COVID-19 Lawsuits Continue to Pose Ongoing Risk

As the COVID-19 pandemic wears on and 2020 nears its end, one thing is abundantly clear: the vast, unprecedented impacts of the pandemic are going to be a part of the conversation moving forward. This conversation will be perpetuated by the risk and effects of COVID-19 lawsuits stemming directly from circumstances caused by the pandemic.

There has been a wide variety of litigation – at least 125 cases identified by Audit Analytics – related to the pandemic, under circumstances that would not have otherwise been present. The ongoing risk associated with COVID-19 litigation is significant, given the uncertain nature as to the duration of the pandemic and the diversity in the types of litigation that we’ve seen.

These court actions range from consumer and personnel complaints to charges from government agencies, actions taken by investors in response to corporate action, lawsuits related to cybersecurity issues, and insurance claims litigation.

Government Actions

Some of the most severe lawsuits arising from the COVID-19 pandemic have been filed by regulatory and government agencies, including the SEC and DOJ.

The SEC alleged in a complaint that biopharmaceutical company Applied BioSciences made false and misleading statements to the general public about the Company’s intent and ability to produce and ship a COVID-19 home test kit for private use, causing an increase to their stock price and trading volume. However, the claims by the company were allegedly categorically false, as the FDA had not approved the home test kits and Applied BioSciences intended for the kits to be used in consultation with a medical professional, instead of privately at home.  

The SEC also charged Praxsyn Corp. and its CEO with violating the antifraud provisions of securities laws after the Company issued a misleading press release regarding their ability to acquire and supply critical personal protective equipment. After regulatory inquiries, Praxsyn revealed they never had any masks available to sell. The matter was quickly resolved, with Praxsyn and its CEO paying the SEC $65,000 to resolve the accusations.

In the first criminal securities fraud prosecution related to the COVID-19 pandemic brought by the DOJ, the president of California-based medical technology company Arrayit Corporation allegedly conspired to commit health care fraud in connection with $69 million in false claims for allergy and COVID-19 testing.

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Shareholders and Investors

Multiple shareholder derivative lawsuits and investor complaints have come out of the pandemic, including investors suing corporations for making false claims about products and/or services and insider misconduct.

Lawsuits have been filed against Chembio Diagnostics [CEMI], SCWorx Corp [WORX], Sorrento Therapeutics [SRNE], and Vaxart Inc [VXRT] regarding false and/or misleading claims – and the subsequent market consequences – that the individual companies made about COVID-19 testing kits, “cures”, and vaccines.

While multiple cruise lines have been sued by consumers alleging personal injury and breach of contract, investors in Royal Caribbean Cruises [RCL] have brought legal actions against them, claiming the Company made materially false claims and misled investors by downplaying the global impact of COVID-19 on cruise bookings and falsely claiming that their cruise ships had implemented safety protocols that would prevent the spread of disease.

A class action suit against Wells Fargo [WFC] alleges that Wells Fargo improperly allocated government-backed loans under the Paycheck Protection Program (PPP), increasing litigation risk, regulatory scrutiny and/or potential enforcement actions.

In a more severe federal securities class action lawsuit, plaintiffs allege that insiders of Eastman Kodak Company [KODK] violated securities laws and engaged in a fraudulent scheme to artificially inflate the Company’s stock price. Kodak insiders purchased tens of thousands of Company shares prior to making public the knowledge that the Company had received a $765 million government loan in order to produce drug ingredients, including ingredients for COVID-19 drugs. Plaintiffs allege that the Kodak insiders knew that once the news was made public, the stock would immediately increase in value, allowing the insiders to profit significantly from the compensation scheme. Kodak is now facing investigations from several government agencies in relation to the scheme.

COVID-19 Lawsuits Filed by Shareholders and Investors
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Cyber criminals have taken advantage of the COVID-19 crisis in a variety of ways, including breaching personal data, hacking web-based meetings, and the use of phishing campaigns.

Deloitte Consulting was contracted with various state agencies to assist with states administering the federal Pandemic Unemployment Assistance Program (PUA) by designing, building, and maintaining a computerized unemployment system. Deloitte Consulting is now facing litigation from multiple parties in a consolidated class action lawsuit alleging a flaw in the system that exposed the personal information of those who applied for unemployment benefits.

The plaintiffs additionally asserted that Deloitte Consulting “represents itself to have robust security features” to protect sensitive personal information. For the hundreds of thousands of individuals who applied for unemployment benefits through Deloitte Consulting’s system, the breach of their personal data resulted in consequential damages, for which the plaintiffs are seeking compensatory and punitive damages.

