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Litigation risk in COVID-19 environment: Class actions and more

Monday, June 08, 2020 @ 1:34 PM | By David Outerbridge, Sylvie Rodrigue and David Wawro

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As we discussed in the first article in this series, the economic and strategic considerations affecting organizations’ litigation decisions are shifting because of COVID-19. For example, class action activity in the first few months of the pandemic already includes:

  • Privacy claims (e.g., alleging failure of a videoconferencing platform to protect personal information);
  • Personal injury claims (e.g., alleging failure to protect against COVID-19);
  • Employment claims (e.g., for mass layoffs, unsafe working conditions);
  • Securities disclosure claims (e.g., alleging failure to disclose the effect of the pandemic on the organization in a timely fashion);
  • Consumer protection claims (e.g., for not refunding payments relating to purchases that could not be fulfilled); and
  • Insurance claims (e.g., for not providing coverage for certain types of losses).

The range of class actions that COVID-19 is generating will continue to grow. Successfully defending some of these class actions will be vital for the organization being targeted — that is, the significance of the claim may be such that the survival of the organization depends on either successfully defending against it, or negotiating a compromise resolution that allows the organization to continue. The leverage for class counsel, and the determination of defendants, are heightened.

The pandemic is also producing a range of new interparty commercial disputes, such as novel force majeure claims affecting supply chain and construction contracts, claims through which buyers seek to terminate corporate acquisition agreements based on material adverse effect clauses, interim operating covenants, bringing down requirements or other alleged breaches, whistleblower suits relating to improper receipt of government funds and cybersecurity claims, among a variety of others.

Many of these claims will likewise be of heightened importance for defendants, for at least two reasons. First, less material disputes are now more likely to be resolved at the business level, given cash scarcity, a less efficient justice system and the need to prioritize business continuity. Second, the pandemic is generating “bet the farm” litigation at a higher rate. The breaches of material contracts are more frequent; the dollar values of the losses are higher.

A related trend in the non-class action litigation space may be increased use of private arbitration and other alternative dispute resolution mechanisms outside the traditional court process. In the short term, this consequence is arising from the shutting down of the court system. In the longer term, it is expected that some commercial parties will prefer private dispute resolution, with the goal (if not always the effect) of expediting the process, controlling the costs and achieving greater certainty of outcome.

It is not yet known how courts and arbitrators will react to the unprecedented cluster of problems and losses created by COVID-19. The effects of the pandemic are far broader than any single private law dispute. It is likely that adjudicators, in assessing the merits of any particular claim arising from COVID-19 (whether a class action or an ordinary interparty claim), will weigh the law and the equities carefully before laying the concentrated financial risk of the pandemic on the shoulders of any single defendant.

Due diligence takes a different form in a crisis, and adjudicators can be expected to be attentive to whether a defendant took steps that were reasonable based on the limited time and information available. The assessment of what constitutes reasonable contractual risk allocation will likewise be performed differently when dealing with a risk no one considered or could readily have fully accounted for. Ultimately, there are some losses for which our system of private law will not be prepared to compensate.

This is the second in a two-part series. Read part one: Litigation risk in the COVID-19 environment: Big changes.

David Outerbridge is a partner in Torys’ litigation department, based in Toronto. He acts as both trial and appellate counsel, with specialized expertise in complex written and appellate advocacy. Sylvie Rodrigue is the managing partner of Torys Montréal. She has a broad litigation practice with extensive experience defending class actions across Canada as well as other corporate commercial matters. David Wawro is a litigator in Torys’ New York office whose practice focuses on arbitration and mediation. He has tried cases in both the federal and state courts in New York and in several other states and has handled antitrust, securities, tax, employment and corporate litigation matters.

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