Free For All, or All For One? The Medical Supply Chain and COVID-19

medical matrix

The impact of the COVID-19 pandemic on the global economy needs not restating. The saying “desperate times call for desperate measures” fits the current environment well. Governments throughout the world have instituted or are considering unprecedented measures to keep up with the demand for the medical products necessary to combat COVID-19.  Several such developments come from Russia, including (1) the suspension of competitive bidding in government procurement, (2) allowing foreign companies to bid on government contracts, and (3) a zero customs duty for imports of medicines and medical devices along with other essential goods. The second—gaining momentum in the United States through endorsements by several governors—urges President Trump to nationalize the medical supply chains to stymie shortages and price gauging and decrease lead-time of medical products. However, President Trump has expressed reluctance to follow this path, instead relying on other measures to fight shortages and their associated behaviors.

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COVID-19: Italy ratchets up

Coronavirus in ItalyWhat has changed?

Up to now, European Governments have followed an approach to tackling Coronavirus based on three main elements:  closing down the main public interactions (retail, hospitality, sports) except those necessary for food and healthcare;  encouraging/requiring people to work remotely where they can, and to stay away from work if not essential;  and social distancing/ staying at home.  Within these parameters, everyone else – in practice a significant proportion of the economy – could continue their activities.

On the evening of 21 March, the Italian Prime Minister announced a new approach, which switches from this approach of defining certain restrictions and allowing anything not restricted to continue, to ceasing all production and economic activities unless exempted.  The new Italian regime will initially run for two working weeks, until 3 April.  Two weeks is also the recommended household isolation period in case of infection:  one week for the person infected and one in case they have infected others in the household.  The new approach is set out in a decree published on 22 March, which the Government worked on with the Scientific Committee and the Trades Unions.

In taking this decision, Italy is moving to the approach used in China and now in the US – defining which parts of the economy can continue to function, rather than defining what must cease.

Read the full Insight on our website.

Are You An Essential Business?

This week, we anticipate that states and municipalities will likely issue a number of “stay-at-home orders” that will require the temporary closure of businesses not deemed “essential.”  Ohio just put such an order in place, for example.  Unfortunately, to date, the direction to stay at home is not being directed by the federal government or in a uniform manner, but rather is being directed by state and municipal governments and piecemeal.  The various stay-at-home orders have nuances and must be read individually.

 Also, determining whether and to what extent a business’ functions are essential needs to be done on a product-by-product and customer-by-customer basis.  For instance, a company that supplies to both automotive OEMs and to the telecommunications industry may well be categorized as “non-essential” as it relates to the automotive business, but “essential” as it relates to the telecommunications business.  Companies supplying to end-uses that are essential are advised to seek confirmation of that fact from their customers in writing.

Finally, on March 19, 2019, the U.S. Department of Homeland Security, Cybersecurity & Infrastructure Security Agency (CISA) issued a “Memorandum on Identification of Essential Critical Infrastructure Workers During COVID-19 Response.”  This Memorandum has been incorporated into a number of stay-at-home orders, but not always in a clear manner.  Unfortunately, the CISA website provides a definition of essential businesses that was adopted for other purposes and that does not apply to our current situation – and which has caused significant confusion.  The correct CISA guidance memo is located here:  https://www.cisa.gov/sites/default/files/publications/CISA-Guidance-on-Essential-Critical-Infrastructure-Workers-1-20-508c.pdf

 

Defense Production Act (DPA) and Defense Priorities and Allocations System (DPAS) – Substance and Process

On March 18, 2020, President Trump issued an Executive Order on prioritizing and allocating health and medical resources to respond to the spread of COVID-19 in the US, citing the Defense Production Act of 1950 (DPA), as amended (50 U.S.C. 4501 et seq.).  The DPA confers on the President, and his administration, a broad set of authorities to ensure domestic industry can meet national defense requirements.  The President made his announcement specifically to respond to the need for medical supplies to address the COVID-19 pandemic.  Our colleagues in our Washington DC office, Karen R. Harbaugh, Jack Deschauer, and Pablo E. Carrillo, have prepared a detailed client advisory covering the substance, process, and requirements under the DPA and the Defense Priorities and Allocations System (DPAS) regulation (15 C.F.R. Part 700).  Click below to read more:

US Policy Prognosis: The Legislative Response to COVID-19

With the rapid spread of coronavirus disease 2019 (COVID-19), commonly known as the “coronavirus” or COVID-19, lawmakers are proposing and voting on policies to aid people and industries affected by the virus. Several legislative packages have already been enacted, and our elected officials continue to negotiate bills to assist our communities and economy.  Our colleagues in our Washington DC office, John B. Breaux, Trent Lott, Edward J. Newberry, and Robert S. Kapla, have prepared a comprehensive client advisory covering the steps that Congress has taken thus far, as well as thoughts on the next steps Capital Hill may take, in conjunction with Administrative actions, to pass relief legislation.  Click below to read more:

Cross-Post from The Trade Practitioner: Coronavirus and Trade – US Perspective; What Comes Next?

This is a Cross-Post from The Trade Practitioner Blog.  Please contact our colleagues in the Washington DC office, Frank Samolis, Ludmilla Kasulke, Stacy Swanson and Rory Murphy, with any questions. 

