Making Rhyme or Reason out of Reopening

By Jordan E. O'Connell on Posted in Legal Analysis

Most states and U.S. territories have now begun reopening at least parts of their economies.  The reopening efforts purport to follow a three-phase White House plan, even though not many states have met the plan’s benchmarks, including a “downward trajectory” in coronavirus cases.  The White House guidelines are not mandatory.  Rather, they advise governors to take a state-wide or county-by-county approach to analyzing the progress made in combating the coronavirus hotspots and permitting economic and social activity accordingly.  Easier said than done.  Reopening is proving challenging as leaders across the country are weighing health, economic, and political ramifications of opening too soon, too quickly, or not soon enough.  At a congressional hearing last week, Dr. Anthony Fauci warned that reopening too quickly poses “a real risk that you will trigger an outbreak that you may not be able to control.”

Our colleagues Kristina Arianina and Dimitar Georgiev have prepared a thoughtful article that considers the roles both state and local officials have in determining the pace and approach at which to reopen.  Read the full article here.

Government COVID-19 Trade Credit Protections – Backstops Are Not Just For Brexit!

By Simon Garbett, Garon Anthony, Devinder Singh and Nicola Smith on Posted in Legal Analysis

The announcement from HM Treasury on May 13 2020 to support trade credit insurance has to be very welcome news for many UK businesses and their supply chains.  It is a very significant announcement because trade credit insurance plays a vital role in supply chains, oiling, as it does, the wheels of domestic and global trade.

In the UK and the world over, supply chains have been under very significant strain and distress over recent weeks, and in some cases are even broken right now, as a result of the ongoing COVID-19 pandemic.  This will likely lead to increased risk of supply chain insolvencies with falling demand for some products or certain supply chain partners seeking to push out payment terms.

The further government assurance of trade credit, which complements all the other financial support packages put in place by the government over recent weeks, such as the various loan schemes and furlough arrangements, will undoubtedly help many businesses to better plan and continue to do (or recommence) business with added security and confidence as the economy re-opens/re-energizes – but without additional financial headaches and cash-flow constraints.  We have prepared a client alert with more information on the announcement from HM Treasury to support trade credit insurance.  Read the full client alert below:

Cross-Post from the Insurance and Reinsurance Disputes Blog: Is a COVID-19 Stay-Home Order Alone Enough to Trigger Business Interruption Coverage?

By Jordan E. O'Connell on Posted in Legal Analysis

This is a Cross-post from the Insurance and Reinsurance Disputes Blog.  Please contact Larry P. Schiffer and Aaron C. Garavaglia with any questions. 

Back in March, when the novel coronavirus was spreading and local and state governments were issuing stay-home orders, we published a blog post on Civil Authority Orders and COVID-19 Coverage.  Since that time, there have been over 125 lawsuits filed by insured businesses, many of them arguing that the economic damages caused by these COVID-19 governmental orders, by themselves, trigger coverage under business interruption-type provisions of property policies.  The argument goes that because the civil orders restricted operations or forced businesses to close, the insurance policies should pay regardless of whether there is actual physical damage to property.

In this blog post, we take a further look into civil authority order provisions and whether the order alone is a sufficient trigger of coverage.  As has been said previously, the specific facts of the alleged loss and the actual words of the individual policy may affect whether coverage exists.

Many business and property insurance policies contain a civil authority coverage provision.  Under the most common policy language, this coverage applies when a civil authority (e.g., state, local or federal governmental entity) prohibits or restricts access to an insured’s premises due to direct physical loss of or damage to property other than at the insured’s premises, from a covered cause of loss.

A form of civil authority coverage has been in use for at least sixty years.  In an early case, Cleland Simpson Co. v. Firemen’s Insurance Co. of Newark, N.J., 140 A.2d 41 (Pa. 1958), the Pennsylvania Supreme Court declined to find coverage after the mayor proclaimed a state of emergency and ordered stores closed in anticipation of a hurricane and related fire damage.  The policy provision stated:

Liability under this policy is extended to include actual loss as covered hereunder sustained during the period of time, not exceeding two weeks, when as a direct result of a peril insured against access to the premises described is prohibited by order of civil authority.

