August 13, 2025|Franchise Frontlines
August 13, 2025 | United States Bankruptcy Court for the District of Delaware | Unpublished Opinion
Executive Summary
In an unpublished opinion, Judge J. Kate Stickles of the United States Bankruptcy Court for the District of Delaware granted H.I.G. Capital Management LLC’s motion to dismiss claims brought by former Jenny Craig employees, but allowed leave to amend. Plaintiffs alleged that H.I.G., the private equity firm that acquired Jenny Craig in 2019, qualified as their employer under California labor laws and owed WARN Act notice, wages, and benefits. H.I.G. countered that it did not employ the plaintiffs and had no role in day-to-day operations. The court agreed, finding the complaint lacked factual allegations showing H.I.G. acted as an employer under joint employer or alter ego theories, but permitted plaintiffs an opportunity to replead.
Relevant Background
Jenny Craig operated for decades as a weight-management company before its financial decline. H.I.G. acquired the company in 2019, and by May 2023, Jenny Craig filed for Chapter 7 bankruptcy after closing its offices nationwide. Former employees alleged they were not provided with WARN Act notice, final pay, or COBRA benefits, and that health insurance deductions were misapplied. They sued H.I.G. and others in California state court in 2024, asserting six causes of action under the California Labor Code, COBRA, and contract law. The case was removed to federal court, transferred to Delaware, and referred to the bankruptcy court as related to Jenny Craig’s Chapter 7 proceedings.
Decision
Judge Stickles dismissed the complaint on multiple grounds, focusing heavily on the insufficiency of the plaintiffs’ joint employer allegations. The court applied the California “integrated enterprise” test, which considers “(1) interrelation of operations; (2) common management; (3) centralized control of labor relations; and (4) common ownership or financial control.” Laird v. Capital Cities/ABC, Inc., 68 Cal. App. 4th 727, 737 (1998). To establish liability, a plaintiff must allege that a parent “exercised control to a degree that exceeds the control normally exercised by a parent corporation.” Id. The complaint, however, alleged only that Jenny Craig was “under the control of Defendants” and that certain unnamed managers were employed by both entities. The court concluded that these “threadbare recitals” did not satisfy the integrated enterprise standard, observing that “common ownership or control alone is never enough to establish parent liability.” Luna v. Universal Studio City Prods., LLLP, No. CV 12-9286 PSG (SSx), 2013 U.S. Dist. LEXIS 203001, at *16 (C.D. Cal. Aug. 27, 2013).
The plaintiffs also attempted to raise an alter ego theory, but the court rejected this argument. Citing Sonora Diamond Corp. v. Superior Court, 83 Cal. App. 4th 523, 538 (2000), the court explained that alter ego liability requires both a “unity of interest and ownership” and “an inequitable result if the acts in question are treated as those of the corporation alone.” The complaint contained no allegations of commingling of funds, disregard of corporate formalities, or other facts that could support veil-piercing. Instead, the plaintiffs offered only conclusory assertions that H.I.G. had “control” over Jenny Craig, which the court found inadequate.
The WARN Act claim likewise failed. The California WARN Act prohibits “an employer” from ordering a mass layoff without 60 days’ written notice, and the statute defines “employer” to include a parent company only if it “directly owns and operates a covered establishment.” Cal. Lab. Code §§ 1400.5, 1401(a). The court cited Cruz v. HMR Foods Holding, LP (In re HMR Foods Holding, LP), 602 B.R. 855, 877 (Bankr. D. Del. 2019), where WARN Act claims were dismissed because the complaint failed to allege the parent “ordered” the closures. Similarly here, Judge Stickles noted: “Nothing in the Complaint alleges H.I.G. controlled labor and employment decisions or ordered anything with respect to employment at Jenny Craig”.
The court also dismissed the wage and hour claims, noting that merely reciting statutory obligations and asserting they were violated is insufficient. As the court explained, “stating various obligations California law imposes upon employers, averring simply that Defendant violated those laws, and claiming damages and an entitlement to penalties and other relief is insufficient.” Ovieda v. Sodexo Operations, LLC, No. CV 12-1750-GHK (SSx), 2012 U.S. Dist. LEXIS 173844, at *4–5 (C.D. Cal. May 7, 2012). The COBRA claim was dismissed because ERISA imposes notification obligations on the plan administrator, not the employer. Finally, the breach of contract claim was held preempted by ERISA under Aetna Health Inc. v. Davila, 542 U.S. 200, 209 (2004), which held that “any state law cause of action that duplicates, supplements, or supplants the ERISA civil enforcement remedy” is preempted.
Although all claims were dismissed, the court granted leave to amend. Citing Foman v. Davis, 371 U.S. 178, 182 (1962), Judge Stickles emphasized that leave should be “freely given” absent undue delay or futility, concluding that it was not clear the plaintiffs could not allege additional facts to support their theories.
Looking Forward
Private equity is becoming more and more integral in the franchising industry, often serving as the capital and strategic driver behind emerging brands. As this case illustrates, employees are increasingly willing to test joint employer and alter ego theories against investment firms—particularly when a portfolio company collapses. With this trend, investment firms and the franchisors they back must expect heightened scrutiny over the extent of their involvement in day-to-day operations and employment practices.
For franchisors backed by private equity, the risks are significant even when the legal standards remain demanding. Courts require specific factual allegations that an investor dictated labor relations, ordered layoffs, or otherwise engaged in employee management before liability will attach. General assertions of “control” are not enough, as Judge Stickles underscored by holding that “common ownership or control alone is never enough to establish parent liability.” Still, even unsuccessful cases carry heavy costs in litigation and reputational exposure.
The Jenny Craig decision reinforces that private equity oversight must be carefully structured to preserve the independence of the operating company or franchisor in employment matters. High-level governance, capital allocation, and brand development can be appropriate, but any blurring of lines into wage practices, HR policies, or layoff decisions may create exposure under joint employer or alter ego theories. As private equity’s role in franchising expands, careful documentation and separation of responsibilities may prove decisive in avoiding liability.
Thomas O’Connell is a Shareholder at Buchalter APC and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
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