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How you can prepare your company for COVID-19 litigation

Mar 24, 2020

Given the rash of moment-by-moment challenges presented by the COVID-19 pandemic, it is understandable that many companies have not been focused on what is likely coming when the crisis subsides: a flood of litigation related to the devastation left in the wake of the virus. 

While the thought of trying to plot a course months in the future while managing a host of urgent issues might seem daunting,  there are measures companies can take now to better protect themselves for what’s to come. 

Below are 21 recommendations companies should consider as they navigate these trying times.

1. Adapt and Communicate Document Retention Policies.  With large percentages of the company’s workforce operating remotely, determine what changes need to be made to existing document retention policies (and if you don’t have an existing policy, consider implementing one asap).  Understand that inconsistent approaches to document retention will be a potential headache for the litigation to come.

2. Encourage communications through company systems.  Recognize that employees might be inclined to communicate through text and personal email when operating remotely.  Encourage them to use company systems whenever possible, and to adhere to document retention policies when other avenues of communication are required.

3, Urge consistency in information reporting.  Another risk of remote operations is the tendency to resort to more informal reporting and documentation measures.  Make clear to employees that working from home does not mean abandoning existing templates for recording and reporting of information such as sales transactions and communications with vendors,  customers and others.   

4. Protect against expected vendor-related litigation.  As the virus continues to spread, expect this to be the area of greatest exposure going forward.  Consider the effect of contractual and common law defenses to your or your opposing party’s failure to perform contractual obligations, including force majeure, impossibility of performance, frustration of purpose, failure of consideration and prior material breach.  Review your vendor contracts to determine whether you are obligated to purchase a certain amount of goods or services. If your circumstances suggest that you will not be able to meet those obligations (e.g., you rely heavily on longer supply chains), understand what steps need to be taken now to protect the company. 

5. Be mindful of other types of contracts.  While vendor contracts are likely to represent a significant percentage of litigation to come, remember that a full range of exposure is likely.  Be aware of expiration dates on service contracts, building permits or construction contracts. If you promised to complete a project, or were promised that a project would be completed by a date certain, recognize the likelihood that the project will not be completed timely. In some cases, you will need to be aware of your rights under contracts with other private parties, but in others you will need to be aware of certain government requirements (e.g., the need to seek approval for the continuation of a building permit).

6. Understand where HIPAA and OSHA intersect.  For those who don’t deal regularly with HIPAA and OSHA issues, keep in mind that actions which appear to be logical and necessary in this new environment can give rise to exposure.  For example, are you prohibited by HIPAA from disclosing that an employee tested positive, or obligated to do so under OSHA?  Before deciding whether to disseminate or withhold information about any employee, consider the HIPAA and OSHA implications.  Get advice about the statutes’ reach, and document the reasons why particular steps were taken. 

7.  Anticipate challenges in obtaining judicial relief, now and going forward.  Virtually all courts are shut down at this point, at least for in-person hearings, and it’s not clear how long that will continue.  Expect to be heavily challenged in obtaining any relief that requires court action (e.g., injunctive relief, evictions) now and in the future. In particular, expect some number of outright virus-related denials of requests for injunctive relief with respect to non-compete agreements.  Assuming the negative economic trends continue and unemployment begins to rise, companies seeking to enforce non-compete agreements might face challenges.  Be mindful of which employees are subject to restrictive covenants when considering any workforce reductions, and factor those challenges into the decision-making calculus.  

8. Have a continuity plan.  Unfortunately, none of us know when we might contract the virus and, if so, how severe the health consequences will be.  Take measures to ensure that the business can continue on in the event critical business leaders or key personnel is required to quarantine, or worse, is incapacitated.  This means thinking now about redundancy and a particularly robust emergency succession plan.

9. Be circumspect in forbearance efforts.  Due to these uncertainty of contractual defenses to defaults, limited access to the courts, and the inability to exercise remedies as a practical matter (e.g. monetize collateral) in the current market, companies may be considering forbearing on exercising contractual rights, at least temporarily.  If the company is contemplating forbearance, consider executing a robust forbearance agreement that acknowledges the parties rights and obligations (e.g. debt), contains a release of any prior claims against you, and expressly reserves rights and remedies.  Even without a formal forbearance agreement, be careful to reserve all rights in (preferably written) communications to others.

10. Document compliance with applicable law and guidance.  Companies can expect a wave of litigation arising out of virus transmission.  The contours of that exposure likely won’t come into clear focus for some time, but there are steps companies can take now to reduce risk.  Adherence to CDC guidance and other mitigation measures are important, but so is documenting the fact that the company has done so. 

11. Remember obligations under your commercial leases.  Keep in mind that not every lease follows the same format, and adjust as necessary.  Be particularly focused on those which contain percentage rent clauses and other affirmative obligations which may be challenging to satisfy in this environment (e.g., keeping a location open during certain hours/days). 

