Finding Legal Pathways Through the Pandemic
Businesses have learned to adapt to an economy that’s still being affected by Covid-19, but their resiliency hasn’t kept them out of legal conflicts.
As companies approach the end of 2021, some are still dealing with commercial lease disputes and breach of contract claims.
Manufacturers are struggling with supply chain bottlenecks that have prevented them from producing goods on time, because their suppliers are missing deadlines for delivering parts.
And employers are dealing with the legal ramifications of vaccine requirements for their employees as well as what they can require for where employees do their work.
Twin Cities Business asked four experienced local attorneys to share their expertise and insights about how businesses can address these legal challenges.
Theresa Bevilacqua: Partner, Co-Chair, Minneapolis Trial Group
Q: Litigation is often very expensive. As we approach the two-year anniversary of the emergence of Covid-19 in Minnesota, what are the most common business disputes that have arisen as a result of Covid? Are those disputes being litigated in courtrooms or primarily resulting in negotiated settlements outside of the courts? Have you been advising many of your clients to settle out of court? If so, why?
A: In the year and a half since the first stay-at-home orders went into effect, the most common business disputes making their way onto civil dockets are still commercial lease disputes and breach of contract claims.
In the state courts, there is also a small uptick in breach of fiduciary duty claims and minority shareholder or investor disputes, primarily related to a proposed sale, wind down, or buyout of a closely held business. But these are only the cases that make their way onto a court’s docket.
Minnesota has a unique “pocket-pleading” rule, which allows parties to commence a civil action by serving a complaint, without filing the action with a court. We have seen an uptick of “pocket-pleaded” claims naming our clients as defendants, and where appropriate, we advise our clients to use the pocket-pleading rule as a plaintiff. The rule provides several advantages that are appealing during the pandemic.
First, it delays litigation costs as no court fees are advanced or incurred until the case is filed. Second, it preserves claims and defenses and eliminates any arguments related to the statute of limitations. Third, during the pandemic, parties have been more willing to engage in meaningful alternative dispute resolution early in the case due to the backlog in the courts.
For several months, our state and federal courts were not able to address civil cases. While our courts never closed, priority had to be given to criminal matters. Due to the sheer volume of cases that were pending when the stay-at-home orders took effect, combined with active criminal dockets and new civil filings, our court system has a backlog of civil trials to work through.
Business clients are much more likely to get a resolution sooner if they engage a mediator or arbitrator early. We have seen companies be more interested in early alternative dispute resolution because it can be done effectively in a remote environment, and it brings certainty and closure much faster than litigation. While I only advise clients to settle if the particular settlement is in the client’s best interest, certainty, predictability, and expediency are key factors driving those client decisions.
Q: The leisure and hospitality sector was particularly hard hit during the worst of the pandemic. In that industry, have a lot of leases simply been renegotiated? In your law practice, are you doing a lot of litigating, or helping business clients deal with the Covid fallout by working through issues without filing lawsuits?
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A: We are still litigating many cases, but the types of cases being litigated through the courts has shifted. For business clients engaged in a dispute with another business, we are seeing more early mediated resolutions and business-to-business direct negotiated settlements.
Jim Seifert: Shareholder, Head of the Manufacturing Practice Group
Q: Supply chain problems have become a chronic issue during the pandemic. This is a headache for consumers and businesses, but particularly problematic for manufacturers. What are the legal implications when contracts are violated because suppliers cannot provide parts or materials to manufacturers by guaranteed dates, and manufacturers lack the items they need to produce finished goods for customers? What are you advising your business clients to do?
A: A typical supply chain problem is caused by a single point of failure. As a consequence of “just in time manufacturing”—which is extremely valuable if all the required suppliers can perform—if just one supplier fails to supply the required component part just in time, the finished product cannot be made.
Even if the product is simple and in short supply, such as fasteners or specialty glues, these products have caused assembly lines to stop.
The legal implications when a subcontractor or OEM (original equipment manufacturer) fails to perform according to the agreement, penalties apply, and those penalties can sometimes be extreme.
This begins a cycle of failure for both the supplier and customer. If penalty clauses are enforced, the supplier is wounded and becomes a less reliable partner. A less reliable partner is bad for the customer and so I think we have entered an era where customers and suppliers must share the risk of nonperformance.
If the cause of the supply breach is demonstrably beyond the control of the supplier, the penalty clause should not be enforced, and a collaborative plan should be drafted. Such a plan would include a larger “safety stock” and an alternative supplier within the North American trading zone.