Zoom Video Communications [ZM], while prospering during the pandemic due to the nature of the services they provide, has been sued in multiple class action complaints by plaintiffs who experienced hijacked Zoom web calls by malicious outside parties.

Plaintiffs in the class action suits are seeking equitable relief and damages, alleging that Zoom improperly prioritized profit and revenue over user security and data protection. In Rios v. Zoom Video Communications, the plaintiffs are seeking $5 billion equitable relief and damages against Zoom due to the “particularly horrifying” content shown during the hijacked webinar.

Related to those cybersecurity issues for Zoom is a shareholder derivative complaint against the directors and officers of the Company; the plaintiffs in Gervt v. Yuan allege that the Zoom platform was riddled with security deficiencies, despite assurances from Zoom’s leadership about the platform’s reliability and safety.

The hijacked Zoom calls and related shareholder complaint are not Zoom’s only legal troubles related to poor cybersecurity. A class action lawsuit was filed by consumers alleging that Zoom shared their information with third parties without the customers’ knowledge and went so far as to assist outside platforms, including LinkedIn and Facebook, with collecting the personal information of Zoom users.

In a different type of lawsuit not filed by consumers seeking damages related to cybersecurity, Microsoft [MSFT] is suing unnamed defendants, alleging that an “online crime network” deployed a COVID-19 phishing campaign targeting Microsoft’s customers.

Cybersecurity litigation stemming from COVID-19
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Insurance Coverage

The pandemic has prompted several companies to file claims with their insurance agencies related to losses incurred as a result of COVID-19; several of these claims have been denied, resulting in litigation filed against the insurance companies in regards to the denied claims.

California retailers, in Mudpie v. Travelers Casualty Insurance Company of America, sued their insurance company, alleged that Travelers categorically denied claims from the retailers – without investigation or due regard – arising from California’s mandated interruption of business services due to the pandemic. Similarly, Ralph Lauren [RL] is suing Factory Mutual Insurance Company after the insurance company denied their claim related to losses incurred as a result of mandatory store closures during the pandemic.

Denied insurance claims are only a portion of the COVID-19 related litigation that we’ve seen so far. According to the complaint filed in Marks Engine Company No 28 Restaurant LLC v. Travelers Indemnity Company of Connecticut, the plaintiffs purchased an insurance policy for their business, for which Travelers allegedly accepted the policy premiums with no intention of actually providing coverage due to losses caused by COVID-19 related shutdowns.

McDonald’s [MCD] is suing their insurer Austin Mutual Insurance Co for failure to pay legal fees in connection with a class action lawsuit filed against McDonald’s by employees that alleged unsafe working conditions during the pandemic.

At least one insurance company – US Specialty Insurance Company – filed a lawsuit against one of their insured clients, asserting that Gartner Group cannot increase limits of indemnity for losses from the COVID-19 pandemic.   

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Contract Disputes

The level of uncertainty around the pandemic has resulted in some entities seeking to terminate or alter contracts prematurely, leading to litigation seeking damages in regards to the broken contracts.

Lawsuits have been filed against Coca-Cola [KO], Microsoft [MSFT], and Under Armour [UA] for terminating contracts prematurely, allegedly due to circumstances arising from COVID-19.

UCLA is seeking $9.9 million in a case against Under Armour after the Company sought to end their contract with the university, a contract considered “the largest athletic apparel sponsorship deal in the history of American college sports.” Under Armour claimed that their financial situation caused by COVID-19 made the contract terms untenable for them; however, in their complaint, UCLA alleges that Under Armour is using the pandemic as a pretext to terminate the agreement.

COVID-19 Disputes Related to Contracts
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The above-named lawsuits would not otherwise exist if the pandemic didn’t alter circumstances or provide opportunity for malicious actors. The unprecedented economic effects from the pandemic pose certain risks on their own for relatively routine transactions, such as mergers.

As an example, a planned merger between Forescout Technologies [FSCT] and Advent International Corporation deteriorated after Forescout Technologies experienced, and failed to disclose, a significant downturn in business related to the COVID-19 pandemic. Allegedly, in an effort to meet its obligations under the Merger Agreement, the Company inflated its Q4 2019 revenues through a channel stuffing scheme. When the merger failed to materialize after the allegations were discovered, the Company’s stock plummeted, wiping out approximately $300 million in market capitalization for Forescout Technologies between May 15, 2020 and May 18, 2020. The failed merger resulted in several lawsuits.

Despite the routine nature of the some lawsuits filed thus far, it is important for all business entities to consider the various ways in which COVID-19 could post a litigation risk on an ongoing basis.

This analysis uses data from the Litigation database, powered by Audit Analytics.

For more information about Audit Analytics or this analysis, please contact us.

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