Id. at 45.  (Emphasis added).  The court stated, “We can only conclude that the clear language of the policy restricts the loss to that following a direct invasion of the property by fire or another specified peril and the subsequent prohibition by civil authority of access to the properties.”  Id.  The court made two points.  First, the order had to come after the peril for coverage to apply.  Second, the peril had to affect the property (direct invasion of property by fire).

Several years later, in Bros., Inc. v. Liberty Mutual Fire Insurance Co., 268 A.2d 611 (D.C. 1970), the D.C. Court of Appeals affirmed summary judgment for the insurer and declined to find coverage under a civil authority provision.  A restaurant’s business was interrupted after the District ordered a curfew to deter demonstrations in response to Dr. Martin Luther King, Jr.’s assassination.  The policy in Bros. provided that:

This policy is extended to include the actual loss sustained by the Insured, resulting directly from an interruption of business as covered hereunder, during the length of time, not exceeding 2 consecutive weeks, when, as a direct result of damage to or destruction of property adjacent to the premises herein described by the peril(s) insured against, access to such described premises is specifically prohibited by order of civil authority.

Id. at 613.  (Emphasis added).  The court noted the insured “did not claim physical damage to the premises,” and “the claim was founded on loss of business due solely to the curfew and accompanying municipal regulations.”  Id. at 612.  When declining coverage, the court stated “though the loss alleged resulted from the curfew and municipal regulations, these did not prohibit access to the premises because of damage to or destruction of adjacent property.”  Id. at 614.  This is precisely the same factual situation presented by many of the COVID-19 declaratory judgment actions.  The claims are founded on loss of business due solely to the stay-home orders closing non-essential businesses and not because of direct physical damage to adjacent property.

Since Cleland and Bros., civil authority provisions have continued to evolve.  For instance, ISO Form CP 00 30 (4-02 ed.) states:

We will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused or resulting from any Covered Cause of Loss (Emphasis added).

As numerous courts have stated, the presence of the phrase “due to direct physical loss of or damage to property,”  or its equivalent, in policy language is crucial to determining whether coverage exists.

It is clear that the loss of income triggered by a civil authority order shuttering a business is, by itself, insufficient to trigger coverage.  When a policy specifies “direct physical loss,” the absence of “physical loss” prior to a civil authority order is a dispositive factor that likely will preclude coverage.

For example, in Dickie Brennan & Co. v. Lexington Insurance Co., 636 F.3d 683 (5th Cir. 2011), the court addressed whether a series of New Orleans restaurants were entitled to coverage for income lost as a result of a mandatory evacuation order issued prior to Hurricane Gustav’s landfall.  Id. at 684.  The order specified “anticipated high lake and marsh tides due to the tidal surge, combined with the possibility of intense thunderstorms, hurricane force winds, and widespread severe flooding.”  Id. at 684.  The policy stated:

We will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss.

Id. at 685.  (Emphasis added).  The Fifth Circuit affirmed summary judgment for the insurer and set out a four-factor test for coverage under a civil authority provision.  The test required a policyholder to establish a loss of business income:

(1) caused by an action of civil authority; (2) the action of civil authority must prohibit access to the described premises of the insured; (3) the action of civil authority prohibiting access to the described premises must be caused by direct physical loss of or damage to property other than at the described premises; and (4) the loss or damage to property other than the described premises must be caused by or result from a covered cause of loss as set forth in the policy.

Id. at 685.  (Emphasis added).  Focusing on the third factor, the court found the insured failed to “demonstrate a nexus between any prior property damage and the evacuation order.”  Id. at 686.  The court found that “physical damage to other premises in the proximity of the insured’s property” was a prerequisite to civil authority coverage.  Id. at 687.

