April 24, 2020

COVID-19 Litigation And Government Investigations in the U.S.: What We Are Seeing Now, And What the Future Holds

The emergence of COVID-19 has led to increased litigation and government activity across all industries, and this trend is only likely to accelerate. To assist you in better understanding your risk, we have examined matters in which Goodwin is involved, as well as other sources,1 to identify litigation and government investigations already initiated, which are noted below with a checkmark (). We have also identified future litigation and government actions that are likely to result from the COVID-19 pandemic and significant federal funding, including through the Paycheck Protection Program. This list is broken up into four areas: (1) Business & Contract Disputes, (2) Consumer and Securities Class Actions, (3) Employment Litigation, and (4) Government Investigations and Enforcement Actions.

This list, while not exhaustive, is intended to provide guidance as to the risks your organization potentially faces and, relatedly, to focus the analysis of your organization’s own particularized litigation risks, including through the examination of contracts, policies, company practices, customer relationships, and reporting requirements, if any. Similarly, we hope this list will help as you examine options for assistance from government programs, business plans, and future agreements, or actions to be taken over the next several months to help minimize risk.

I. Business & Contract Disputes

  1. Breach of contract claims for failure to perform, such as breaches in lease agreements, loan agreements and supply chain agreements for failure to meet delivery deadlines/targets.

  2. Litigation over “Force Majeure” provisions in contracts, brought both by companies attempting to argue that (i) the provision does/does not cover pandemics, and/or (ii) their supplier is using the pandemic to cover up for a failure to deliver that would have occurred regardless.

  3. Litigation over “reasonable best efforts” provisions in contracts, particularly where one contractual party is looking to pre-emptively terminate a contract that is no longer necessary or profitable as a result of the pandemic.

  4. Improper and “unfair” business tactics to accelerate payment. A company filed suit seeking declaratory relief relating to a loan servicer’s allegedly improper sweep of cash from a borrower due to concern the borrower could not pay the outstanding debt as a result of the pandemic.

  5. Mergers & Acquisitions. We are already seeing litigation relating to deals failing to close as a result of the pandemic, and should expect to see post-deal escrow and earnout disputes.

  6. Partnership -related disputes. As economic conditions deteriorate, pressures will be placed on businesses that are run as partnerships. Disputes over who makes key decisions, when and how a partner can exit the partnership, and when capital can be withdrawn will occur.

  7. Corporate governance litigation, including alleged breaches of fiduciary duties by board members relating to, among other things, whether to accept government funding,  actions taken during the pandemic, and not being properly prepared for the business impact of the pandemic.

  8. Insurance. Businesses impacted by COVID-19 are suing insurers for business interruption coverage, alleging coverage is required because the county/state mandated closure of the business/industry. Insurance companies have filed suit too, seeking a declaration that there is no coverage.

  9. Bankruptcy/creditor litigation. Unfortunately, the pandemic is leading to companies not being able to pay their bills or recapitalize, leading to bankruptcy.

  10. Disputes relating to shutdowns and delays of clinical trials for non-COVID-19 treatments.

  11. Disputes relating to joint development, manufacturing and supply agreements, focusing on ownership of patents, trade secrets and other know-how.

  12. Trade secret litigation relating to the alleged potential “leakage” and risk of disclosure for trade secrets and other confidential information as a result of employees working from home or other remote arrangements.

  13. Disputes over IP use and ownership resulting from COVID-19 related products and partnerships (e.g., ventilators, production of PPE, vaccines and treatments, etc.)

  14. Wrongful death actions filed by customers/clients.

II. Consumer and Securities Class Actions

  1. Unfair competition law claims relating to alleged unfair business practices surrounding the COVID-19 virus. Consumer class actions have been filed against Major League Baseball, ticket vendors, universities, gyms, airlines and others for failing to issue refunds or suspend memberships after cancellations and, closures, and postponements of an unspecified length resulting from the COVID-19 pandemic.

  2. Class actions filed by small businesses alleging bank favoritism towards larger business relating to the distribution of Paycheck Protection Program funds.

  3. Privacy class actions arising from the increased use of technology for meetings, alleging, among other things, the failure to protect users’ personal information, including by sharing it with others and recording information.

