Learn about a recent New York court decision where the buyer of a business was found not liable for the seller’s higher unemployment insurance rates. The court clarified the criteria for acquiring goodwill in a business asset purchase.
M&A Stories
June 09, 2021
In a recent case, a New York intermediate appellate court clarified that the buyer of a business did not acquire the seller’s goodwill. The buyer purchased certain intangible assets like the seller’s online schedule booking website and tradename but never used them. Instead, the buyer acquired the seller’s assets to eliminate them as a competitor.
The background of the case:
The buyer was a company providing post-production services to the television and film industry, along with operating a screening room in Manhattan for clients’ use. They entered into an agreement in March 2013 to buy the assets of a competing business located in Manhattan. The assets included electronic equipment, hardware, the seller’s trade name, online screening schedule booking website, and domain name.
After the deal closed, New York’s Department of Labor determined that a business transfer had occurred and transferred the seller’s unemployment insurance experience account to the buyer, leading to an increase in the buyer’s unemployment insurance tax rate. The buyer contested this determination, resulting in a legal dispute.
The court’s decision:
The appellate court reversed the initial determination, stating that a transfer wouldn’t be considered if the buyer did not assume the seller’s obligations, did not acquire the seller’s goodwill, did not continue the seller’s business, and did not employ substantially the same employees as the seller. The court found that the buyer met these requirements, except for the issue of acquiring the seller’s goodwill.
However, the court clarified that even if the intangible assets acquired by the buyer, like the trade name and online schedule booking website, could be considered goodwill, they were not used by the buyer. The buyer had purchased these assets solely to shut down the seller’s screening room and business operations, not to benefit from the seller’s goodwill.
This case is referred to as Matter of Hop NY Entertainment, LLC v. Commissioner of Labor, 2021 NY Slip Op 03093, 530931, Appellate Division of the Supreme Court of New York, Third Department, (Decided May 13, 2021).
In conclusion, the court ruled that the buyer did not acquire the seller’s goodwill and, therefore, was not liable for the seller’s higher unemployment insurance rates. This decision reaffirms that imposing a seller’s unemployment experience rating on a buyer makes sense only when the buyer intends to profit from the acquired goodwill of the seller’s business. In cases where the buyer does not continue the seller’s business, does not employ their employees, and does not use the acquired intangible assets, such imposition would not be justified.
By John McCauley: I help people manage M&A legal risks.
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