The COVID-19 pandemic has created significant challenges for many businesses. Some companies, particularly in the travel, hospitality, and leisure industries, have seen revenue drop precipitously. Other companies, particularly in certain sectors of the healthcare industry, are overwhelmed with demand. In this alert, we draw upon our business litigation experience in discussing suggested best practices for companies seeking to mitigate risks as they adapt to face COVID-19 challenges.
Best Practices for Developing and Marketing New Products
Many companies are developing new product lines or marketing existing products in different ways. For example, liquor distilleries are now producing hand sanitizer, automobile manufacturers are producing ventilators, and companies of all types are selling protective masks. The vast majority of these business shifts are designed to support front-line healthcare workers and first-responders and to minimize or avoid employee layoffs and furloughs. Even with good intentions, however, businesses face potential risks in developing and marketing new products and services, especially in a high-scrutiny environment. To mitigate these risks, companies should consider these best practices:
- Ensure that new product offerings are safe. Given the urgency to address the COVID-19 pandemic, companies may be tempted to shortcut traditional research and development processes. Although speed is certainly important, if a product is not safe, companies could risk product liability suits, negligence claims, and other similar actions. Congress and the Department of Health and Human Services recently expanded certain immunities from suit to address these concerns, but not all products developed on an expedited basis are covered. To mitigate risks related to unsafe or defective products, companies should consider applicable regulatory guidance and conduct fulsome safety and efficacy testing, even if that testing is performed on a compressed timeline.
- Ensure that any marketing claims are supported by research and data. Relatedly, companies must ensure that their marketing is fair and accurate. Several companies have already faced civil lawsuits or regulatory actions for allegedly claiming that their products are effective against the novel coronavirus. Unsupported marketing claims can expose a company to potential liability under state consumer protection statutes; the federal Lanham Act; industry regulations; or various other contract, warranty, or tort theories. To mitigate these risks, companies should support any advertising claims with research and data, and they should not merely parrot claims made by manufacturers of similar products.
- Conduct intellectual property searches. In moving swiftly to meet consumer needs for protective equipment, cleaning supplies, and other products, some companies are using other companies’ existing products as templates. This can create a risk of intellectual property infringement. For example, a cleaning formula might be covered by a patent, a handwashing poster might be protected by copyright, and a product name might be trademarked. Before developing a new product line, companies should conduct appropriate intellectual property searches to minimize risk. Even if the proposed new product is protected, the company might still be able to proceed by negotiating a license with the intellectual property owner. Indeed, several high-profile intellectual property owners have signed on to the Open COVID Pledge, agreeing to enter temporary royalty-free licenses for intellectual property used to fight the COVID-19 pandemic.
- Analyze historical pre-pandemic pricing data. When a company develops new products, part of the pricing analysis typically involves assessing supply and demand. Basing pricing decisions on these factors amid a global pandemic, however, can lead to allegations of price gouging under various federal and state statutes. Several companies have already been sued for alleged price gouging in connection with sales of protective masks, toilet paper, and hand sanitizer. To minimize the risk of price gouging claims, companies entering into product areas should consider historical pricing data as part of their pricing decisions.
Best Practices for Public Statements and Financial Disclosures
In light of what is likely to be increased scrutiny from the media, regulators, and plaintiffs’ attorneys, companies – and especially publicly traded companies – should be mindful of their public statements and financial disclosures lest they risk potential regulatory or private enforcement actions under federal and state securities laws. Indeed, in a recent release, SEC Chairman Jay Clayton reinforced the importance of companies providing investors “with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable to keep investors and markets informed of material developments.” Such caution should be exercised not only with respect to the company’s current financial condition, management of pandemic-related risks, and the timing of any recovery and/or prospects going forward, but also to statements regarding the company’s lines of business, both new and existing, that may relate to COVID-19 treatment or prevention. For example, as discussed below, statements about a newly released product’s capabilities that later turn out to be unfounded, exaggerated, or which omit discussions of material risks, can potentially give rise to a securities claim.