  4. Securities class actions relating to inadequate or misleading disclosures, that either allegedly downplayed the seriousness of the pandemic, misrepresented a company’s preparedness to address current circumstances and/or failed to accurately communicate the true state of material business operations, current trends, and/or anticipated difficulties. Plaintiffs’ lawyers have publicly stated that they also will look to bring cases against companies that attempt to use current market volatility to “camouflage” the effects of business problems unrelated to COVID-19.

  5. Securities litigation and product liability litigation, including claims that consumer products fraudulently were touted as being approved by the FDA, reliable, or effective against COVID-19 or otherwise misleading the public. (litigation threatened)

  6. Telephone Consumer Protection Act litigation, including class actions, relating to calls or texts made to update customers or for marketing during or shortly after the pandemic.

III. Employment Litigation

  1. Wrongful death or personal injury claims from employees exposed to COVID-19 on the job, as the alleged result of improper precautions taken by the employer.

  2. Efforts to use the virus as a basis for expediting independent contractor misclassification suits, to assist securing workers paid sick leave, unemployment, or other benefits.

  3. Retaliation claims stemming from employees alleging they suffered adverse action for raising concerns about health conditions at their workplace.

  4. Claims stemming from lay-offs, including alleged violations of federal/state WARN act requirements and disparate impact on protected groups.

  5. Governmental audits and administrative hearings resulting from increased numbers of gig workers filing for unemployment.

  6. Failure to pay wages or severance due to distressed company’s inability to pay.

  7. Disability and privacy claims resulting from employers conducting “fitness to report to work” assessments.

  8. Expense reimbursement and off-the-clock work claims stemming from remote work arrangements.

IV. Government Investigations and Enforcement Actions

  1. Government contract fraud claims typically brought under the False Claims Act, particularly related to CARE Act/PPP funds. Potential liability may arise from decisions made at any stage, including: (a) the application, particularly regarding whether the applicant and its affiliates have under 500 employees and the funds are “necessary” for continued operations; (b) assessing whether to take the loan once approved if the business’s circumstances have changed; (c) spending of the funds; (d) responding to government questions/updates; and (e) responding to audits.

  2. Whistleblower complaints filed by private citizens seeking federal bounties for reporting misconduct and fraud involving federal funds and programs.

  3. Claims resulting from alleged violations of local/state stay in place provisions or the operation of a “non-essential” business or “non-essential” portion of an otherwise essential business.  This is a particular concern for gig economy platforms with drivers or taskers.

  4. Unfair, Abusive, or Deceptive Acts and Practices. Unfair competition law claims relating to alleged unfair business practices as a result of taking advantage of circumstances surrounding the COVID-19 virus. Federal and state regulators are issuing COVID-19 related regulations and guidance for certain industries, and consumer litigation could also arise out of actions taken in contradiction to these regulations and guidance.

  5. Price-Gouging. States, including Florida, are issuing subpoenas to investigate price gouging relating to highly sought after products such as face masks and disinfectants. Relatedly, the California Attorney General has issued an executive order relating to price gouging and directed e-commerce platforms to increase monitoring of price gouging.

  6. Lawsuits have been filed alleging public officials acted improperly by mislabeling a particular business or industry as “non-essential” or using the pandemic as an excuse to target an industry disfavored by the state government. The filing of such cases may accelerate as states slowly “open” their economies, creating “winners” and “losers” based on which industry sectors are allowed to open early.

  7. Potential government seizure of IP and manufacturing capacity for vaccine and production of treatments and litigation arising from the seizure. This post-seizure litigation may include claims relating to misrepresentations as to product efficacy or safety.

  8. Government investigations into material misstatements and inadequate public disclosures, including downplaying the virus’s impact on a company’s financial position.

  9. Insider trading investigations and lawsuits. Investigations and prosecutions based on alleged insider trading by executives, board members, employees, and their family members relating to material non-public information, including based on nonpublic material information concerning adverse business conditions relating to the pandemic and other factors. The first insider trading lawsuit was filed against U.S. Senator Richard Burr for allegedly using information he received relating to the pending pandemic to sell stock before the negative information became public, thus avoiding large losses.

Please contact your usual Goodwin’s Litigation team member to review or continue the discussion.

1 Law360 publishes and is a good source for new COVID-19 litigation.