12. Expect close scrutiny of borrowing efforts and attempts to secure stimulus relief. History tells us that prosecutors and regulators tend to move aggressively against those deemed to have unfairly capitalized on lowered borrowing standards or the provision of public funds (recall that an entirely new federal agency - the Office of the Special Inspector General for the Troubled Asset Relief Program - was created to investigate and prosecute such cases in the wake of the 2008 economic crisis).  Expect that those companies who seek and obtain financial relief will be scrutinized closely to evaluate whether they fully and accurately represented their eligibility. 

13. Stay aware of financial covenants.  Many lending arrangements require some level of reporting regarding adverse financial events.  Make sure to understand when and how these obligations are triggered - and what can be done to cure defects - in order to avoid potential litigation down the road. 

14. Anticipate potential threats.  With all of the challenges involved in keeping up with immediate obligations in this crisis, it can be easy to lose sight of what’s coming next.  Understanding that predicting the future is difficult in these times, make an effort to project out how the range of potential developments over the next 30, 60, and 90 days is likely to impact the company’s operations.  Look for ways to employ “ounce of prevention” strategies now.

15. Anticipate Cybersecurity Risks.  The increasing number of employees working remotely greatly increases the flow of personal and confidential information electronically.  Safeguards that may work well when employees are located in the same office may not work as effectively when those employees are working remotely and requests for HR, tax, or bank wiring instructions by email do not seem suspicious.  Expect phishing attacks attempting to steal this information.  Remind all employees of this risk; provide guidelines for the sending of personal or confidential information; and, to the extent possible, add certificates to internal emails so that other emails are flagged as coming from outside sources.  Ensure that all security software is up to date and that updates can be pushed to remote users.  If possible, lock down and encrypt personal and confidential data. 

16. Gather current insurance policies and review them for coverage. It is important during this time to understand the insurance program you have in place and potentially re-assess that program for the future. Now is an important time to gather all of your current insurance policies and determine what coverage you may have for certain risks. Policies can change at renewal, and thus, analysis of an older form policy that may not include all current declarations, coverages, and endorsements may not be worth the effort.

17. Don’t assume you do or do not have insurance for a specific loss or claim. You may have read that you either do have coverage for all of your losses or that you have no chance of coverage for anything related to COVID-19. There are no “uniform” answers, and it is important to review your particular policy to determine the scope of potential coverage.  Failing to confirm what coverage exists could either leave the company unnecessarily exposed or unaware that it is underprotected when litigation comes. 

18. Don’t assume anything. Although the world has ground to a halt, and tax day has been extended, you should not assume that payments are not due, that contracting parties will or will not perform, or that the crisis will end in a month or even two. Assumptions in this environment could create significant exposure if, for example, you did not pay for or accept goods under a contract because you assumed that the supplier would not deliver them in this crisis.

19. Don’t make oral modifications to written contracts. Many contracts will not be fulfilled as originally expected, but making oral modifications could create problems down the road after this emergency has passed. If you do make an oral agreement, follow up in writing to confirm the details of the agreement. For example, if your bank or landlord agrees over the phone to some flexibility when it comes to payment of your note or rent, don’t carry on without memorializing the terms in writing.

20. Don’t over-promise on performance. No one knows when this crisis will end, no one knows when state governments will lift restrictions, and no one knows what the health ramifications will be publicly and individually. Understand that any degree of uncertainty will be multiplied exponentially in this environment, and avoid making promises which minimize that doubt (e.g., promising to start work in “two weeks” or complete work “within a month”; pledging that at-will employees will receive a certain number of paychecks).

21. Monitor and communicate with your local, state and federal governments and elected officials. The fluid and ever increasing government response to this situation requires that someone in your organization follow in real time the local, state and federal response. This includes not only the current wave of “shelter in place” orders, but also the myriad of relief programs being created to assist your business and your employees. Keep a close eye on what has been enacted and other developments that could affect your company.  Every business has its own unique set of circumstances that makes it potentially problematic to rely on “summaries” provided by the media, and frankly even trade associations.  Making sure that your elected representatives are directly aware of any unique and business critical issues associated with your business is a critical component of weathering the maelstrom of litigation likely coming.

While these recommendations cover a broad spectrum, they share several common elements.  First, the value of communicating effectively, both internally and externally.  There are too many questions coming too fast for even the most vigilant and effective inhouse counsel to keep up.  Figure out who has traveled the road before, and leverage their experience and expertise. Second, the importance of making thoughtful, principled decisions which will stand up to hindsight.  Third, the need to document those decisions to as great an extent possible so that companies will be best equipped to defend those decisions when the time comes. While no one can predict the future, applying these principles should go a long way toward protecting your company when it arrives, whatever it looks like.

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