Baker Marquart Client Resource Center: COVID-19 Client Advisories

Federal and state regulators and law enforcement agencies continue to introduce enforcement initiatives in response to disruptions caused by COVID-19. Baker Marquart can help you navigate this rapidly changing environment.

The coronavirus has caused volatility in the securities markets and threatens a global recession. Seeking to support investor and consumer confidence, federal regulatory agencies, including the SEC, FTC, and CFPB, have issued releases indicating they are hard at work policing the capital markets and protecting consumers and investors. These government agencies have warned against potential scams involving microcap stocks, coronavirus-related research, drug-treatment regimens, vaccinations, and test kits, and have stated they will be proactive in investigating any alleged scams. Public companies’ disclosures will also be under the SEC’s proverbial microscope, particularly those that experience high levels of volatility in their stock prices or substantial price decreases.

The Department of Justice has indicated that not only will it investigate and charge coronavirus-related scams as criminal offenses, but it also will pursue individuals who amass critical medical supplies or engage in profiteering. DOJ has already announced several newly-filed cases; such prosecutions will surely only increase over time and, in some cases, play out over years.

In California, Attorney General Becerra has warned that he will lead the stepped-up enforcement of price-gouging, defined as charging a price more than 10% more than pre-crisis prices, and he has invited consumers to file complaints. Like the DOJ, we can expect aggressive action from the Attorney General.

While government regulators and law enforcement agencies have an important mission to prevent fraud and consumer abuse, it is wholly foreseeable that legitimate projects and companies will also be investigated and may receive subpoenas, as government enforcement officials cast a wide net. This is not unprecedented. After the 2008 financial crisis, the SEC claimed that it charged 204 entities and individuals for financial crisis-related misconduct; 93 of the charged individuals were corporate officers and 54 received officer and director bars, industry bars, or commission suspensions. These statistics of course do not take into account individuals or companies who were investigated by the SEC but not charged.

Companies and individuals should realize that the COVID-19 pandemic will create pressure on prosecutors and government enforcement officials to take swift and decisive public action by filing lots of cases. In these critical times, we recommend that you treat any government inquiry as a serious investigation and, upon hearing from any government agent – whether it be in the form of a formal subpoena or an apparently casual phone call –immediately retain qualified outside counsel to intercede with the investigating agency. We have seen individuals and small companies nearly bankrupted by investigations that ultimately led to no charges. While it may seem counter-intuitive, early intercession by a qualified lawyer can help government agencies reach the conclusion not to further investigate, or to reach a declination decision, sooner rather than later.

If you hear from a regulator or law enforcement agency, or if you want to discuss ways in which you might prepare for such an inquiry, we are here to help.

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This communication is for general information purposes only, is not a full analysis of the matters discussed, and should not be relied upon as legal advice

We hope you are safe during these rapidly evolving times.

We all have watched as the coronavirus (COVID-19) has spread across the globe, causing unprecedented disruption to almost every aspect of our daily lives. Anticipating these unfortunate events, our firm transitioned to “work from home” three weeks ago and has been fully operational – including filing motions, conducting discovery, and appearing telephonically in court – and serving clients without interruption the entire time. Reliable information is critical during times of uncertainty like these. The goal of this update is to provide some insight into a few critical legal issues that will undoubtedly rise in the aftermath of the coronavirus pandemic. We are prepared to assist you during these difficult times.

Contracts, employment, torts, and insurance are among the areas of law most likely to see an immediate increase in activity as a result of coronavirus. This update offers a quick update on these discrete and timely legal issues, along with some best practice recommendations. We know everyone is being inundated with information, and your time is more precious than ever, so we will keep this brief.

We are ready and available to consult with you about those or other legal issues you are confronting without charge – we view our relationship with you as a partnership and value it tremendously. We know these are difficult times, and we want to do what we can to help you navigate them.

Contract Issues

Many of our clients are reevaluating their business plans and prior contractual commitments, and disputes with third parties are very likely on the horizon. Widespread business closures, disruptions to the supply chain, and “shut down” orders are interfering with the ability to operate and perform under their existing contracts. We can help evaluate your business’s legal rights and obligations under your contracts and can provide guidance on steps that you should be taking now to build your best case now, as well as assist with things like preparing and responding to demand letters.

