By Steven Witzel, Joshua Roth and Shira Sandler

Law360 (April 15, 2020, 4:54 PM EDT) --

Steven Witzel

Joshua Roth

Shira Sandler

The coronavirus pandemic is having a profound impact on nearly every business. As with any disruptive event — and this pandemic has already been one of the most disruptive events in recent history — conventional wisdom and experience suggest that related litigation will quickly follow.

Although the level of litigation activity to date has been relatively limited and primarily confined to a handful of industries, it provides some sense of what is likely to come.

We have been tracking litigation related to the pandemic and see emerging patterns as they relate to significant commercial matters. Although the nature of these litigations differ based on the relief sought and the governing statutes, they can generally be grouped into the following categories: real estate, employment, securities, false advertising, canceled events and insurance.

Real Estate

There have been a number of litigations commenced relating to real estate. In two actions commenced in Indiana and Texas state courts, buyers sought to extend the closing deadlines for the sale of residential apartment complexes.

The buyer in the Indiana action alleges that, as a result of the coronavirus pandemic, its key employees (located in another state) could not undertake critical tasks required to close a large-scale real estate transaction, including verification of banking details and wire transfers, review of voluminous relevant documents and the transmission of signature pages. Similarly, the buyers in the Texas action allege that, as a result of the coronavirus, they have not been able to place their property management team on the ground to adequately transition management and operations from the sellers to the buyers.

Additionally, two homeowners commenced a purported class action against a bank and a foreclosure trustee in West Virginia federal court seeking injunctive relief to prohibit all residential foreclosures within 120 days of commencement of the action (i.e., through July 14). The homeowners claim that public actions for foreclosures cannot be conducted in accordance with West Virginia law and the governing agreement (i.e., a commercially reasonable public auction at an appropriate time, place and manner) during this national emergency.

In another real estate-related litigation, a tenant of a commercial parking garage in New Orleans seeks a declaration that the coronavirus pandemic constitutes an unforeseen "act of God" that has interrupted the use of the premises, and that it is entitled to a rent abatement until the pandemic no longer interrupts the operation of the premises.

The operative provision in the lease entitles the tenant to an abatement due to an "unforeseen act of God or unforeseen cause beyond the reasonable control of Tenant."

Employment

The coronavirus pandemic also raises many employment law-related issues concerning compliance with wage and hour laws, anti-discrimination laws, the Americans with Disabilities Act and the Family and Medical Leave Act, among others.

To date, we have seen purported class action complaints against two different national companies for allegedly misclassifying employees as independent contractors — the classification decisions themselves had no connection to the pandemic — which, according to the plaintiffs, means that they are not entitled to sick leave.

Accordingly, the plaintiffs claim that that they have been required to work during the coronavirus outbreak to support themselves. In these actions, plaintiffs seek a declaration that their respective employers are acting in violation of applicable employment laws and damages as a result.

Another litigation was filed in federal court in Alaska by a medical center against a labor organization that represents hospital employees, seeking injunctive relief to enjoin a threatened strike. The medical center alleges that its ability to provide health care to the community will be severely compromised if the strike were to occur during the coronavirus pandemic.

Securities

Based on recent market volatility attributed to the pandemic, we anticipate a sharp rise in securities litigation commenced against public companies. A number of coronavirus-related securities class action lawsuits have been commenced against public companies.

In one, the plaintiff alleges that the defendant, a public pharmaceutical company, capitalized on widespread fears of the coronavirus by falsely claiming that it had developed a vaccine for coronavirus. As a result of such false claims, the pharmaceutical company allegedly falsely inflated its stock price and enticed individuals to invest.

Similarly, in another coronavirus-related securities litigation, a class action plaintiff is seeking damages against an international cruise line as a result of its purported violation of federal securities law. Specifically, the plaintiff alleges that the cruise line, to entice customers to invest, filed misleading and false statements about the impact of the coronavirus on the company.

False Advertising

We have also seen a surge in class action litigation alleging false advertising under applicable state and federal laws relating to the coronavirus pandemic. The majority of these litigations allege that companies that produce or market hand sanitizer products improperly have claimed that their products kill over 99% of germs.

In some of these actions, the proposed class plaintiffs are asserting that the Federal Drug Administration has recently concluded that hand sanitizers do not, in fact, prevent illness or disease, and that the U.S. Food and Drug Administration has already warned these companies against making such false promises, particularly during a global pandemic.

