court's opinion in Burns, see id., at 285-286, we do not believe that the fundamental policies outlined in Burns can be so lightly disregarded. In Textile Workers v. Lincoln Mills, 353 U.S. 448 (1957), this Court held that § 301 of the Labor Management Relations Act authorized the federal courts to develop a federal common law regarding enforcement of collective-bargaining agreements. But Lincoln Mills did not envision any freewheeling inquiry into what the federal courts might find to be the most desirable rule, irrespective of congressional pronouncements. Rather, Lincoln Mills makes clear that this federal common law must be "fashion[ed] from the policy of our national labor laws." Id., at 456. MR. JUSTICE DOUGLAS described the process of analysis to be employed:

"The Labor Management Relations Act expressly furnishes some substantive law. It points out what the parties may or may not do in certain situations. Other problems will lie in the penumbra of express statutory mandates. Some will lack express statutory

[ 417 U.S. Page 256]

     sanction but will be solved by looking at the policy of the legislation and fashioning a remedy that will effectuate that policy." Id., at 457.

It would be plainly inconsistent with this view to say that the basic policies found controlling in an unfair labor practice context may be disregarded by the courts in a suit under § 301, and thus to permit the rights enjoyed by the new employer in a successorship context to depend upon the forum in which the union presses its claims.*fn2 Clearly the reasoning of Burns must be taken into account here.

We find it unnecessary, however, to decide in the circumstances of this case whether there is any irreconcilable conflict between Wiley and Burns. We believe that even on its own terms, Wiley does not support the decision of the courts below. The Court in Burns recognized that its decision "turn[ed] to a great extent on the precise facts involved here." 406 U.S., at 274. The same observation could have been made in Wiley, as indeed it could be made in this case. In our development of the federal common law under § 301, we must necessarily proceed cautiously, in the traditional case-by-case approach of the common law. Particularly in light of the difficulty of the successorship question, the myriad factual circumstances and legal contexts in which it can arise, and the absence of congressional guidance as to its resolution, emphasis on the facts of each case as it arises is especially appropriate. The Court was obviously well aware of this in Wiley, as its guarded, almost tentative statement of its holding amply demonstrates.

When the focus is placed on the facts of these cases, it

[ 417 U.S. Page 257]

     becomes apparent that the decision below is an unwarranted extension of Wiley beyond any factual context it may have contemplated. Although it is true that both Wiley and this case involve § 301 suits to compel arbitration, the similarity ends there. Wiley involved a merger, as a result of which the initial employing entity completely disappeared. In contrast, this case involves only a sale of some assets, and the initial employers remain in existence as viable corporate entities, with substantial revenues from the lease of the motor lodge and restaurant to Howard Johnson. Although we have recognized that ordinarily there is no basis for distinguishing among mergers, consolidations, or purchases of assets in the analysis of successorship problems, see Golden State Bottling Co. v. NLRB, 414 U.S. 168, 182-183, n. 5 (1973), we think these distinctions are relevant here for two reasons. First, the merger in Wiley was conducted "against a background of state law that embodied the general rule that in merger situations the surviving corporation is liable for the obligations of the disappearing corporation," Burns, 406 U.S., at 286, which suggests that holding Wiley bound to arbitrate under its predecessor's collective-bargaining agreement may have been fairly within the reasonable expectations of the parties. Second, the disappearance of the original employing entity in the Wiley merger meant that unless the union were afforded some remedy against Wiley, it would have no means to enforce the obligations voluntarily undertaken by the merged corporation, to the extent that those obligations vested prior to the merger or to the extent that its promises were intended to survive a change of ownership. Here, in contrast, because the Grissom corporations continue as viable entities with substantial retained assets, the Union does have a realistic remedy to enforce their contractual obligations. Indeed, the Grissoms

[ 417 U.S. Page 258]

     have agreed to arbitrate the extent of their liability to the Union and their former employees; presumably this arbitration will explore the question whether the Grissoms breached the successorship provisions of their collective-bargaining agreements, and what the remedy for this breach might be.*fn3

Even more important, in Wiley the surviving corporation hired all of the employees of the disappearing corporation. Although, under Burns, the surviving corporation may have been entitled to make substantial changes in its operation of the enterprise, the plain fact is that it did not. As the arbitrator in Wiley subsequently stated:

"Although the Wiley merger was effective on October 2, 1961, the former Interscience employees continued to perform the same work on the same products under the same management at the same work place as before the change in the corporate employer." Interscience Encyclopedia, Inc., 55 Lab. Arb. 210, 218 (1970).*fn4

[ 417 U.S. Page 259]

     The claims which the union sought to compel Wiley to arbitrate were thus the claims of Wiley's employees as to the benefits they were entitled to receive in connection with their employment. It was on this basis that the Court in Wiley found that there was the "substantial continuity of identity in the business enterprise," 376 U.S., at 551, which it held necessary before the successor employer could be compelled to arbitrate.

