30 April 2020 (Brussels, Belgium) – As I noted last week in my piece on the tsunami of legal work and e-discovery work to come, the real big fights will be “business interruption” claims due to the COVID-19 pandemic. The economic consequences of the pandemic on businesses have been dire, to say the least. With many businesses being forced to close either due to government shutdown orders or simply due to a lack of a customer base in light of quarantines, the effects will be long-term and detrimental to businesses that simply cannot afford to shut their doors.
As a result, businesses throughout the U.S. may be faced with practical inabilities and/or economic difficulties in performing certain of their contractual obligations and may seek to determine whether they or their counterparties have any legal basis on which to excuse performance of those obligations. Of course, there is no one-size-fits-all answer to this question, and the legal ramifications of the virus on any particular business and its particular contractual obligations will be fact-specific and dependent on the specific provisions of each contract and the particulars of the state laws that governs each contract’s interpretation and enforcement.
During these difficult times, many business owners are finding that their insurance carriers are not covering claims for these interruptions. Although business interruption insurance typically covers losses resulting from disaster-related damage, i.e., fires, theft, etc., many carriers are denying claims related to COVID-19. Some businesses have already filed lawsuits against their carriers, while state legislatures are fighting to mandate certain coverage. Like most questions during such an uncertain time, the issue of business interruption insurance will unfold as we continue to go through this pandemic.
The following will be both a primer on the issues and some suggestions about legal vendors that might be helpful in your work. NOTE: none of the law firms, insurance companies or legal vendors noted herein are clients of any of my companies, nor sponsors of any kind.
I have read through about 30 law firm guides aimed to assist companies in determining when contractual performance may or may not be excused in light of the COVID-19 pandemic. All of them set out several general principles that contracting parties should consider when evaluating how to address the difficulties of performance posed by the wide-ranging effects of this situation. They all pretty much break down as follows:
• The legal principles generally applied in giving effect to and interpreting express force majeure clauses
• Material adverse effect (MAE)/material adverse change (MAC) clauses
• The common law doctrines of impossibility, impracticability and frustration of purpose, as well as several other contractual interpretation concepts that may bear on whether or not performance is required or excused in light of the unusual exigencies posed by the COVID-19 pandemic
I have found the analysis done by Sherman & Sterling to be the best of the group that I read. Here is a summary of their analysis. To read the full piece (which is helpfully footnoted) click here:
Force Majeure
Contractual force majeure clauses provide a narrow defense excusing a party’s obligation to perform in certain enumerated circumstances beyond the parties’ control. The construction of any particular force majeure clause will depend on the facts and circumstances of the situation, including the language of the clause and its meaning within the context of the broader contract, the extent to which the event prevents performance, the custom and practice in the particular industry, and nuances of governing state law. Nonetheless, following are some general principles applied by courts throughout the U.S. in analyzing whether performance is excused by a claimed force majeure event.
• Force majeure clauses are interpreted narrowly, meaning that the type of event that prevents performance must be expressly identified in the clause in order to excuse performance.
• When a force majeure clause includes a “catchall” phrase in addition to an enumerated list of specific events that constitute force majeure, the catchall phrase generally is construed within the context of the preceding listed events or causes so as to include only events that are of the same general kind or character as the specified events mentioned in the clause.
• The non-performing party has the burden to establish that a force majeure event occurred and excuses its performance.
• Unless otherwise agreed in the contract, the occurrence of a force majeure event excuses performance by both parties.
• In some jurisdictions, the non-performing party might be required to demonstrate its efforts to perform its contractual duties despite the occurrence of the claimed force majeure event.
• Similarly, some jurisdictions require the non-performing party to demonstrate that the claimed force majeure event was unforeseeable at the time the parties entered into the contract.
• Finally, in most cases, mere adverse economic conditions or non-extreme financial hardship will not constitute force majeure excusing performance of contractual obligations.
In light of the government-issued shelter-in-place directives in many states and municipalities, force majeure clauses that include some form of governmental action among the events that excuse performance may be of greatest relevance in the current circumstances. Of course, any party seeking to rely on any such provision would have to prove that performance of the party’s contractual obligations was prevented by the unforeseen governmental shelter-in-place directives through no fault of the party. For example, in Castor Petroleum v. Petroterminal De Panama, 107 A.D.3d 497, 498, 968 N.Y.S.2d 435, 498 (1st Dep’t 2013), the Appellate Division in New York affirmed a trial court’s determination that the attachment by a Panamanian court of the plaintiff’s oil excused the defendant’s obligation to perform under an oil transportation and storage agreement. In that case, the force majeure clause expressly relieved the defendant of its obligations in the event that performance was prevented by “government embargo or interventions or other similar or dissimilar event or circumstances.”