The court also rejected the policyholder’s argument that prior damage in the Caribbean and the hurricane’s projected path toward New Orleans were sufficient when the policy did not specify any geographical limitations.  Id. at 686 (“Nothing in the record, including the order itself, shows that the issuance of the order was ‘due to’ physical damage to property, either distant property in the Caribbean or property in Louisiana.”).  The court also acknowledged that both sides agreed there had been no property damage in Louisiana at the time the order was issued and the order identified future harm, e.g., “possible future storm surge, high winds, and flooding based on Gustav’s predicted path as reasons for evacuation.”  Id. at 686.

Similarly, in Jones v. Chubb Corp., No. 09-6057, 2010 U.S. Dist. LEXIS 109055 (E.D. La. Oct. 12, 2010), the court granted summary judgment for the insurer.  Citing “anticipated high tides and the possibility of hurricane force winds and widespread severe flooding” as factors that necessitated evacuation, the mayor of New Orleans issued two evacuation orders and declared a state of emergency.  Id. at *3.  The insured’s policy stated:

We will pay for the actual business income loss you incur due to the actual impairment of your operations, directly caused by the prohibition of access to your premises by a civil authority.  This prohibition of access by a civil authority must be the direct result of direct physical loss or damage to property away from such premises or such dependent business premises by a covered peril.

Id. at *7.  (Emphasis added).  For the Jones court, the presence of the bolded language meant a prompt answer to the coverage question.  The court found the policy should be strictly construed and stated:

The Policy does not insure against impairment of operations that occurs simply because a civil authority prohibits access unless the civil authority order meets the requirements of the policy–one of those requirements is a nexus between the order and certain physical damage.  Reading the Civil Authority section as a whole, it is clear that it was not written with the expectation that a civil authority order prohibiting access would issue before the property damage that forms the basis of the order actually occurs.

Id. at **8-9.  (Emphasis added).  In Jones, the absence of prerequisite physical damage under common policy terms meant a civil authority order could not trigger coverage by itself.  Underscoring that physical damage is a prerequisite to coverage, the court stated that the second evacuation order, issued after the hurricane made landfall, “arguably . . . could trigger Civil Authority coverage” because it prohibited access “in light of damage sustained throughout the City of New Orleans.”  Id. at *10. Ultimately, the court held there was no coverage because of the waiting period in the policy.

The civil orders issued across the nation in response to the novel coronavirus pandemic, on their own, should not trigger coverage under most business interruption insurance provisions.  Where the insurance policy requires direct physical loss of or damage to property by a covered cause of loss, the same analysis as the cases discussed above apply.  Moreover, civil orders issued as preventive measures prior to any physical damage should not trigger coverage, as there has to be a direct nexus between preexisting physical damage to property and the civil order.

Managing Distressed Customer Relationships

By Jordan E. O'Connell on Posted in Legal Analysis

In the wake of the COVID-19 pandemic, we often are asked what our clients should do if a business counterparty (such as a vendor, customer or other contract counterparty) is suffering distress and may be contemplating filing for bankruptcy.  It is, of course, impossible to anticipate every possible scenario, but our colleagues in the Restructuring and Insolvency group, Stephen D. Lerner, Karol K. Denniston, Christopher J. Giaimo, Nava Hazan, Norman N. Kinel, Peter R. Morrison, Jeffrey N. Rothleder, Mark A. Salzberg, and Kelly E. Singer, have prepared a very helpful client alert including several general “do’s and don’ts” to consider.  Recognizing that the facts and circumstances differ as to each situation, as always, it is best to consult your restructuring advisors as soon as possible if you believe a business counterparty is suffering financial distress and may be close to bankruptcy.  They will be able to tailor the advice to the specifics of the circumstances.  Read the full client alert below:

Employer’s Guide to Return-to-Work Issues: COVID-19 Public Health Emergency

By Daniel Pasternak and Laura Lawless on Posted in Legal Analysis

The coronavirus disease 2019 (COVID-19) public health emergency has changed life as we know it, including by severely disrupting business on a nationwide scale. In some cases, employers have been forced to temporarily close their doors and cease operations, while others have had to make radical changes to the workplace in order to maintain operations. For nearly two months, employers have had to make these adjustments in response to the unprecedented circumstances the pandemic has caused, and employers now face many more months of uncertainty ahead, as the economic consequences continue to be felt by businesses of all sizes.