Many contracts contain “force majeure” or “materially adverse change” clauses, which places the risk of loss is placed on a particular party where certain conditions are met. These clauses usually are triggered by certain specified risks and sometimes expressly refer to epidemics or pandemics, and certain governmental orders. Even in the absence of such an express contractual clause, common-law doctrines such as impossibility and impracticability may provide a party with a valid legal excuse to get out of its contractual obligations under certain circumstances.

At this time, we are seeing that many businesses are attempting to work together to resolve these contractual issues. There typically are significant hurdles to overcome to trigger these clauses or legal doctrines, and a negotiated resolution is often preferable to litigation. If litigation does ensue, it is important that a party be able to demonstrate that it acted in good faith and took all reasonable steps to resolve the situation and that it ultimately was unable to perform.

Employment and Tort Issues

As companies struggle with how to safely and profitably stay in business during this uncertain time, they face a range of unanticipated challenges. From a legal perspective, those challenges include how to safely operate without posing an unreasonable risk of transmitting COVID-19 to employees or consumers. Simultaneously, as employers consider the need for layoffs or reductions in force, disgruntled employees may bring wrongful termination, discrimination, retaliation and other claims.

Although an at-will employee generally can be terminated for any reason, employers should be careful in how they handle terminations to ensure compliance with existing rules and regulations and to reduce the risks of lawsuits. Some jurisdictions like California are currently considering bills that would protect workers from retaliation when they are unable to work during public health emergencies such as the COVID-19 outbreak.

As experienced litigators, we can help you with these issues. We are particularly experienced in handling claims of wrongful termination, discrimination, trade secret misappropriation, breach of non-competition agreements, and breach of fiduciary duty. The firm’s criminal and regulatory defense practices, which are helmed by a number of former federal prosecutors, are helpful to clients when allegations also concern potential criminal conduct.

With our litigator’s perspective, we can advise clients on severance agreements and packages connected to major corporate mergers, restructurings, and workforce reductions. In doing so, we provide counsel on numerous matters related to the rights and duties of departing employees, including senior executives.

Insurance Issues

Many of our clients are examining their insurance portfolio to determine if they may have insurance for losses or damages relating to the COVID-19 pandemic.

It is important to review the language of your specific policy, the factual circumstances for which you may or do want to invoke it, and the applicable state law to determine your rights. Some policyholders may have coverage under an infectious diseases extension to their policy, whereas other policies may contain exclusions arising out of communicable or contagious diseases. Additionally, some policyholders may have coverage for event cancellations or supply chain losses. As with any insurance claim, it is important to give notice of any potential claims to your insurance provider as soon as possible to preserve those claims, but you should do so in consultation with legal counsel.

Often, insurance coverage for business interruption losses requires that the business interruption losses arise from “direct physical loss” to the insured’s property by a covered loss, such as a fire. But some courts have construed the definition of “physical loss” broadly to include damages arising from bacteria or contamination under certain circumstances, such as where the property is rendered uninhabitable or unusable for its intended purpose. Some policyholders may have a “civil authority” coverage, which may provide coverage for business interruption losses where a civil order (such as a governmental shut down order) prohibits access to your business. Depending on the particular policy language and state law, it may still be necessary to demonstrate “physical loss” or damage to the property; other policies do not include such a limitation. During this time, your D&O insurance coverage may also be an important resource to defend and protect a company’s directors and officers against claims arising from the COVID-19 pandemic.

In our experience, some insurance disputes can be resolved early through effective advocacy before litigation commences. Where litigation is necessary, our attorneys are experienced in handling lawsuits against insurance companies for breach of contract and bad faith.

Practical Action Items – “An ounce of prevention is worth a pound of cure”

Below is a list of concrete steps you might consider in an effort to protect and preserve rights:

· Continue keeping good written records while remote working. Ask all employees to copy other team members on all third-party communications. Although consistency
is always important, in times where staff are largely remotely working, additional steps should be taken to ensure all team members understand and maintain consistent positions.