Whether a U.S. court will consider the COVID-19 pandemic and/or the associated business disruptions, including those caused by the various governmental “shelter-in-place” directives a force majeure excusing contractual performance in whole or in part will vary from case to case, depending on such factors as the language of the relevant contractual provisions, the scope and extent to which the pandemic and/or governmental directives have actually impeded the parties’ ability to perform, whether alternative means of performance are available and the parties’ efforts to seek out such alternatives, and whether the conduct of the parties themselves caused the nonperformance, among others.
Material Adverse Effect/Material Adverse Change Clauses
A contract may also include a material adverse effect (MAE) or material adverse change (MAC) clause that, depending on the particular facts and circumstances and the specific language included in the clause, may be invoked to excuse a contracting party’s performance in light of the COVID-19 pandemic. MAE/MAC clauses are often included to permit one or more parties to escape their performance obligations should fundamental conditions change for the worse after the parties commit to a transaction, such as an acquisition or financing. The party invoking the MAE/MAC clause to avoid performance of its obligation—for example, to close an M&A transaction or to advance a draw request pursuant to a draw agreement—bears the burden of proving that an MAE/MAC occurred.
MAE/MAC clauses most frequently have been litigated in the context of M&A transactions, and courts have interpreted them narrowly, seeing them “as a backstop protecting the acquiror from the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner.” The factors that are most frequently considered in determining whether an MAE or MAC occurred include:
* the foreseeability of the alleged cause of the MAC or MAE;
* who assumed the risk of such an event;
* the durational significance of the event in the context of the transaction; and
* whether the cause of the material adverse change is based on industry-wide or company-specific developments.
These factors are considered together, and no single factor is dispositive. In general, however, courts are reluctant to find that an MAE/MAC has occurred when the claimed MAE/MAC is based on the realization of a risk that was foreseeable or known to the parties, when a business downturn is a result of industry-wide rather than company-specific developments, and/or when the negative impact of a development is not expected to last a particularly long time relative to the duration of the underlying transaction. Parties should bear in mind that the analysis of whether an MAE or MAC occurred is highly dependent on the facts and circumstances (and typically requires expert testimony). As such, the party seeking to invoke a MAC/MAE clause is unlikely to prevail without an evidentiary hearing, full summary judgment record or an expedited trial.
Impossibility, Impracticability, and Frustration of Purpose
In the absence of an express contractual provision, a party might seek to excuse nonperformance of its contractual obligations pursuant to the related common-law doctrines of impossibility, impracticability of performance, or frustration of purpose. These doctrines are narrowly applied and have several common features:
* As with force majeure and MAE/MAC, the party asserting the defense bears the burden of proof.
* The event resulting in non-performance must have been unforeseen at the time of contracting.
* The party asserting the defense must show that it made every effort to perform and its actions or inactions did not cause the event resulting in non-performance.
Impossibility and impracticability are similar doctrines that excuse performance when an unanticipated event that could not have been foreseen or guarded against in the contract makes performance impossible or impracticable. Some courts and jurisdictions require actual objective impossibility, whereas others require impracticability, meaning that performance would require excessive and unreasonable cost—not simply that performance would be more costly than anticipated or would result in a loss. The doctrines of impossibility and impracticability have been applied to excuse performance permanently or temporarily in contexts where governmental action has rendered performance permanently or temporarily impossible, but not where governmental action simply makes it more difficult or more costly to perform. For example, in Bush v. Protravel International, Inc., the court held that the plaintiff raised a triable issue of fact as to whether her obligation to cancel a travel package was temporarily excused under the doctrine of impossibility on September 11, 2001, and the days that immediately followed, when New York City “was in [a] state of virtual lockdown with travel either forbidden altogether or severely restricted,” and the Governor of New York had issued an Executive Order extending the statutes of limitations for all civil actions in all New York State courts for a period of time that extended beyond the date when the plaintiff was able to notify the travel agency of her cancellation.
Parties whose contractual performance has been temporarily or permanently prevented due to the various COVID-19 governmental shelter-in-place directives, shutdowns and travel bans may be able to rely on the doctrines of impossibility or impracticability if they can show they were not at fault, did not contribute to or in any way cause the impossibility, and that the governmental action was unforeseen at time of contracting. Parties should keep in mind that these doctrines are applied narrowly and rarely succeed when the intervening governmental action merely results in greater difficulty or financial expense or loss.
