Law360 (April 21, 2020, 7:58 PM EDT) -- In this edition of Coronavirus Q&A, one of Foley & Lardner LLP's top business restructuring lawyers discusses how manufacturers are grappling with COVID-19 production slowdowns and how companies throughout the supply chain may navigate pandemic-related contract disputes and other legal challenges.
Ann Marie Uetz
A former chair of Foley & Lardner's litigation department in the Motor City and former vice chair of the firm's national bankruptcy and business reorganizations practice, Uetz specializes in advising clients throughout the manufacturing supply chain, which has been hit with widespread disruptions.
This interview has been edited for length and clarity.
With much of the economy at a relative standstill after more than a month of government stay-at-home mandates, what would you say are the most pressing needs for your clients?
The No. 1 issue that our clients have focused on has been relief available under the [Coronavirus Aid, Relief, and Economic Security, or] CARES Act. That includes the loans to small businesses, loans to midsize businesses, the Main Street funding, the PPP [Paycheck Protection Program] funding. Closely behind it or right alongside it has been compliance with government stay-at-home mandates. Because there's no federal mandate, each state has its own specific stay-at-home mandate, and for companies who do business as part of the global supply chain and across state lines, it's been really important for them to understand not only what the rule is in their home state for their operations but more broadly what are the rules of the other states so that they know what their customers and suppliers are subject to as well. There are still states which are actually increasing their restrictions, but at the same time, the national conversation is turning to restarting the economy and easing some of the restrictions. And that's all very fluid. Companies are needing to keep up with the question of, What are the rules today for where I do business?
How would you describe the overall state of manufacturing and the supply chain, and what sort of gaps has the COVID-19 pandemic exposed about the fragility of the supply chain?
You can't look at issues concerning the supply chain in a vacuum. They're driven by those shelter-in-place orders, and as we see those orders start to change, we see the impact on industry in the supply chain. In some cases, suppliers are [considered] essential or critical infrastructure workers under the terms of the orders, so they have maintained some level of operations. In other cases, they've pivoted their production to personal protective equipment, helping with ventilator production, masks, surgical scrubs and the like.
What we're starting to see is that over the next several weeks, carmakers are announcing they're going to be resuming operations, and the expectations are that their suppliers are going to be there resuming operations with them. But the hurdles they've got to overcome to resume that supply are severalfold. Suppliers are in a cash crunch; their liquidity is very tight. You also have human capital issues. Schools are still closed, parents are home with their children, there are still shelter-in-place orders throughout the country, which give people concern whether a loved one should go to work or not. And you're going to have a host of legal issues to be discussed between suppliers and their customers in the supply chain regarding things like debits or chargebacks, who pays for increased freight if they want to speed up production and get parts here sooner.
Speaking of legal issues, what types of disputes or cases do you anticipate we'll see more of involving companies in the supply chain?
Many parties have invoked force majeure under their contracts to excuse them from performance and how that's going to get sorted out between suppliers and customers in terms of the cost and damages associated with that. If a supplier is having trouble or it's impossible to provide goods according to its contract with its customer due to the pandemic, we've seen reservation of rights and certainly notices of force majeure go back and forth within the supply chain. I think it's pretty safe to say that right now, that hasn't really been litigated or decided. At some point when the dust settles, there will be some conversations, some negotiations and possibly some litigation over that kind of issue.
Another challenge which we would expect to see with some time is potential insurance claims, negotiations with disputes with insurers over whether any of the losses for this period are covered by a business interruption policy or a general liability policy in the case where a company gets sued and their insurer provides a defense to that lawsuit.
We've seen manufacturers with idled production lines make the switch to manufacturing medical equipment and personal protective equipment for health care and front-line workers. The president has invoked the Defense Production Act to procure respirators and ventilators from manufacturers such as 3M and General Motors. How much more movement or additional actions do you anticipate we'll see on this front?
We've connected a lot of manufacturing clients with [the Federal Emergency Management Agency] or with state governments for the purpose of donating or selling personal protection equipment, and so for some manufacturers whose operations have been sidelined, that's actually created some opportunity for them.
I don't think we're beyond [continuing to invoke the DPA]. I saw that the White House was preparing to use DPA regarding a facility which manufactures swabs that are needed for the coronavirus tests. Regarding the invocation of DPA against GM, for example, GM is obviously undertaking the manufacture of the ventilators and reportedly will be delivering them by the end of the month. But it still remains to be seen how long that need will continue, and the president certainly has the DPA at his disposal to continue to use as basically a hammer where he chooses to use it.
--Editing by Brian Baresch and Alanna Weissman.
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