To date, multiple federal securities class action lawsuits already have been filed asserting claims under Section 10(b) of the 1934 Act and Rule 10b-5 that relate, directly or indirectly, to the COVID-19 pandemic. These include:
- Atachbarian v. Norwegian Cruise Lines, et al., Case Nos., 1:20-cv-21386 (S.D. Fla.); Douglas v. Norwegian Cruise Lines, et. al., Case No. 1:20-cv-21107 (S.D. Fla.). Plaintiffs asserted claims against a cruise line and several executives relating to defendants’ alleged “failure to accurately disclose the deleterious effect of COVID-19 on its financial performance and the fact that it would have to suspend all cruises,” and specifically references the aforementioned statements by the SEC relating to the importance of accuracy in COVID-19 financial guidance.
- McDermid v. Inovio Pharmaceuticals, Inc., et al., Case No. 2:20-cv-01402-GJP (E.D. Pa.). Plaintiff asserted claims relating to statements the company and its executive made regarding the company’s supposed development of a COVID-19 vaccine “within three hours,” which the company later had to walk back after receiving immediately skeptical coverage that allegedly caused the company’s stock price to decline.
- Drieu v. Zoom Video Comm’ns, Inc., et al., Case No. 5:20-cv-02353 (N.D. Cal.); Brams v. Zoom Video Comm’ns, Inc. et al, Case No. 3:20-cv-02396 (N.D. Cal.). Plaintiffs asserted claims relating to the alleged failure to disclose and misstatements regarding, the inadequacy of the Zoom telecommunication service’s data privacy and security measures, lack of encryption, and the increased risk that users would have their personal information accessed by unauthorized parties. As we are all likely aware, demand for telecommunication apps and services such as Zoom has skyrocketed during the COVID-19 pandemic, with companies looking to take advantage of this growing market.
For additional risk factors facing publicly held companies, read our post on Reevaluating Risk Factors in Response to COVID-19.
Best Practices for Interacting With the Federal Government
With the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the federal government has enacted the largest emergency stimulus package in history, the goal of which is to minimize the economic effects of COVID-19. Many businesses across the country have turned to various CARES Act programs in hopes of weathering the economic storm caused by the current pandemic. But, companies should be aware of the risks they face in doing so. If history holds, the CARES Act’s monumental stimulus package carries with it the likelihood of significant federal government enforcement to combat perceived fraud with respect to its programs.
The False Claims Act (FCA), 31 U.S.C. § 3729 et seq., has long been the federal government’s most powerful tool for combatting fraud with respect to goods sold to the government and services rendered under government contracts and programs. The penalties under the FCA are significant—three times actual damages and fines of over $20,000 per claim are available against anyone who is found to have defrauded the government.
The Department of Justice (DOJ) has already made clear that it will prioritize the investigation and prosecution of coronavirus-related fraud schemes. And, two new oversight bodies have been created to monitor CARES Act activity. First, the Pandemic Response Accountability Committee is made up of Inspectors General from at least nine federal agencies to oversee outlays under the CARES Act and prevent fraud and abuse. Second, the Special Inspector General for Pandemic Recovery is a new office within the Department of the Treasury created to, among other things, conduct audits and investigations of issues pertaining to loans and other investments under the program. For further insight into the oversight bodies, read our post on The Special Inspector General for Pandemic Recovery – Crisis Funding Comes with Heightened Investigation Risk.
In light of this stringent government oversight and the looming prospect of government enforcement actions, businesses utilizing the assistance available under the CARES Act should be vigilant to ensure that they do not violate program mandates or run afoul of the FCA in applying for CARES Act assistance or implementing programs under the act. Below are some things businesses should keep in mind to minimize their risk:
- Be careful not to misstate or overstate information in applying for Small Business Administration (SBA) loans or other money available under the CARES Act.
- If selling personal protective equipment (PPE) or any other type of goods to the government, do not misrepresent material information about the goods or make incorrect or misleading statements about the quality, effectiveness, or certification of the goods.
- Avoid any actions that could potentially be seen as attempts to mask or hide non-compliance with material conditions of CARES Act loans or other economic relief.
- In applying for any loan forgiveness available under the CARES Act, take care not to provide false information regarding adherence to the requirements for forgiveness.
Many businesses are facing unprecedented challenges during this global pandemic and they have been forced to act quickly with new and dramatic measures to address those challenges. Companies can protect themselves by factoring risks into their decision-making process and implementing the best practices outlined herein. Still, we recognize that each situation, and each company’s risk tolerance, is different.
If you have questions about the content of this alert or about the risks associated with a particular decision your company is considering, please contact one of the authors.