Litigating the Pandemic
After Covid-19 shocked the U.S. economy in March, some businesses quickly recognized they were dealing with a historic downturn that could be much worse than the Great Recession.
Through no fault of their own, they suddenly were facing severe financial challenges. Many companies were shuttered by government order.
Millions of Americans shifted to working from home. For those businesses deemed essential and still operating stores or plants, they potentially could expose their employees and customers to the novel coronavirus.
In this new pandemic world, business liability issues surfaced. Many companies found themselves dealing with contract breaches. Some were frustrated that their insurance carriers were unwilling to pay them under business interruption policies.
The number of Covid-19 related business disputes continued to rise as spring turned to summer in Minnesota. Now many of these unresolved conflicts are the subject of business litigation. Twin Cities Business asked experienced local attorneys to share their insights about the issues in play and how the disputes might be resolved.
Co-Chair, Minneapolis Trial Group Dorsey & Whitney
Q> The economic disruption caused by Covid-19 has led to many breach-of-contract scenarios, including nonpayment of rent on commercial leases and business deals that have fallen apart. Since March, what are the most common breach-of-contract disputes that have arisen? What factors should businesses consider in attempting to resolve these conflicts? When does it make sense to file a lawsuit vs. pursuing mediation or renegotiating terms?
A> We really did not see much commercial litigation activity in March or April because there was so much uncertainty as to how long markets or segments of the economy would be closed, so most businesses were in a holding pattern.
As more and more stay-at-home orders are lifted, we are starting to see the uptick in commercial litigation in Minnesota courts. The majority of those new cases are primarily commercial lease disputes for non-payment of rent, and breach-of-contract claims on supply contracts. We have seen a small number of broken deal cases for failure to close on a proposed transaction or failure to pay the purchase price as specified in an agreement.
The common factors across all three types of cases are a contract requiring a payment made at a regularly scheduled interval, and non-payment at the appointed time or interval. In most cases, the defendant simply does not have the ability to pay and typically has missed more than one payment with no prospect of making a payment in the near term.
Parties should always try renegotiation or high-level business to business discussions before pursuing litigation. Because litigation is time consuming and costly, it really should be the last resort for many businesses, and I say this as a trial lawyer. In my experience, parties can often negotiate a better result than what could be won or lost in litigation.
From a plaintiff’s perspective, a company would want to consider several concepts before filing a lawsuit, such as the express contract language at issue and its enforceability under the circumstances, the nature of the relationship with the opposing party, any offers for partial payment or extended terms from the opposing party, the ability to collect any meaningful relief (e.g. is the opposing party likely to file for bankruptcy or already completely out of business), as well as the cost of pursuing the claim versus the likely return on that investment.
From a defendant’s perspective, there are some proactive steps a company can take to try to avoid litigation such as assessing all of its key contracts and performance obligations, conducting a legal review of any contract terms that may be helpful (such as a force majeure clause), sending prompt notices to suppliers as required by your contracts or by applicable statutes, and engaging counterparties in a dialogue on waivers, extensions, or substitute performance.
Partner • Ballard Spahr
Q> Certainly Covid-19 has had a negative effect on many Minnesota businesses, including those that had to shut down for many weeks as well as those that kept operating and saw big revenue declines for their products and services. What trends are you seeing in bankruptcy filings? Are there upticks in Chapter 11 restructurings as well as Chapter 7 liquidations? How should businesses evaluate their viability prospects before proceeding to a Ch. 11 filing? Are there particular aspects of the Small Business Reorganization Act of 2019 that are proving useful as businesses try to recover during difficult economic times?
A> The coronavirus has had an unprecedented impact on the world economy. Although actual business bankruptcy filings year-to-date in this country are trending only slightly higher compared with the same period last year, the moderate escalation obscures the reality of what is going on in the business sector across entire industries. [For the first half of 2020, bankruptcy filings were down in Minnesota.]
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Sharp, and unexpected, declines in revenue and decreases in the availability of credit have resulted in the permanent closure of many businesses and an increase in out-of-court restructurings aimed at saving troubled companies. The financial aid that has been received by many from government loan programs simply will not carry businesses that are unable to generate positive cash flow over the long term and service existing debt.
