May 11, 2026|Franchise Frontlines
May 11, 2026 | United States Court of Appeals for the Fifth Circuit | Unpublished Opinion
Executive Summary
In an unpublished opinion, a divided panel of the United States Court of Appeals for the Fifth Circuit affirmed judgment for Black Diamond Capital Management, LLC after a bench trial on whether the private equity firm could be liable under the Worker Adjustment and Retraining Notification Act for the abrupt closure of Bayou Steel’s Louisiana plant and resulting layoff of approximately 300 employees. Plaintiffs argued that Black Diamond exercised de facto control over Bayou Steel and specifically directed the plant closure without proper WARN Act notice. Black Diamond argued that Bayou Steel made the employment decision, that plaintiffs lacked direct evidence connecting Black Diamond to the unlawful layoff decision, and that ownership, financing, board involvement, and operational oversight did not make it the statutory employer. The majority held that the district court did not clearly err in finding plaintiffs failed to prove Black Diamond specifically directed the closure. Judge Higginson dissented, concluding that the majority’s approach narrowed WARN Act de facto-control analysis too far and failed to account for evidence of functional control over Bayou Steel’s finances, operations, personnel, board process, bankruptcy preparation, and layoff communications.
Relevant Background
Bayou Steel operated a steel plant in LaPlace, Louisiana. Black Diamond acquired Bayou Steel through a holding company in 2016 and installed several Black Diamond employees and independent directors on Bayou Steel’s board. Black Diamond also helped secure substantial financing for Bayou Steel, including revolving loans from outside lenders. Despite that funding, Bayou Steel struggled financially. Steel-market fluctuations, equipment problems, and monthly losses placed the company under increasing pressure, and by September 2019, the company faced a liquidity crisis.
In late September 2019, Black Diamond’s principal visited the plant twice and concluded that the investment was no longer viable. Around the same time, Bayou Steel’s board discussed the company’s financial condition and voted to retain bankruptcy counsel. Bayou Steel’s human resources director initially prepared WARN notices reflecting a November layoff date, which would have complied with WARN’s 60-day notice requirement. But after the outside lenders accelerated their loans and demanded payment of more than $40 million by September 30, Bayou Steel moved toward bankruptcy and immediate layoffs. The Black Diamond-affiliated board members abstained from the bankruptcy vote and resigned. The employees were laid off on September 30, 2019, and Bayou Steel filed for bankruptcy the next day.
A putative class of terminated employees sued Bayou Steel and Black Diamond. The district court granted summary judgment for the defendants. On appeal, the Fifth Circuit reversed as to Black Diamond and remanded for further factual development on whether Black Diamond specifically directed the plant closure. After a limited bench trial, the district court found in favor of Black Diamond. Plaintiffs appealed again, arguing that the record compelled a finding that Black Diamond exercised de facto control over Bayou Steel’s decision to terminate them without proper WARN notice.
Decision
The Fifth Circuit framed the remaining issue narrowly. No one disputed that Bayou Steel failed to give the required WARN Act notice. The question was whether Black Diamond could be held liable for Bayou Steel’s violation as a single employer. Under the WARN Act, liability attaches to the employer that orders a plant closing or mass layoff without required notice. Because Bayou Steel, not Black Diamond, employed the plaintiffs directly, plaintiffs needed to establish that Black Diamond and Bayou Steel functioned as a single employer.
The court applied the Department of Labor’s five-factor test for determining whether related entities should be treated as a single employer under WARN: common ownership, common directors or officers, de facto exercise of control, unity of personnel policies from a common source, and dependency of operations. In the prior appeal, the Fifth Circuit had already resolved the other factors against plaintiffs, leaving only de facto control. That factor asks whether the defendant specifically directed the allegedly illegal employment practice. In this case, the relevant employment practice was the closure of the plant without proper WARN notice.
The majority emphasized the procedural posture. At summary judgment, plaintiffs needed only to identify a genuine factual dispute. At trial, they had to prove that Black Diamond specifically directed the closure. The record showed serious uncertainty about who made the final decision. The Black Diamond-affiliated directors testified that the board did not decide to close the plant. Some witnesses attributed the final decision to management or outside advisors. Other witnesses could not recall who directed the closure. One independent director gave inconsistent testimony about whether bankruptcy counsel recommended the closure and whether the board voted to approve it. The majority described the record as lacking “clear evidence” about what occurred between the initial WARN notice draft and the immediate layoff decision.
Plaintiffs asked the court to infer from Black Diamond’s broader control over Bayou Steel that Black Diamond must have directed the plant closure. The majority declined to disturb the district court’s contrary inference. It acknowledged that some evidence suggested Black Diamond exercised control over Bayou Steel near the time of closure and noted that the inability of Bayou Steel’s own officers and directors to identify who ordered the layoffs was “bizarre.” But the majority held that circumstantial evidence of broader involvement did not necessarily prove that Black Diamond specifically directed the unlawful employment decision. Because the district court had chosen between competing permissible inferences after trial, the majority held that its finding was not clearly erroneous.