Here, however, Howard Johnson decided to select and hire its own independent work force to commence its operation of the restaurant and motor lodge.*fn5 It therefore

[ 417 U.S. Page 260]

     hired only nine of the 53 former Grissom employees and none of the Grissom supervisors. The primary purpose of the Union in seeking arbitration here with Howard Johnson is not to protect the rights of Howard Johnson's employees; rather, the Union primarily seeks arbitration on behalf of the former Grissom employees who were not hired by Howard Johnson. It is the Union's position that Howard Johnson was bound by the pre-existing collective-bargaining agreement to employ all of these former Grissom employees, except those who could be dismissed in accordance with the "just cause" provision or laid off in accordance with the seniority provision. It is manifest from the Union's efforts to obtain injunctive relief requiring the Company to hire all of these employees that this is the heart of the controversy here. Indeed, at oral argument, the Union conceded that it would be making the same argument here if Howard Johnson had not hired any of the former Grissom employees,*fn6 and that what was most important

[ 417 U.S. Page 261]

     to the Union was the prospect that the arbitrator might order the Company to hire all of these employees.*fn7

What the Union seeks here is completely at odds with the basic principles this Court elaborated in Burns. We found there that nothing in the federal labor laws "requires that an employer . . . who purchases the assets of a business be obligated to hire all of the employees of the predecessor though it is possible that such an obligation might be assumed by the employer." 406 U.S., at 280 n. 5. See also Golden State Bottling Co. v. NLRB, 414 U.S., at 184 n. 6. Burns emphasized that "[a] potential employer may be willing to take over a moribund business only if he can make changes in corporate structure, composition of the labor force, . . . and nature of supervision." 406 U.S., at 287-288. We rejected the Board's position in part because "it would seemingly follow that employees of the predecessor would be deemed employees of the successor, dischargeable only in accordance with provisions of the contract and subject to the grievance and arbitration provisions thereof. Burns would not have been free to replace Wackenhut's

[ 417 U.S. Page 262]

     guards with its own except as the contract permitted." Id., at 288. Clearly, Burns establishes that Howard Johnson had the right not to hire any of the former Grissom employees, if it so desired.*fn8 The Union's effort to circumvent this holding by asserting its claims in a § 301 suit to compel arbitration rather than in an unfair labor practice context cannot be permitted.

We do not believe that Wiley requires a successor employer to arbitrate in the circumstances of this case.*fn9

[ 417 U.S. Page 263]

     The Court there held that arbitration could not be compelled unless there was "substantial continuity of identity in the business enterprise" before and after a change of ownership, for otherwise the duty to arbitrate would be "something imposed from without, not reasonably to be found in the particular bargaining agreement and the acts of the parties involved." 376 U.S., at 551. This continuity of identity in the business enterprise necessarily includes, we think, a substantial continuity in the identity of the work force across the change in ownership. The Wiley Court seemingly recognized this, as it found the requisite continuity present there in reliance on the "wholesale transfer" of Interscience employees to Wiley. Ibid. This view is reflected in the emphasis most of the lower courts have placed on whether the successor employer hires a majority of the predecessor's employees in determining the legal obligations of the successor

[ 417 U.S. Page 264]

     in § 301 suits under Wiley.*fn10 This interpretation of Wiley is consistent also with the Court's concern with affording protection to those employees who are in fact retained in "the transition from one corporate organization to another" from sudden changes in the terms and conditions of their employment, and with its belief that industrial strife would be avoided if these employees' claims were resolved by arbitration rather than by "'the relative strength . . . of the contending forces.'" Id., at 549, quoting United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 580 (1960). At the same time, it recognizes that the employees of the terminating employer have no legal right to continued employment with the new employer, and avoids the difficulties inherent in the Union's position in this case. This holding is compelled, in our view, if the protection afforded employee interests in a change of ownership by Wiley is to be reconciled with the new employer's right to operate the enterprise with his own independent labor force.

Since there was plainly no substantial continuity of identity in the work force hired by Howard Johnson with that of the Grissoms, and no express or implied assumption of the agreement to arbitrate, the courts below erred in compelling the Company to arbitrate the extent of its

[ 417 U.S. Page 265]

     obligations to the former Grissom employees. Accordingly, the judgment of the Court of Appeals must be

Reversed.

Disposition

482 F.2d 489, reversed.

MR. JUSTICE DOUGLAS, dissenting.

The petitioner, Howard Johnson, in 1959 and 1960 entered into franchise agreements with P. L. Grissom, P. L. Grissom & Son, Charles T. Grissom, Ben Bibb, and the Belleville Restaurant Company (hereinafter collectively the Grissoms) under which the franchise operated a Howard Johnson Restaurant and Motor Lodge. In 1968 the Grissoms entered into collective-bargaining agreements with the respondent Union affecting both their restaurant and motel employees. On June 16, 1972, the Grissoms sold the business to Howard Johnson, the transfer of management to take place on July 24, 1972. On June 28, Howard Johnson notified the Grissoms that it would not recognize or assume their labor agreements and on July 9, 1972, the Grissoms gave notice to their employees that they would be terminated at midnight, July 23. Howard Johnson began interviewing prospective employees in early July, and when it took over the operation on July 24 it retained only nine of the Grissoms' employees; at least 40 were permanently replaced. The Union brought this action under § 301 of the Labor Management Relations Act, and the District Court issued an order compelling petitioner to arbitrate. The Court of Appeals affirmed, but today this Court reverses, holding that Howard Johnson was not a successor employer. I believe that the principles of successorship laid down in John Wiley & Sons v. Livingston, 376 U.S. 543, and NLRB v. Burns International Security Services, 406 U.S. 272, require affirmance, and thus I dissent.