The doctrine of frustration of purpose, by contrast, may have less applicability in the current circumstances. Frustration of purpose discharges a party’s duties to perform under a contract where an unforeseen event has occurred, which, in the context of the entire transaction, destroys the underlying reasons for performing the contract, even though performance is possible. Frustration of purpose excuses performance when a “virtually cataclysmic, wholly unforeseeable event renders the contract valueless to one party;” it is not enough that the transaction has become less profitable for the affected party or even that the party will sustain a loss. Because the frustration of purpose must be so substantial and the frustrating event must be one that could not have been foreseen or provided for by means of contractual safeguards, the doctrine is rarely found to apply in practice.
Additional Contractual Considerations
Parties evaluating their contractual obligations in light of the business disruptions caused by the COVID-19 pandemic should also consider whether their contracts include conditions precedent that have not been satisfied, whether non-satisfaction of those conditions precedent excuses performance temporarily or permanently, and/or whether satisfaction of certain conditions precedent can or should be waived. In the absence of agreement, litigation over such issues can be complicated and drawn out, as well as fraught with collateral considerations arising from the seriousness of the virus’s effects.
Similarly, parties should be careful not to communicate or conduct themselves in ways that might inadvertently convey an intent to abandon contractual obligations to another party. The wrong messaging may be interpreted as an anticipatory breach, and a contracting counterparty may suspend its own performance until it receives adequate assurances as to the other party’s ability to satisfy its own obligations. Contrariwise, parties concerned that a counterparty may fail to perform at a crucial junction may seek assurances or performance from the counterparty and may initiate litigation if such assurances are found insufficient.
Contracting parties should be also be cognizant of potential breaches by their contractual counterparties and be prepared to address whether such breaches would excuse their own performance. In general, and absent contrary contractual provisions, only material breaches permit converse non-performance. A breach is material if it goes “to the root of the agreement between the parties.” The materiality of a breach is a fact intensive inquiry that weighs multiple factors, including “the extent to which the injured party will be deprived of the benefit which he reasonably expected.”
In view of uncertain times of economic upheaval, parties should continually reassess the economic terms of their contractual obligations and whether a breach is more economically efficient than performance. Such assessments should consider the impact of the pandemic on the non-breaching party’s ability to mitigate its losses, which will likely be taken into account in assessing whether and the extent to which the non-breaching party is entitled to damages.
As of now, several insurance companies have released statements expressing that coronavirus-related business interruption claims are not covered by their policies. The Hartford Insurance Company, for example, states that:
“Most property insurance includes business interruption coverage, which often includes civil authority and dependent property coverage. This is generally designed to cover losses that result from direct physical loss or damage to property caused by hurricanes, fires, wind damage or theft and is not designed to apply in the case of a virus.”
However, the carrier waivers on an unequivocal denial of claims, noting that:
“Every situation, however, will be evaluated on a case-by-case basis and reviewed based on the underlying facts, policy language, and applicable law.”
Likewise, the insurance carrier, Travelers, takes a similar position, stating that:
“Insurance for business interruption can provide coverage when a policyholder suffers a loss of income due to direct physical loss or damage to covered property at its location or another location. It does not cover loss of income due to market conditions, a slowdown of economic activity or a general fear of contamination. Nor does the policy provide coverage for cancellations, suspensions and shutdowns that are implemented to limit the spread of the coronavirus. These are not a result of direct physical loss or damage. Accordingly, business interruption losses resulting from these types of events do not present covered losses under our property coverage forms. Even if there has been direct physical loss or damage to property, your policy contains a number of exclusions that are likely to apply to business interruption losses. The most important exclusion to note is the exclusion for losses resulting from a virus or bacteria, which would include coronavirus.”
The rationale behind such denials of coverage, according to the U.S. insurers I spoke with, is that the cost would cause the “industry to collapse” and that if the exclusion of pandemics is nullified, insurers will decide that “such coverage is not worth the risk and will drop the product.” As Sean Kevelighan, CEO of the Insurance Information Institute, said:
“Pandemics are an extraordinary catastrophe that can impact nearly every economy in the world, so it is hard to predict and manage the risk. Pandemic-caused losses are excluded from standard business interruption policies because they impact all businesses, all at the same time.”
Numerous states, such as Massachusetts, New Jersey, New York, and Ohio, have introduced legislation that would require insurance companies to cover claims for business interruptions due to COVID-19. Under the proposed New York legislation, insurers would be required to provide business interruption and loss of use coverage to “business interruption during a period of a declared state emergency due to the coronavirus disease 2019 (COVID-19) pandemic.” The bill would apply to policies in force by March 7, 2020, and would cover businesses with fewer than 100 full-time employees.
