ANALYSIS: Covid-19 Litigation Pending, Poised to Boom

During any serious economic downturn, plans come apart and businesses falter. Litigation often follows.

The economic crisis precipitated by Covid-19 will be like previous downturns in some respects: We can expect to see a boost in bankruptcy, employment, and foreclosure matters. But in some respects, we could see different commercial litigation emerging from this crisis than in the previous one. That’s because the 2008-2009 recession’s epicenter was a financial collapse, while the Covid-19 downturn came from a public health crisis that has cut Main-Street America off at the knees.

Here are some types of litigation that may be of particular interest in the coming year.

Contract Disputes

Contracts come undone in any recession. But in this one, disputes will be widely centered on contract clauses and defenses like force majeure, material adverse effect or change, frustration of purpose, illegality, impossibility, and duress. The worldwide nature of the crisis means that counterparty risk is truly global, and the economic hard stop some countries are enduring will upend many more agreements than in past downturns.

Expect a boom in disputes about arbitration and whether lawsuits belong before a judge at all. If parties start flooding arbitration systems, there may be a severe backup in adjudications or a sharp uptick in the price of arbitration. As a result, for routine commercial disputes, parties might reassess whether arbitration clauses belong in so many agreements. But for international disputes, there is little alternative.

Of interest going forward will be whether parties adjust drafting conventions following the crisis. If parties can agree up front on circumstances under which no reasonable merchant would adhere to the contract, they might be able to short-circuit disputes arising out of extreme circumstances. In the alternative, counterparty risk hedges might become significantly more widespread.

Unfair Trade Practices Enforcement

Fraudsters never let a good crisis go to waste, and we already have seen a spike in Covid-related fraud complaints to federal and state authorities. Along with the usual snake oil pitches, there are financial schemes tied to the novel coronavirus itself or to subsequent federal relief programs. Expect that the broader use of online communication and financial transactions will lead to some additional identity theft and credit card fraud as well.

The Department of Justice has established a task force devoted to prosecuting coronavirus fraud, hoarding, and price gouging (more on the latter below). Expect vigorous enforcement from both federal authorities and state attorneys general, who typically constitute the front line of unfair practices enforcement. Any enforcement actions will likely draw widespread private litigation as well. In fact, consumer product and protection actions of all kinds can be expected to see a boom.

Hoarding and Price Gouging

State and federal price gouging laws are usually triggered only by a declaration of emergency. Typical disasters create a localized or regional emergency, but with a nationwide emergency declaration, and one in almost every state, new problems arise for supply chains for scarce products.

These laws are varied and many are vague. While some price gouging laws specify a percentage price increase that will trigger scrutiny, others apply to charging an “excessive price” or “unconscionable price.” Making pricing decisions will be exceedingly complex for impacted companies. Any attempt to coordinate or allocate resources risks running afoul of the antitrust laws.

Not only are these laws varied, they are sparsely litigated. The federal hoarding and price gouging law codified in the Defense Production Act, 50 U.S.C. § 4512, has not been meaningfully interpreted by a court in at least 50 years. But Attorney General William Barr encouraged federal prosecutors to use the statute to attack market disruptions and profiteering, so we are likely to get some litigated disputes on this law and the diverse patchwork of state statutes.

Insurance Litigation

Disasters breed insurance litigation. And this is a nationwide disaster that has severely impacted businesses in every industry.

The dollars at stake in whether business interruption, contamination, and related coverages apply to the Covid-19 crisis will be very high. Some legislatures have threatened to retroactively declare the coronavirus crisis covered under existing policies. For their part, insurers have warned that such a move would bankrupt them and leave all policyholders worse off.

Privacy

The health and economic crisis is also fertile ground for privacy litigation.

Most of the country is on an extended experiment with distance learning, working, visiting, and shopping in some form. For each of the new apps, programs, and services consumers signed onto, they clicked through user agreements that required them to accept terms regarding how the data that their activities generate will be used.

Eventually, some of those systems, stores, and services will be breached. And state privacy regulations giving some citizens stronger privacy rights make for a patchwork of potential liability. The opportunity of having more users during the crisis comes with a risk for online companies that are sitting on increased amounts of data and may not have in place security systems of attendant strength— as Zoom Video Communications Inc. discovered when it saw a spike in use during the crisis.

If track-and-trace programs become widely used, consumers will give up a remarkable amount of privacy, particularly regarding associations and movement.

If you’re reading this on the Bloomberg Terminal, please run BLAW OUT <GO> in order to access the hyperlinked content.