Bankruptcy activity will increase dramatically in the coming months, with many businesses saying “uncle” and filing Chapter 7 liquidations, and others attempting to delever their balance sheets through a Chapter 11 reorganization. Chapter 11 will give businesses time and the opportunity to restructure their operations and debts. It will not, of course, create revenue. The fundamentals of the core business must be sound and a plan must be developed for restoring lost revenues even in an environment where developing reliable projections can be next to impossible. Consideration must also be given to scaling back the enterprise to right size the business for current market conditions.
Chapter 11 is expensive. Congress recently enacted “The Small Business Reorganization Act” for the express purpose of lowering costs and streamlining the bankruptcy process to enable a small business, one having $7.5 million or less in debt, to survive and restructure in bankruptcy. The act increases the prospects of salvaging a small business through an expedited process that eliminates a number of the burdens, such as committees and the need for complex disclosure statements, and the expense that larger Chapter 11 cases confront. The statute also has been modified to make confirmation of a plan easier for some.
Most Chapter 11 bankruptcy filings result in a dismissal of the case or its conversion to Chapter 7 liquidation. That fact won’t change in the current environment, even with the help that the new legislation provides. Often, the business is simply no longer viable or the principals wait too long to take the steps that are necessary to address the situation. Increasing the prospects for a successful out-of-court workout or Chapter 11 reorganization now, more than ever before, requires the distressed business to work openly and collaboratively with its landlords, lenders, and other major stakeholders.
Chair of the Executive Board • Robins Kaplan
Q> Your law firm specializes in litigation. Since Covid-19 surfaced, what types of business litigation have you seen emerging most frequently as a result of the pandemic? Is your firm dealing with cases involving breach of contract, business interruption coverage, Covid-19 damage claims associated with employment or customer exposure to the virus? What legal trends are arising that affect Minnesota businesses?
A> Our firm represents many major property insurance companies and Lloyds of London Syndicates. There has been an explosion of claims by the policy holders of our clients for business interruption losses and many of those claims are now in litigation in various courts throughout the country.
We have also begun to see commercial general liability insurance claims. We have one case where a nursing home is suing a doctor’s office that services the home as one of the doctor’s purportedly was Covid-19 positive and spread the virus amongst the vulnerable population, ultimately causing 40 seniors and staff to become ill and/or die.
There are extensive and numerous disputes among landlords and tenants in the retail industry across the country concerning the abatement of rent, and the period that that abatement should continue in light of the disease curves as landlords and retailers try to foresee what will constitute the new normal in omnichannel sales, physical restrictions and guidelines, and consumer behavior.
We represent several large retail clients and we have been advising them on these issues. For one client we have cases pending in Florida, North Carolina, West Virginia, Virginia, Georgia, Pennsylvania, New Jersey, New York, Connecticut, Vermont, Illinois, Ohio, Michigan, Arizona, California, Washington, and Texas. These suits involve hundreds of leases and we are overseeing all of the litigation. Our aggressive strategy on behalf of this particular client has saved them tens of millions of dollars so far.
We have advised clients on procedures to implement to minimize their risk for claims related to their employees or customers for exposure to the virus. Some of our clients have been subject to employment discrimination claims related to the virus.
We have seen numerous claims for breach of contract and supply agreement claims. These cases frequently assert force majeure and frustration of purpose contract claims. Some of these claims have now been asserted in litigation.
With increased bankruptcies we have filed adversary proceedings related to business litigation in the Bankruptcy Courts.
Zoom depositions, hearings, and mediations have now become routine. And we had a Zoom arbitration in late June. I think that Zoom depositions will continue after this pandemic subsides. Likewise, a lot of travel that had previously been done to meet with witnesses and experts will now be done by Zoom or Microsoft Teams. This trend will save Minnesota companies money in pursuing their legal claims.
Partner • Taft
Q> When government officials ordered businesses to lockdown to combat Covid-19, the issue of business interruption insurance surfaced. Would standard policies cover losses associated with a pandemic? Would contagion or a virus need to specifically be cited in the policy to obtain a payment? Since Covid-19 spread across the country, is there a trend surfacing in how courts are ruling on disputes over business interruption coverage? Some Twin Cities businesses also closed because of social unrest in their neighborhoods. Are those incidents covered under business interruption policies? Based on what companies have experienced in 2020, going forward what legal considerations should companies weigh when deciding what kind of business-interruption policies they should buy?