Now, as our collective attention turns to the next phase in the pandemic, with relaxing of stay-at-home orders and efforts to reopen the economy, employers must assess and evaluate dozens of employment-related issues as they plan for a post-COVID-19 work environment that may look quite different than any we have worked in before. To help employers identify those issues, we have prepared an “Employer’s Guide to Return-to-Work Issues: COVID-19 Public Health Emergency.” This Guide identifies health and safety, wage and hour, leave of absence, payroll, compliance, and other issues to be considered before resuming, or fully resuming, operations. Read the full guide below. 

Global Supply Chains In The Wake Of COVID-19 In Socially Critical Industries – Is It Time To Reshore?

By Sarah Rathke and Jordan E. O'Connell on Posted in International, Legal Analysis

dockAs countries, economies, and businesses adjust to life in the COVID-19 era, many governments have started to ask questions about the wisdom and longer term implications of allowing key components of socially or economically critical products like pharmaceuticals, medical devices, and defense products to be sourced beyond domestic borders. One key area of concern – and an area of weakness that the pandemic has revealed – is that many supply chains in crucial industries rely on a limited number of suppliers and/or on suppliers in a limited geographic region.

In France, Finance Minister Bruno Le Maire has called for a review of French industries to assess their reliance on companies in China and Asia in their supply chains, and to identify which industries need to develop “economic and strategic independence.”  Le Maire specifically noted that France’s pharmaceutical and automotive industries rely on sources in China or Asia for essential components, such as raw materials for active ingredients in drugs and brake pedals. Similarly, since November 2019, the Japanese government has begun to lower the allowable foreign investment ownership level threshold for companies in fields critical to national security, and has recently added vaccine, medicine, and advanced medical equipment makers to the list. And in the US, various federal agencies have begun inquiries to understand better how key components of certain critical products are sourced.

These developments suggest that businesses should consider the resilience of their supply chains and take steps to diversify their suppliers geographically.  And, for essential products, businesses and governments should consider the extent to which it makes sense to develop a reshored domestic supplier base.

But how easy is it to reshore, and how should companies go about doing this?

To find guidance, we talked with Rosemary Coates, the Executive Director of the California-based Reshoring Institute, a non-profit that provides information, research, and support for companies trying to reshore their manufacturing and services back into the United States. (Full disclosure, Rosemary is also co-author of the supply chain treatise, Legal Blacksmith: How to Avoid and Defend Supply Chain Disputes, with SPB partner Sarah Rathke. She is also an expert witness and the President of Blue Silk Consulting.)

Leaving China

Rosemary agrees that pharmaceutical sourcing will likely start moving back to domestic suppliers, where possible. However, she cautions that moving operations away from China – for example – is not as easy as companies might like. In China, Rosemary points out, most employees have employment contracts, with the typical duration being 1-2 years. Thus, companies seeking to leave China cannot simply terminate workers; rather, these employment contracts in most instances must be fully paid.

Another complication is that, typically, manufacturers in China are not permitted to simply move their tooling and equipment out of China. According to Rosemary, “Chinese manufacturers consider machinery, tools and molds that a customer may have provided for production as part of their infrastructure, no matter who you think owns it. It will not matter to the Chinese government whether a non-Chinese company purports to have contractual ownership rights to the equipment. The Chinese government may not allow the equipment to be exported when you close the factory.”