Wiley was also a § 301 suit, to compel arbitration. There the company had merged with Interscience,

[ 417 U.S. Page 266]

     another and smaller publisher, 40 of whose employees were represented by the union. The union contended that the merger did not affect its right to represent these employees in negotiations with Wiley, and that Wiley was bound to recognize certain rights of these employees which had been guaranteed in the collective-bargaining agreement signed by Interscience. Wiley contended that the merger terminated the collective-bargaining agreement for all purposes and refused to bargain with the union. We held that the union could compel arbitration of this dispute under the arbitration provision of the collective-bargaining agreement even though Wiley had never signed the agreement. We pointed out that the duty to arbitrate will not in every case survive a change of ownership, as when "the lack of any substantial continuity of identity in the business enterprise before and after a change would make a duty to arbitrate something imposed from without, not reasonably to be found in the particular bargaining agreement and the acts of the parties involved." Wiley, supra, at 551. But that was not the case in Wiley : "The impressive policy considerations favoring arbitration are not wholly overborne by the fact that Wiley did not sign the contract being construed. This case cannot readily be assimilated to the category of those in which there is no contract whatever, or none which is reasonably related to the party sought to be obligated." Id., at 550.

It must follow a fortiori that it is also not the case here. The contract between the Grissoms and the Union explicitly provided that successors of the Grissoms would be bound,*fn1 and certainly there can be no question that

[ 417 U.S. Page 267]

     there was a substantial continuity -- indeed identity -- of the business operation under Howard Johnson, the successor employer. Under its franchise agreement Howard Johnson had substantial control over the Grissoms' operation of the business;*fn2 it was no stranger to the enterprise it took over. The business continued without interruption at the same location, offering the same products and services to the same public, under the same name and in the same manner, with almost the same number of employees. The only change was Howard Johnson's replacement of the Union members with new personnel, but as the court below pointed out, petitioner's reliance upon that fact is sheer "bootstrap": "[Howard Johnson] argues that it need not arbitrate the refusal to hire Grissoms' employees because it is not a successor. It is not a successor, because it did not hire a majority of Grissoms' employees." 482 F.2d 489, 493.

As we said in Wiley, "it would derogate from 'the federal policy of settling labor disputes by arbitration,' . . . if a change in the corporate structure or ownership of a business enterprise had the automatic consequence of removing a duty to arbitrate previously established . . . ." 376 U.S., at 549.

NLRB v. Burns International Security Services, supra, does not require any different result. There the

[ 417 U.S. Page 268]

     original employer, Wackenhut, had a contract with Lockheed to provide security services, and at the expiration of that contract Lockheed took bids on providing the service and hired Burns to replace Wackenhut. Wackenhut employees had been represented by the union, but Burns, which hired 27 of the 42 Wackenhut guards, refused to bargain with the union or honor the collective-bargaining agreement signed by Wackenhut. We affirmed the NLRB's order requiring Burns to bargain with the union, but concluded that Burns was not bound by the substantive provisions of the collective-bargaining agreement between the union and Wackenhut. In distinguishing Wiley, we pointed out in Burns that unlike Wiley it did not involve a § 301 suit to compel arbitration, and thus was without the support of the national policy favoring arbitration. Burns, supra, at 286. Moreover, in Burns "there was no merger or sale of assets, and there were no dealings whatsoever between Wackenhut and Burns. On the contrary, they were competitors for the same work, each bidding for the service contract at Lockheed. Burns purchased nothing from Wackenhut and became liable for none of its financial obligations." Ibid.

All of the factors distinguishing Burns and Wiley call here for affirmance of the order to arbitrate. This is a § 301 suit, and Howard Johnson did purchase the assets from the Grissoms. As a matter of federal labor law, when Howard Johnson took over the operation that had been conducted by its franchisee, it seems clear that it also took over the duty to arbitrate under the collective-bargaining agreements which expressly bound the Grissoms' successors. Any other result makes nonsense of the principles laid down in Wiley. The majority, by making the number of prior employees retained by the successor the sole determinative factor, accepts petitioner's

[ 417 U.S. Page 269]

     bootstrap argument. The effect is to allow any new employer to determine for himself whether he will be bound, by the simple expedient of arranging for the termination of all of the prior employer's personnel. I cannot accept such a rule, especially when, as here, all of the other factors point so compellingly to the conclusion that petitioner is a successor employer who should be bound by the arbitration agreement.

Counsel FOOTNOTES

* Gerard C. Smetana, Jerry Kronenberg, and Milton Smith filed a brief for the Chamber of Commerce of the United States as amicus curiae urging reversal.

Thomas E. Harris filed a brief for the American Federation of Labor and Congress of Industrial Organizations as amicus curiae urging affirmance.


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