· Track all potential damages. If damages are a potential issue, keep contemporaneous records of any and all losses or other damages. You might consider asking your accounting department to track certain items that may be characterized as a loss.

· Create a virtual war-room. If you anticipate a potential legal issue, start aggregating materials in a single place. The creation of a file or workspace where team members can save information will help if and when a claim is asserted.

· Maintain good internal communications. Team leaders should regularly interact with other team members. You may also want your human resources department to routinely reach out to employees to offer consultation and provide answers to any questions. In addition to boosting morale, this type of policy is meant to hinder the development of a “constructive” employment claim.

· Double-check insurance policies and important contracts. Review any and all potentially impacted insurance policies and contracts for language that may provide further guidance on important steps to take. Based on specific contract language, preemptive communications may be warranted.

· Consult. Discuss any of these concerns with outside legal counsel, whether at our firm or another.

Again, all of us at Baker Marquart hope you, your loved ones, and colleagues are staying safe and doing well. Please contact us to discuss any of the issues raised in this update or to discuss any other legal matter. We are ready to help.

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This communication is for general information purposes only, is not a full analysis of the matters discussed, and should not be relied upon as legal advice

The COVID-19 pandemic has every general counsel thinking about and confronting a host of legal issues (employment, force majeure clauses, insurance, etc.). And this is happening in a rapidly evolving environment with little visibility into what, at least, the next coming weeks and months might hold. If there was ever a time to reduce legal spend on disputes, this is it, and we say that as a boutique law firm dedicated exclusively to litigation. We recognize that litigation should almost always be the option of last resort, even in the best of times.

As you navigate the tumultuous waters over the coming weeks and months, we want to offer practical tips to help you avoid the high costs of litigation. These tips are based on our experience of counseling clients on ways to resolve disputes quickly and successfully before litigation starts. We have seen every permutation of dispute, from the plaintiff and defendant’s perspective. Based on that experience, we recommend a consideration of the following:

We are ready and available to consult with you about any specific disputes you are facing without charge – we view our relationship with you potential clients and clients as a partnership and value it tremendously. We know these are difficult times, and we want to do what we can to help you navigate them.