A third major issue with moving away from China, according to Rosemary, is that by operating in China, “You have taught your Chinese suppliers how to make your products, and they are not likely to stop just because you are no longer doing business there.” As most international companies are aware, China takes a constrictive view of the intellectual property rights of foreign manufacturers, so once a company moves its supplier production out of China, it will need to be prepared to compete against this product (which is why Rosemary encourages US manufacturers not to manufacture their latest product editions in China).supply chain

Resourcing Sensibly

Issues of leaving China aside – which are likely intractable – successfully reshoring requires robust strategic planning. In order for a company using US manufacturing to compete, its domestic labor rates must either be comparable to non-US labor rates, or enough labor must be extracted from production to be cost-competitive, according to Rosemary. This, obviously, means automation. Thus, companies must re-engineer their operations to determine how to produce more efficiently. The result is likely to include advanced automation, the use of robotics, 3D printing, and IoT.

Approaching reshoring in this way naturally means that fewer manufacturing jobs will be created for Americans than if a company were to simply staff its US production the same way that it did in China. However, jobs in automated factories require a skilled and trained work force, and for companies willing to engage in that endeavor, a way to begin to return robustness to the US working class. These new jobs will be more technical and better paying than their non-US hourly counterparts, and helping to rebuild the economic middle-class is at the heart of the Reshoring Institute’s mission.

Of course, companies that want to leave China or diversify in other low-cost markets (not the US) face different challenges, according to Rosemary, essentially figuring out how to vet alternative suppliers in unknown and untested jurisdictions. China’s rise as a manufacturing giant means that they are good at it, and their workers are very efficient and productive. For manufacturing in other countries, it will likely take time to build up the same level of expertise, so companies should be prepared to be as involved as possible, and to be patient.

However, for companies making the move now, there is obviously very little ability to travel and to vet directly alternative foreign suppliers. Rosemary counsels, nevertheless, that companies must conduct due diligence of potential alternative suppliers in a thorough way. Now that trade shows have been eliminated due to COVID-19 (which was a traditional method of being introduced to suppliers), Rosemary recommends retaining experienced counsel in the jurisdiction that a company is considering to make introductions, but more importantly to investigate and validate business licenses, experience, and longevity of potential suppliers. Companies should avoid sourcing agents and trade representatives unless they are well-known.

We will continue to follow these trends on this blog, so stay tuned!

Serving and Receiving Legal Notices in the Context of COVID-19 – UK

By Jordan E. O'Connell on Posted in International, Legal Analysis

Businesses have been adopting unusual and novel practices to ensure their operations can continue during the period of the COVID-19 outbreak.  The lockdown has forced many businesses to temporarily (or in some cases permanently) close down offices and other premises, and divert attention to remote working and the utilization of workforces predominantly working from home.

Whilst these efforts to adapt to the current situation are extremely commendable, still it cannot be ignored that these changes to operational practices are creating new practical difficulties for businesses.  One of these practical difficulties relates to the serving and receiving of contractual notices.  Our colleagues in Leeds, Jason Blakey, Jenny Broderick, James S. Peel, and Elisabeth Fuller, have prepared an update on this issue in the UK.  Read the full client alert below:

 

Considerations for Schools and Universities that Manufacture or Supply PPE

By Marques Richeson and Emily Spivack on Posted in Legal Analysis

In the ultimate act of service learning, many universities and schools have shifted their focus during the COVID-19 crisis to manufacturing personal protective equipment (“PPE”) or providing PPE supplies to the local medical community and first responders. Colleges and schools across the country are using 3D printers to make masks, face shields, and ventilators. Many closed K-12 schools are also turning over their supplies of PPE to local hospitals and emergency responders. Although such altruism is admirable, it is important to be mindful of potential liabilities in taking on new manufacturing projects or donating school materials.

Schools that create or supply PPE have some level of protection from the March 2020 Declaration of the Secretary of Health and Human Services (“HHS”), which provides tort immunity under the Public Readiness and Emergency Preparedness Act (“PREP Act”) to entities involved in the creation or distribution of “countermeasures” to the COVID-19 virus. See 85 Fed. Reg. 15198. The types of covered “countermeasures” triggering PREP Act immunity include the manufacturing or supplying of any drug, medicine, vaccine, or device used to treat, diagnose, cure, mitigate, or prevent COVID-19, which could potentially include PPE.