A> Insurance for business losses due to Covid-19 is typically found in the business interruption, supply chain disruption, and civil authority coverages in commercial property policies. In the absence of viral exclusions in such policies, most policyholder practitioners view the presence of the virus on surfaces at insured premises, or third-party premises, to constitute the type of property damage needed to trigger coverage. Most likely, many state courts will agree with this view, though some will not.
Business interruption coverage for insureds’ lost profits and additional expenses depends on the presence of the virus at the insured premises. Supply chain disruption coverage is similar to business interruption coverage except that usually it is triggered by the presence of the virus at the supplier or customer facilities. Civil authority coverage typically requires a governmental order prohibiting access to the insured premises because of viral contamination at third-party premises.
Many lockdown orders state that the reason for the order includes the contamination of surfaces within the community. Some policies require that the shutdown last for a minimum amount of time, such as 24 to 72 hours. Frequently, civil authority coverage lasts only for 30 or 60 days, though insureds will argue that each new civil authority order begins a new time period.
Many class actions against carriers have already been commenced. Participation in class actions may benefit small insureds who are unable to litigate on their own. Larger insureds with high dollar claims are less likely to benefit from this approach. The litigation is just beginning and will take time to play out.
News reports so far suggest that carriers are covering property destroyed in the wake of unrest in Minnesota. Also, curfews are a classic example of the type of governmental order that triggers civil authority coverage (and ingress coverage) for losses during the curfews. Unfortunately, waiting periods for civil authority coverage and the pre-existing Covid-19 lockdown orders may reduce the amount of civil authority coverage available for curfews. Even more unfortunate is that many affected small businesses did not have any coverage whatsoever.
It remains to be seen whether, as they did after prior pandemics, carriers will increasingly insist on express viral exclusions or offer only low limits for viral contamination at high premiums. For insureds whose business would be seriously affected by future pandemics, coverage for viral contamination may be advisable depending on price and limits available.
Pamela Dattilo and Aron Frakes
Shareholders • Fredrikson & Byron
Q> Liability issues are at play with Covid-19. Many businesses have some employees still working at home, and others have employees based in company workplaces. What are the legal liabilities that companies face when their employees or their customers contract Covid-19 on company property? If the companies have safety protocols in place, yet an employee or customer dies from Covid-19, would the surviving family members be able to successfully sue the company for wrongful death or another claim? Overall, what steps should companies, which are trying to provide safe and sanitized spaces, take to minimize their legal liability associated with Covid-19?
A> While businesses should take steps to ensure a safe environment for both employees and customers, liability for employees differs significantly from customers.
If an employee contracts Covid-19 at work, the employee’s remedy will generally be limited to benefits under worker’s compensation laws—absent highly unusual circumstances. This is true even if the employer was negligent. If an employee were to die, family members may stand in the employee’s shoes and pursue worker’s compensation, but they would also be barred from a civil action seeking damages unavailable under worker’s compensation.
The worker’s compensation exclusivity rule should not cause employers to take their obligations lightly. Failure to follow required safety protocols can lead to OSHA citations and liability under a variety of federal, state, and local anti-discrimination, anti-retaliation, failure to accommodate, and leave laws.
Some employers have considered asking employees to sign liability waivers. We recommend against doing so because such waivers are likely not enforceable and may have other unintended consequences (for example, potential penalties for attempting to avoid worker’s compensation or OSHA obligations).
Instead of waivers, employers should effectively communicate with employees the measures taken to mitigate any spread of Covid-19. Prompt remedial action is necessary in response to valid complaints about workplace safety.
Customers who contract Covid-19 are not barred from filing a civil action—typically for negligence—against the business seeking a broad array of damages. The touchstone will likely be whether the business exercised reasonable care. Businesses should implement, clearly document, and follow reasonable measures to prevent the spread of Covid-19 on their premises so that they can provide clear, contemporaneous evidence of the business’s reasonable efforts.
Although employee Covid-19 waivers are not recommended, such waivers may be viable for limiting customer claims. Such a waiver should be in writing and should include indemnification if the customer’s employee makes a claim against the business.
Many businesses are considering whether it makes good business sense to seek customer waivers. If so, we generally recommend any waiver request be made with a statement about the steps the business is taking to prevent the spread of Covid-19. This demonstrates that the business cares about its customers’ safety—not just about limiting liability.
Following public health guidelines is critical to minimizing potential liability to employees and customers. A waiver may be appropriate in some instances, but should never be used in lieu of implementing and following smart precautionary measures.