  1. Do Not Ignore a Complaint or Dispute. What seems like a small thing can quickly spin out of control, especially in these unprecedented times, so tackle problems before they escalate. As businesses deal with a host of internal and external changes and pressures, it may be necessary to prioritize the most immediate and pressing issues and set up a triage system. That makes is easier than ever to lose track of other issues or disputes. While most people understand that additional time may be needed to address a complaint or dispute at this time, it is important to communicate the reasons for any delays. When someone sees that you want to help them resolve a complaint or dispute promptly, they will be impressed with your attention to detail and more easily trust you to solve their problem for them.
  2. Tolling Agreement. To avoid unnecessary and expensive litigation, it may be particularly useful at this time of crisis for parties to enter into tolling agreements. Under a tolling agreement, the parties agree to “toll” the running of the statute of limitations on certain claims for an agreed-upon period of time such that a party cannot later argue that a claim is time-barred due to the passing of time during the tolled period. Given the pandemic, many businesses today may be unable to manage all their litigation risks and potential legal disputes on the same time-line as they would have done in the past. Rather than being forced into litigation due to a statute of limitations deadline, it may be beneficial to enter into tolling agreements. A tolling agreement can provide the breathing room needed for the parties to conduct negotiations to settle a dispute.
  3. Turn Your Adversary into Your Ally. Know your adversary’s position. If possible, before litigation arises, have your potential adversary explain their position preferably in writing for clarity and to erase any doubt. As litigators, we often find that the parties do not understand each other’s motives or reasoning when litigation begins. Due to the adversarial nature of litigation and the high value placed on the element of “surprise,” it can be difficult to obtain important information about the other party’s position before the parties find themselves entrenched in their positions. Before litigation arises, keep communication with the other party open. Put yourself in the other party’s shoes. There are often good reasons the other party is frustrated. If you can work out what the other party’s motivation or frustration is, you are halfway to resolution without litigation. Even if you are unable to resolve the dispute, you will be armed with important information that will likely strengthen your case.
  4. Keep People In the Loop. There is a lot of uncertainty and changes due to the rapidly evolving situation with COVID-19. It is more important than ever to provide your stakeholders (e.g., clients, customers, employees) with updates and information so that they know what is happening. If your website goes down, for example, provide an accurate update as soon as practicable. Additionally, even where information appears to be obvious, it is important to notify your stakeholders with basic information about the status of your business operations and what steps you are taking to address issues of importance to them in light of the COVID-19 pandemic. These simple courtesies go a long way. If you were in the same position you would want to know.
  5. Get Contract Changes Documented Properly. If you are restructuring a contract, make sure you properly document the changes preferably in writing and not in an email string, even if you have had prior harmonious dealings with the other side. We often see email “amendments” leading to a host of problems. They often lack context or have significant ambiguities. As businesses experience operational difficulties and possibly even downsize, it becomes even more likely that contract disputes will arise and that oral or hastily drafted amendments will be lost, forgotten, or misunderstood.
  6. Facts First. Understand the complaint and dispute by objectively gathering all of the facts at the earliest possible time and gathering all available documentation to support the facts. Trust but verify what the business people are telling you about the complaint or dispute. Often other facts emerge in litigation that you wish you had known sooner. After you get all the facts, you can then carefully determine your position. This determination should include not only the question of what you may be entitled to but also why and how much. Be objective and do not get emotional about the dispute. It is a business problem and usually involves only dollars. Do not make it a moral issue or you will lose objectivity.
  7. Independent Set of Eyes. If confronted with a contract dispute, ask someone other than the drafter to review it and give an assessment. While the person who drafted the contract (whether that person is an employee or served as outside transactional counsel) may have important first-hand information about the intent of the parties and should be consulted, people who drafted the contract often have a bias to construe the contract in the manner that they subjectively understood it or in an otherwise favorable manner. A fresh set of eyes often can provide a more objective assessment of the contract language—just as a judge or jury would.
  8. An Ounce of Preventive Research. Especially in light of the financial difficulties and uncertainties created by the COVID-19 pandemic, it is more important than ever to be thoughtful and deliberate when entering into new contracts or business relationships. There may be a tendency at this time to do whatever is necessary to get business into the door, but that can lead to problems down the road. Make sure you understand the intentions of your clients or business partners and properly gauge their ability to perform on a deal or contract. If a contract or order seems to good to be true, it probably is. If you do not know your business partners well, the first step is usually to ask around in the business community about the reputation of the other party. You may learn they are experiencing financial problems or often embroiled in disputes. Some people are just litigious and difficult to work with. Additionally, a background check, internet research, and at a minimum a simple Secretary of State search to ensure the business is active will drastically help to limit risks on the deal.
  9. Proper Entity Selection. Take advantage of available corporate structures to ensure you are using the best legal structure for your business, which can save you money on taxes and shield owners and officers from personal liability. It also may also be appropriate to create multiple entities within the corporate family to provide additional protection both for the parent company and its shareholders or members. Although relying on services like Legal Zoom to effectuate entity changes may seem cost effective, contacting a lawyer to provide advise on these matters can save huge amounts of both tax and litigation money down the road.
  10. Document Damages. A case supported with concrete evidence of damages is much more likely to have a positive outcome. Often, parties commence litigation hoping to discover the extent of the damage through the discovery process. While that may be appropriate for certain situations, a litigant is always better suited if specific damages are established by credible evidence. For the same reasons, a resolution short of litigation is much more likely where a demand can be made based on a credible damages theory supported by the factual record. While many will rely on the presumption of damages due to the severe disruptions caused by COVID-19, reliance on any presumption is unlikely to deliver a business resolution outside of court.

We hope you, your loved ones, and colleagues are staying safe and doing well.

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This communication is for general information purposes only, is not a full analysis of the matters discussed, and should not be relied upon as legal advice.