Unsurprisingly, some businesses have turned to the courts for relief. The Hartford Insurance Company currently is facing a lawsuit much covered in the press, filed by famed chef, Thomas Keller, owner of a restaurant group that includes well-known spots such as The French Laundry and Per Se. Keller has requested a declaratory judgment from the court which would allow him to recover business losses incurred from the pandemic. Keller was denied coverage for these claims because Hartford stated that there weren’t any dangerous conditions present at the restaurants. However, Keller’s attorney, John Houghtaling, has countered the claim that the virus does not present a danger to restaurants. In an interview he said:
“This is a lie, it’s untrue factually and legally. The insurance industry is pushing this out to governments and to their agents to deceive policyholders about the coverage they owe.”
Chubb Ltd., another insurance carrier, faces similar lawsuits from restaurants in Florida and New Jersey. In Truhaven Enterprises Inc. d/b/a Fiorino Ristorante v. Chubb Ltd., the New Jersey-based restaurant argues that its policy exclusion for loss or damage caused by a virus or bacteria does not apply because the loss of its use of its property was caused by a compulsory closure, which should constitute a direct physical loss that triggers business interruption coverage.
The Florida case, Cafe International Holding Co. LLC v Chubb Ltd., makes a similar argument, noting that their policy “does not contain any exclusion which would apply to allow Defendants to deny coverage for losses caused by COVID-19 and related actions of civil authorities taken in response to COVID-19.”
NOTE: I only highlighted those two cases (but see my class action case summary at the end of this post). There are scores. I have a subscription to law360 which I find to be a superb source for legal news, current case analysis and industry studies. I also use Court Listener which allows me to download the key documents on a docket and avoid the ridiculous Pacer fees. My media team does a lot of industry analysis for clients and we find those two sources invaluable.
Are COVID-19 business interruption insurance lawsuits “winnable”? There is no clear answer yet as to what makes a winning argument in a COVID-19-related business insurance case. Although, as with any contract, individual insurance policies themselves can provide some clarity. As some businesses have argued, even if there exists a “virus exclusion,” many policies do not address government-forced shutdowns of businesses. The question will then hinge on whether such instances are covered because of the carriers’ failure to specifically exclude it in the policy. As such, at this point in time, any court decision on the subject will likely be precedential.
There are legal technology vendors and other experts who can assist you on business interruption cases. A few sources:
• There has been a huge demand for property insurance expert witnesses who will be essential for interpreting the specifics of policies in question and determining whether the alleged insured perils should trigger business interruption coverage. Law.com has assembled a very comprehensive list of insurance expert witnesses which you can access by clicking here.
• Another demand: forensic accounting experts who can help calculate the quantum of the expenses incurred and income lost as a result of business closures. Again I’ll turn to law.com which has a list here.
• And there are, of course, the legal technology vendors. As I noted in my “tsunami piece” at the start of this post, a number of law firms have already retained contract attorney teams to review 1000s of previous litigations plus hundreds of business-interruption policies for eventual review by the firm’s lawyer, using some of the contract analysis technology e-discovery vendors have been touting. These teams are also using that technology to construct spreadsheets showing premium volumes, and policy limits, all in preparation for e-discovery. These vendors include Elevate (which has set up a COVID-2019 Resource Center), Kira Systems (which has also set-up a COVID-19 Resource Center), Legal Robot, Luminance, and Seal Software. There are other vendors in this space. I am only noting the ones discussed with law firms and in-house legal departments for this post.
Overall, one thing is for certain – the future of many businesses will be held in the balance until courts and legislatures act on these issues.
* * * * * * * * * * * *
COVID-19 Consumer Class Action Litigation Roundup
COVID-19 has created a host of uncertainties in every area of modern life. In doing so, it has also given rise to a number of filed or anticipated lawsuits in various areas. Here are a few of the most prominent pending and anticipated cases. We are following them because they could lead to precedential decisions.
PPP Loan Deception Claims
In late April 2020, four class-action lawsuits were filed in California federal court, seeking relief for small business owners whose Paycheck Protection Program (PPP) applications were rejected by multiple banks.
The Paycheck Protection Program is a federal program tasked with distributing an initial $349 billion in emergency funds to US small businesses. Initially, the program was intended to provide low-interest, forgivable loans of up to two and a half times a business’s monthly payroll. However, its funding ran out on April 16, just 13 days after the program was launched.