Notably, the PREP Act covers not only products that treat or prevent COVID-19, but also products and technologies that merely “enhance” the effects of other products. This likely protects efforts similar to those underway at a private school in Columbus, Ohio, which has printed the headband portion of face shields, which are then added to other components made by larger manufacturers in the Columbus area. PREP Act protection also likely extends to the dozens of colleges and universities across the country working on the development and testing of potential vaccines for COVID-19.

The scope of immunity under the PREP Act, however, is not unlimited. Schools should discuss with counsel whether the immunity provided under the PREP Act applies to the products that they plan to produce. If a school is not adequately covered, it could face substantial exposure to regulatory action or product liability claims.

Schools should be especially wary of statements and claims made to the public about their product’s ability to treat or protect against COVID-19, particularly where those statements may lack medical or scientific support. Inadequate or misleading instructions about the functionality or intended use of a mask, face shield, ventilator, or vaccine could expose schools to regulatory enforcement actions, or private actions for negligence or other product liability claims, as well as commercial claims for breach of warranty. Schools should thus consider placing appropriate disclaimers or warning labels on their products, informing the end user that the product may not prevent the transmission of COVID-19 or fully treat the virus. Schools are advised to consult with counsel in crafting appropriate language.

Public schools, moreover, must be aware of applicable federal, state, and local restrictions, which could affect their capacity to donate PPE. The State of Ohio, for example, restricts the circumstances under which public school districts may make donations. Sending district-owned PPE to the local fire or police department may violate state law or make the district susceptible to an audit. Any educational entities planning to donate (or even, depending on state law, planning to sell PPE), should be mindful of restrictions on their capacity to engage in such transactions.

COVID-19 will not prevent future compliance audits, government inquiries, and other post hoc investigations into a school’s “Good Samaritan” efforts. Accordingly, while there are many ways schools and universities can help out during this pandemic—including the production or donation of PPE—they must approach such activities carefully, keeping in mind that many of the regulations they face during normal times still apply.

Does the Supply Chain Look the Same After COVID-19?

By Matthew Kirk on Posted in International, Legal Analysis

Businesses are starting to look to the longer term, including in respect of supply chain resilience, risk and its mitigation. There seems little doubt that things will not simply go back to what they were before. New partnerships are forming, and building in supplier and supply chain flexibility will be key to coping with uncertainty.  Read the full client alert below, discussing some pointers for the future:

My Company Wants to Manufacture PPE to Protect Against COVID-19… But Are We Protected?

By Marisa Darden and Marques Richeson on Posted in Legal Analysis

As COVID-19 continues to spread rapidly across the globe, we have witnessed an unprecedented amount of altruism and goodwill across the supply chain. With a dearth of hand sanitizer, ventilators, medicine, gloves, masks, and other personal protective equipment (“PPE”) that is desperately needed to combat COVID-19, numerous businesses have rallied and responded to the call for assistance, altering their product lines to address shortages and manufacture vital products. While these initiatives are laudable, companies pivoting to Good Samaritan production should be aware of the existing legal and regulatory landscape to ensure that they comply with industry and regulatory standards. The Plaintiffs’ bar is already posting online advertisements seeking clients who are interested in pursuing product liability and other civil, and criminal, liability claims related to coronavirus treatment and care. Accordingly, even if businesses seek to help individuals survive the COVID-19 pandemic, they may unwittingly expose themselves to potential liability.

One layer of protection the federal government has afforded manufacturers and suppliers of drugs, devices, and PPE is the March 10, 2020 Declaration issued by the Secretary of Health and Human Services (“HHS”). See 85 Fed. Reg. 15198. The Declaration provides tort immunity under the Public Readiness and Emergency Preparedness Act (“PREP Act”) to entities involved in the creation or distribution of “countermeasures” to the COVID-19 virus. The types of covered “countermeasures” triggering PREP Act immunity include the production or manufacture of any drug, medicine, vaccine, or device used to treat, diagnose, cure, mitigate, or prevent COVID-19, which could potentially include PPE.