We also note that the U.S. Department of Justice and state attorneys general have warned businesses and individuals not to engage in deceptive business practices and price gouging relating to the coronavirus and have stepped up their enforcement efforts to rein in such practices.

Canceled Events

Many businesses and individuals have been forced to cancel events (corporate conferences, weddings and other significant events) because of the coronavirus pandemic.

Some of these cancellations were voluntary and others were required based on government directives that prohibited large, or even small, gatherings. These cancellations raise questions relating to force majeure, impossibility, and other similar common law contract defenses.

Two actions of note — one in Los Angeles state court and one in Utah federal court — relate to the parties' rights to terminate existing contracts for concerts. Both of these actions were commenced before either state had invoked a shelter-in-place order or prohibited events that included a certain number of people.

In the Los Angeles action, the plaintiff seeks a declaration as to whether the coronavirus constitutes a force majeure event warranting termination of the contract. In the Utah action, the plaintiff seeks a declaration that its obligations under the agreement are waived and that it properly exercised its good faith judgment in cancelling the concert.

In another action in New York federal court, the organizers of a large-scale comic book convention that was scheduled to occur in late March 2020 commenced an action against a third-party software company that processed ticket sales for the event.

Pursuant to the agreement between the parties, the defendants were required to process the ticket sales in exchange for a percentage fee. The relevant agreement contained a force majeure provision, which excused performance in the event of an act of God or governmental action.

In light of the pandemic, the parties allegedly agreed that the defendants would fully refund the customer. The plaintiff alleges that, despite this alleged promise, the defendants subsequently refused to provide refunds to conference attendees and instead demanded additional money from the plaintiff in connection with the fees allegedly owed pursuant to the original agreement.

The plaintiff is seeking an accounting and damages for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, promissory estoppel and conversion.

Insurance

The first wave of insurance coverage litigation commenced with a lawsuit by a prominent restaurant in the heart of the French Quarter in New Orleans, seeking a declaration that its insurance policy would cover lost revenue as a result of government restrictions imposed to stop the spread of the coronavirus.

In this action, commenced in Louisiana state court, the plaintiff alleges that because the applicable policy does not contain an exclusion for a viral pandemic, the policy should provide coverage. As businesses continue to review applicable policies and provisions, including business interruption insurance, a number of similar lawsuits undoubtedly will follow, in which companies and businesses seek to invoke coverage to recover coronavirus-related losses.

Material Adverse Change or Effect

Although we have not seen any so far, we anticipate that litigations will be commenced relating to whether the coronavirus pandemic constitutes a material adverse change or effect providing a right to terminate or not to perform under existing merger, financing or lease agreements.

Generally, these provisions have been interpreted narrowly and there has been a high bar to a finding that a material adverse change has occurred.

Because the coronavirus appears to be a truly singular event and the existence of a material adverse change depends in large part on the relevant facts and circumstances — including the durational significance of the event, which is not currently known — it remains to be seen how courts will interpret these provisions in this context. We have addressed the parameters of this issue in a separate memorandum.

Conclusion

The relatively limited number of coronavirus-related litigations to date is likely the product of a number of factors.

First, and probably most significantly, management teams are rightly focused on running their businesses during these very difficult times. As a result, many management teams are trying to avoid the distraction and expense of litigation at this time unless absolutely critical.

Second, there seems to be a general consensus among many sophisticated parties (at least for the time being) that it is in everyone's interest to pause, try to cooperate and let events unfold for some time before making litigation decisions.

Third, many courts, including New York state courts, have limited court proceedings to emergency matters, often focusing on criminal matters and matters involving health and human safety issues. For the moment, judges may be unsympathetic to parties running into court on commercial matters.

Nevertheless, we anticipate that there will be a surge in lawsuits, particularly in certain industries, as the coronavirus pandemic and its effects continue to escalate.

We would advise management teams, to the extent possible, to consider how their decisions may be judged in hindsight in a litigation context. Businesses should also carefully review existing agreements, fully document any steps taken in response to the pandemic and, where appropriate, involve counsel in key business decisions.

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Steven M. Witzel and Joshua D. Roth are partners, and Shira Sandler is an associate at Fried Frank Harris Shriver & Jacobson LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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