As with any economically tumultuous time, the Covid-19 crisis will undoubtedly lead to an increase in stock-drop litigation and shareholder derivative actions, as well as increased governmental agency investigations.
As with any economically tumultuous time, the Covid-19 crisis will undoubtedly lead to an increase in stock-drop litigation and shareholder derivative actions, as well as increased governmental agency investigations. Lawsuits have already been filed. On March 12, 2020, a plaintiff shareholder filed a securities class action lawsuit against Norwegian Cruise Line Holdings, Ltd. alleging that the company was employing misleading sales tactics related to the outbreak. Also on March 12, 2020, an Inovio Pharmaceuticals shareholder filed a securities class action lawsuit against the company and its CEO based upon the CEO’s statements about the company’s development of a COVID-19 vaccine. Other suits will likely file in short order, particularly where companies filed year-end financials just before the virus’ effect was fully realized.
Mergers and Acquisitions
Those that entered into contracts pre-Covid may well seek to get out of them given the economic contraction. One argument may be force majeure — Act of God — or an argument that the contract is no longer feasible. The force majeure argument will likely fail, particularly in the context of mergers and acquisitions. Most mergers do not even contain that clause, and others will find that a virus is not a natural disaster in the way that a tornado may be.
Insurance
There is also business litigation that will be focussed on insurance issues. For example, many businesses have business interruption insurance. The availability of business interruption insurance may be critical to getting through this crisis. But the issue is whether insurance policies will cover interruption due to the novel coronavirus. Arguably, this is something that should be uniform across the country, or at a minimum across policy language. But what if your business falls into a grey area of whether it was, or was not, essential? Already there are reports that nearly a a dozen lawsuits from coast to coast where businesses are seeking declarations that their insurance must cover their losses because they were forced to close by local authorities because they were deemed nonessential.
D&O claims will likely flourish. Plaintiffs’ attorneys may try to establish that a company’s disclosures inadequately warned about the nature or scope of risks it faced from a pandemic, similar to what plaintiffs claimed after the SARS and Ebola outbreaks. That will translate into large document requests and electronic discovery issues.
Labor/Premises Liability/Negligence
We can also expect suits after workers return to work in the rush to “reopen America”. Gyms are an obvious example with their close-packed machines, communal locker rooms and sweat. While some gyms are trying to reopen with “social distancing” in the form of “one machine apart” and six feet of separation, this is unlikely to be maintained. If people then get sick – whether employees or invitees — business litigation is likely to follow. Plaintiffs may allege that the business owner failed to use all reasonable means of preventing a known risk, and shareholders may sue for breach of fiduciary duty or negligence. Most likely these cases will be met with stiff resistance, and only the exceptional case would prevail. But the energy, aggravation of defending even a frivolous business litigation lawsuit can be expensive. It is the last thing businesses need coming out of this economically challenging time for businesses.