The lawsuit claims that four major banks involved in approving PPP applications and distributing funds rigged the system to benefit their own bottom lines. Alleged misbehavior includes processing the largest loan amounts first in order to increase banks’ origination fees. This action arguably depleted the fund more quickly, leaving small business owners without recourse.
The outbreak of the novel coronavirus resulted in a number of flights being cancelled, sending passengers scrambling for alternative arrangements and seeking refunds for tickets purchased for those cancelled flights.
United Airlines, Southwest, and Delta now face class-action lawsuits after the airlines allegedly refused to refund the cost of tickets purchased for cancelled flights. According to one lawsuit filed in April 2020 in Georgia, Delta Airlines—headquartered in Atlanta—attempted to offer travel credits rather than a refund, in spite of language in its Contract of Carriage allowing passengers to receive a full refund if Delta cancelled a flight.
Event Disruption Claims
Airline ticket purchasers aren’t the only ones seeking refunds for tickets they purchased for an event that will not happen due to COVID-19.
In McMillan v. StubHub, Inc., a class action lawsuit filed in the Western District of Wisconsin, plaintiffs allege that they bought tickets to various events via StubHub. The events were later cancelled due to the novel coronavirus. The purchasers say they sought refunds under StubHub’s “Fan Protect” guarantee, only to find that the company had retroactively discontinued the policy.
Consequently, the plaintiffs argue, StubHub falsely advertised its “Fan Protect” guarantee when the tickets were purchased and is now attempting to force the plaintiffs to bear the cost of this unprecedented pandemic.
“Adding insult to injury, Defendants repeatedly claim to be doing this for the benefit and/or convenience of their now-disgruntled customers and refuse to take responsibility for the hardships that they have created,” states the complaint filed in the case.
Government and Civil Rights Lawsuits
Customers have sought ticket refunds and small businesses have sought loans in response to various orders issued by state governors throughout the US. New orders to slow the spread of COVID-19—commonly known as “stay at home” or “shelter in place”—required many small businesses to close, causing significant business interruptions.
In Schulmerich Bells, LLC, et al. v. Wolf et al., the plaintiffs address one such order directly. The case, filed in the U.S. District Court for the Eastern District of Pennsylvania in March 2020, alleges that the governor of Pennsylvania and the Pennsylvania Secretary of Health “have seized without compensation the property of businesses and the livelihoods of individuals across the Commonwealth, forcing indefinite closures and widespread layoffs.”
The lawsuit asks the court to declare the governor’s executive orders closing various state businesses unconstitutional under the Fifth Amendment takings clause and to order that the state pay “just compensation” to business owners.
Securities Disputes
As shelter in place orders have limited the movement of people in their everyday lives, online communication tools have become ever more vital. One particularly popular tool for video conferencing—used in business, school and personal settings—is Zoom. But as we all know, Zoom is up against multiple class actions for privacy risks associated with use of the product.
In related California cases, Drieu v. Zoom Video Communications, Inc. and Brams v. Zoom Video Communications, Inc., the plaintiffs allege that Zoom’s security and privacy measures are inadequate to the task of protecting video calls placed through the service, which may contain sensitive, proprietary or confidential information.
The plaintiffs claim that because Zoom’s data-sharing activity wasn’t apparent to the user, users had no way to express or withhold consent for the service to collect or share their information. They allege that Zoom has violated several securities laws and related statutes, including the California Consumer Privacy Act, the California Consumers Legal Remedies Act, and California’s unfair competition laws.
Foreclosure and Debt Collection Suits
Shelter in place orders have left millions of Americans on uncertain financial footing. With no job to do, these workers find themselves in a more precarious position with regard to the essentials of life, including food and housing. In response, several cases have been filed in various courts that seek to prevent banks from executing foreclosures, to suspend debt collection, or both.
In Shuff v. Bank of America, filed in the Southern District of West Virginia, the plaintiffs seek an injunction that would temporarily suspend foreclosures. A separate case filed against Bank of America in Maryland, Profiles, Inc. v. Bank of America, seeks an injunction preventing Bank of America from limiting PPP loans to Bank of American customers only.
A third case filed in Minnesota, Oksenendler v. Northstar Education Finance, Inc., alleges that the defendant, a student loan servicing company, committed consumer fraud and breach of contract in its handling of a student loan repayment suspension in the face of COVID-19 changes.
Similar cases are likely to continue to reach the courts, focusing not only on these areas but also on questions regarding education, employment law, product marketing and labeling, and insurance.