The majority also rejected plaintiffs’ reliance on the Fifth Circuit’s prior opinion. The first appeal allowed the case to proceed because plaintiffs’ control theory was a reasonable inference at summary judgment. The second appeal asked a different question: whether, after trial, the district court clearly erred by rejecting that inference. The majority concluded it did not. In the court’s words, plaintiffs’ burden was “to deliver fire,” but they offered “only smoke.”
Judge Higginson dissented. He viewed the case as raising a mixed question of law and fact, not merely a factual issue reviewed for clear error. In his view, the district court and majority reduced de facto control to an almost impossible search for a specific person who admitted ordering the layoff. The dissent argued that the WARN Act inquiry should instead examine functional control and whether the related entities operated at arm’s length. The dissent pointed to evidence that Black Diamond allegedly controlled Bayou Steel’s financing, operations, personnel decisions, board process, bankruptcy preparation, and communications about WARN notices. It also highlighted evidence that Black Diamond-affiliated personnel allegedly excluded independent directors and Bayou Steel management from critical information and decision-making.
For the dissent, the totality of the record showed that Black Diamond exercised de facto control over Bayou Steel to such an extent that Bayou Steel lacked independent decision-making capacity. The dissent would have treated that functional integration as sufficient to support WARN Act liability, even absent direct testimony identifying the person who ordered the layoffs. The majority, however, held that the law of the case required the panel to focus on whether Black Diamond specifically directed the closure, and the district court did not clearly err in finding plaintiffs failed to prove that point.
Looking Forward
Fleming is a useful defense decision for employers, parent companies, private equity sponsors, franchisors, multi-unit operators, and other businesses that operate through layered ownership or management structures. The majority’s holding reinforces that ownership, board involvement, financial support, lender status, and operational concern do not automatically create WARN Act single-employer liability. Plaintiffs still must connect the related entity to the allegedly unlawful employment decision. In this case, the Fifth Circuit required proof that Black Diamond specifically directed the plant closure without proper WARN notice, and the absence of direct evidence mattered.
At the same time, the case should not be read as permission to blur corporate lines. The dissent provides a detailed account of the litigation risk created when a parent, sponsor, lender, or affiliate appears to control day-to-day operations, personnel decisions, financial reporting, management selection, board process, outside advisors, and crisis communications. Even though Black Diamond prevailed, the record described in the opinion supported years of litigation, a prior reversal, a bench trial, a second appeal, and a lengthy dissent. That is not a low-cost victory.
For franchisors, the case offers a helpful analogy. Franchise systems often need brand standards, operational reporting, quality control, financial visibility, and crisis communication protocols. Those functions serve legitimate business and brand-protection purposes. But franchisors should be cautious about crossing from brand-level oversight into direct control over local employment decisions, including layoffs, hiring, firing, scheduling, payroll, discipline, and plant or unit closure decisions. The more a franchisor or parent entity directs the actual employment decision at issue, the more difficult it becomes to maintain separation.
The decision also illustrates the value of governance discipline during a business crisis. Boards should keep minutes or other reliable records of material decisions. Independent directors should receive timely information and meaningful opportunities to exercise judgment. Management should understand who has authority to make employment decisions. Advisors should know whom they represent and from whom they take direction. Communications about layoffs, closures, and WARN notices should reflect the correct decision-maker and the basis for the decision.
For private equity-backed platforms and multi-unit systems, the lesson is not to disengage from troubled businesses. Owners and sponsors may need to monitor investments, evaluate funding, assess restructuring options, and protect enterprise value. The lesson is to preserve the distinction between oversight and command. A sponsor that declines to provide additional funding does not necessarily order a layoff. But a sponsor that controls the employment decision, directs the timing of notices, manages the local HR process, and bypasses the company’s own governance structure invites a very different argument.
The majority gives defendants a strong framework where plaintiffs rely on inference rather than proof. The dissent gives plaintiffs a roadmap for arguing functional control. Employer-side counsel should treat both parts of the opinion seriously. The best outcome is not merely winning the de facto-control issue after years of litigation. The better goal is structuring governance, documentation, and employment decision-making so that the issue is far less likely to arise.
This article is based solely on the opinion of the Court in this matter. The authors have not conducted any independent investigation into the facts. For the avoidance of doubt, each statement related to the law and facts in this article is drawn from the Court’s opinion in this case.
Thomas O’Connell is a Partner at Buchalter LLP and Chair of the firm’s Franchise Practice Group. Jennifer Misetich is a Partner at Buchalter LLP, Administrative Chair of the firm’s Labor & Employment Practice Group, and Vice-Chair of the firm’s Franchise Law Industry Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com and Jennifer at jmisetich@buchalter.com.
This communication is not intended to create, and does not create, an attorney-client relationship or any other legal relationship. No statement herein constitutes legal advice, nor should it be relied upon or interpreted as such. This communication is for general informational purposes only and is not a substitute for legal counsel. Readers should not act or refrain from acting based on any information provided without seeking appropriate legal advice specific to their situation. For more information, visit www.buchalter.com.