If your company is considering manufacturing or supplying such equipment to the frontline of the COVID-19 battle, the current scope of protection is as follows:

Covered Businesses. Under the Declaration, “covered persons” who cannot be sued under federal or state law include manufacturers, distributors, program planners, and qualified persons—as well as their officials, agents, and employees—who manufacture, test, develop, distribute, administer, or use “covered countermeasures.”

Covered Products. Covered “countermeasures” include not only the manufacturing of drugs and devices used to treat or prevent COVID-19, but also any device used to administer these products, and “all components or constituent materials.” This includes products and technologies designed to merely “enhance” the effects of drugs, devices, and products used in the fight against COVID-19. Immunity could thus be far-reaching, potentially extending not only to manufacturers and suppliers of PPE, but also to fabric and other material suppliers involved in the PPE supply chain.

Covered Activities. Protected activities include the manufacture, testing, development, distribution, administration, and use of covered countermeasures, subject to certain limitations, such as:

  • There must be a causal relationship to the “design, development, clinical testing or investigation, manufacture, labeling, distribution, formulation, packaging, marketing, promotion, sale, purchase, donation, dispensing, prescribing, administration, licensing, or use” of a covered countermeasure.
  • Immunity is limited to activities related to present or future federal contracts or other federal transactions or agreements, or otherwise authorized by a specified health authority with the power to prescribe, administer, deliver, distribute, or dispense covered countermeasures following an emergency declaration.
  • Countermeasures must either be approved or cleared under the Food, Drug, and Cosmetic Act (“FDCA”), or licensed under the Public Health Service Act (“PHSA”), or authorized for “Emergency Use” under applicable provisions of the FDCA. As a practical matter, this means that countermeasures remain subject to a form of pre-market approval.
  • There is no immunity for intentional torts where death or serious physical injury has occurred that was proximately caused by “willful misconduct.” The plaintiff bears the burden of proving willful misconduct by clear and convincing evidence.
  • No immunity is provided where the U.S. has no jurisdiction, unless the events occurred in a U.S. territory or there is some other connection to the U.S. that makes it reasonable to apply U.S. law.
  • Immunity presently extends only through October 1, 2024. Manufacturers have been granted an additional “12 months of liability protection,” however, to “arrange for the disposition of covered countermeasures.”

In sum, although the scope of immunity is broad, it is not unlimited. Companies should discuss with counsel whether the immunity provided under the PREP Act applies to the new products they are considering manufacturing, and whether any applicable insurance policy will provide coverage if they face a lawsuit. If a business is not adequately covered, it could face substantial exposure to product liability claims, including claims alleging marketing misrepresentations, breach of warranty, negligence, failure to warn, or consumer fraud. Companies should be especially wary of statements and claims made to the public about their product’s ability to protect against the virus, particularly where those statements may lack medical or scientific support.

The U.S. Food and Drug Administration (“FDA”) has already sent warning letters to certain companies, stating that they made false or unsupported claims about their product’s ability to protect against or treat COVID-19. Plaintiffs’ attorneys are closely monitoring these regulatory developments, and have initiated class action lawsuits based upon state consumer fraud statutes, false advertising claims, the tort of misrepresentation, and breach of warranty claims. Notably, any business in the supply chain—from the manufacturer to the supplier to the retailer—could find themselves susceptible to such claims.

Accordingly, while the federal government has provided immunity from liability for covered businesses engaging in covered countermeasures to combat the COVID-19 pandemic, it is prudent for companies to consult with counsel and carefully analyze the Declaration and PREP Act to ensure they are engaged in protected activities, and are in compliance with all applicable regulations. COVID-19 will not prevent future compliance audits, government inquiries, and other post hoc investigations on any company’s practices during this time. With careful planning, however, the Declaration should have the intended effect of encouraging businesses to design, test, manufacture, and administer drugs and devices that can treat and prevent COVID-19, making our world a safer place.

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