“Safety stock” is usually used in the context of a supplier’s operations. It is an inventory of finished goods or parts that is in excess of what is forecasted based on current demand. Safety stock increases costs but allows the supplier to continue operations in the face of an interruption in its supply chain whether it’s screws, glue, or electrical components.
Phyllis Karasov: Shareholder, Labor and Employment Law Specialist
Q: The Delta variant of Covid-19 has caused many white-collar employees to continue working remotely. But recently more companies have opened up their offices or plan to do so in early 2022. In Minnesota, can an employer require Covid vaccinations as a condition of employment? If somebody refuses to get vaccinated and their work could be done remotely, would they have a strong discrimination claim if their employer fired them solely for not getting vaccinated?
A: These are questions we would never have considered prior to the Covid-19 pandemic. Because we are in a pandemic, it is permissible for employers to ask employees Covid-related health questions. This right includes asking about and requiring vaccination status. So yes, during a pandemic, employers can require Covid vaccinations as a condition of employment.
Q: If there are no employer-employee conflicts over vaccinations, does the employer have absolute authority over where an employee works? If somebody has been with the company for several years and has received excellent performance reviews, can that person be legally required to work in the office as opposed to remotely? From an employment law standpoint, what is the most ambiguous scenario that has surfaced between employers and employees as a result of the pandemic?
A: Employees have become used to working from home and this is challenging for employers who want employees to return to the office. Employers have the right to require that employees work in the office. An exception to this right can exist when an employee has a medical condition or religious objection which exempts them from the vaccination requirement. In that case, the employer must assess whether a reasonable accommodation exists so that the employee can continue to perform their job in the office, without creating an undue hardship for the employer.
Possible reasonable accommodations an employer can implement are social distancing, wearing a mask, or reassigning the employee to a work location which is isolated from other employees.
If there are no reasonable accommodations available in the office, the employer should determine whether working remotely is reasonable or instead, whether working remotely causes the employer an undue hardship.
If an employee has a medical condition or religious objection, which would exempt the employee from a vaccination requirement, and the employee can be accommodated while continuing to work in the office, it is unlikely the employee would have a claim of discrimination. Positive performance reviews or seniority are not relevant in this equation.
Aside from an obligation to reasonably accommodate a medical condition or religious objection, an employer has the right to establish where an employee will work. Having said that, employers are facing a labor shortage and difficulty retaining employees who are searching for better pay and
Working remotely has become a commonplace benefit rather than a temporary situation caused by the pandemic. Employees are willing to leave their jobs if they are required to be vaccinated, or if they are not allowed to work from home. Despite an employer’s legal right to demand that all employees return to the office, the current labor environment has caused employers to reassess their priorities and allow more flexibility in requiring that employees return to the office.
Robert Tunheim: Partner, Practice Co-Leader, Private Equity Group
Q: The fallout from Covid-19 has disrupted the state’s economy in many ways. How has it affected the market for mergers and acquisitions? Are companies that have been strong financially acquiring smaller businesses? Does it appear that 2022 also will be a big year for M&A activity? What business trends in private equity do you envision for 2022?
A: Like many other markets, the M&A sector paused momentarily when Covid-19 hit. However, there has been so much dry powder in the market—available capital, appealing acquisition targets, a healthy market for growing businesses—that it didn’t stay in stasis for long.
A lot of companies decided they were comfortable enough with a degree of risk that they wanted to keep pursuing advantageous transactions. That has sent volume and valuations skyrocketing. I can’t think of a time in recent memory when our Minneapolis M&A attorneys have been busier than they are now.
We have a strong connection to the Minneapolis and Midwest markets, and what we’re seeing here seems to be borne out on national and international scales, too. KPMG recently released a report indicating that deal-making worldwide could hit $6 trillion by the end of the year, which would eclipse the all-time high of $4.8 trillion set in 2015.
Underlying all of this activity is an Economics 101 supply/demand imbalance that I don’t see going away soon. There are still record amounts of corporate cash and private equity dry powder that are chasing deals and driving up purchase price multiples for the relatively few companies seeking an exit.
On the other side of the equation, many of our clients, particularly manufacturers and distributors, are experiencing supply-chain issues and labor shortages that are connected to, or have been accelerated by, the pandemic.
These issues are discouraging many of these clients from seeking an exit at this point, which further exacerbates that supply/demand continuum in the M&A market.
With the stock market at record highs and interest rates historically low, there are few options for obtaining returns on investment that acquirers can get at even high purchase prices. And with credit still readily available from banks, nonbank lenders, and mezzanine lenders, I think this basic supply/demand imbalance will continue to drive a hot M&A market into 2022 and beyond.