The coronavirus outbreak has caused severe, but widely varying disruptions across the US economy, including increased consumer demand of particular goods, reduced production due to lack of key inputs from abroad or quarantined employees, and dramatic US stock market drops responding to unprecedented levels of uncertainty.  Global supply chain disruptions began earlier this year, as China imposed travel and other restrictions that shuttered manufacturing facilities in an effort to contain the virus, which in turn affected American companies operating in country or reliant on components shipped from China.supply chain

As companies deal with the immediate impact of COVID-19, they are also seeking to better manage risks associated with global supply chain disruptions.  The Trump Administration has articulated clearly that US travel restrictions and now some border restrictions do not extend to goods, keeping America open to reciprocal trade.  However, companies that rely on cargo shipments normally shipped in the body of passenger planes could face severe impacts as flights to Europe and other parts of the world halt in response to these and other countries’ travel restrictions. Commercial trucks transiting across the US-Canada border could also face increased delays as the two countries announced new limits on non-essential travel; similar restrictions on passenger travel to Mexico are expected in the coming days.

2020 Trade Policy Agenda

The Office of the US Trade Representative (USTR) released its 2020 Trade Policy Agenda at the end of February, setting forth the Administration’s trade priorities for the remainder of this year.  However, this document did not take into account COVID-19.  The Administration spotlighted its plans to negotiate new trade agreements with the European Union (EU), the United Kingdom (UK) and Kenya.  Current US travel restrictions on the European region will likely interrupt at least the ongoing trade talks with the EU and UK, though officials could shift negotiations to video teleconferencing for the time being.  Efforts to resolve the lapse of the World Trade Organization’s (WTO) Appellate Body, as desired by the business community, may not advance in the first half of 2020, as the world focuses on the pandemic instead of WTO reform.

The Administration has also made clear it intends to enforce commitments in trade agreements with trading partners in 2020.  Canada ratified the US-Mexico-Canada Agreement (USMCA) before ending its legislative session, making it likely the agreement could enter into force as early as June 1.  The US business sector quickly pushed back, urging the Administration consider a later date of entry as they are focused on managing production during the outbreak and questions remain over USMCA implementation and the need for uniform regulations.

The US is also monitoring benchmarks established under the Phase One Agreement with China, and whether China is adhering to its commitments.  Due to the outbreak, it is possible China may fail to meet certain purchasing and other commitments made under the Phase One deal, which could trigger increased or new tariffs on products from China.  The White House has already signaled flexibility in this scenario; notably, the agreement contains a provision calling for consultations should there be a delay due to “a natural disaster or other unforeseeable event.”  Amid this uncertainty, the US business community continues to advocate for relief in Washington, be it via congressional economic stimulus efforts or additional steps that Congress or the Administration could take to further stabilize the US and global economies.

Potential Tariff Relief

One avenue of potential relief for US businesses may be through the US tariff schedule.  As part of his “America First” trade policies, President Trump unilaterally imposed tariffs on hundreds of billions of dollars’ worth of products from China and on imports of steel and aluminum from much of the world.  While these actions have increased costs for many US businesses, the general feeling in Washington has been that the cost is worth the benefit of creating sustained pressure on Beijing to change perceived unfair trading practices and supporting domestic production of certain unfinished and semi-finished steel and aluminum products.  The pandemic may change that thinking.  President Trump could unilaterally lift these tariffs and provide an automatic cost savings to manufacturers across the United States.  Senior lawmakers – including Senate Republicans – have floated this option, suggesting it may be on the table for the expected third round of economic stimulus legislation.  The President’s hardline strategy against China has been a cornerstone of his first term, and he is unlikely to abandon or diminish the effort without first exploring all other stimulus options.

Congress could act on tariff relief without the President’s support in several ways.  It could mandate a permanent or temporary suspension or reduction of all the tariffs the Trump Administration has imposed as part of its efforts against China and in support of steel and aluminum production.  Short of that, Congress could tailor tariff relief to target imports from China critical to fighting the disease – such as sterile gloves, breathing masks, and x-ray equipment – or products used by small- and medium-sized manufacturers, as they have done in a targeted fashion by granting limited exclusions to date.  However, the advancing stimulus packages do not appear to be moving forward with these options.  Congress could also tweak the Miscellaneous Tariff Bill process by raising the current $500,000 cap per provision and/or allowing the reduced tariffs to apply to those imposed by the Trump Administration under Section 301 of the Trade Act of 1974, as amended.

Globalization – An Uncertain Future

The long-term impacts on globalization are not yet apparent, but experts believe they may be significant, as leaders consider shifting manufacturing capabilities long outsourced abroad back within domestic borders.  To that end, Administration officials confirmed that they are currently working on a new Executive Order that would encourage pharmaceutical and medical supply chains shift back to the United States.  The effort, driven by Peter Navarro, would reportedly add new Buy American requirements on certain government agencies to buy US made drugs and medical supplies; ease Food and Drug Administration (FDA) and Environmental Protection Agency (EPA) regulatory approvals aimed at bringing new plants online; and increase funding for advanced manufacturing, like continuous manufacturing and 3D printing.  The global response to the pandemic continues to evolve, but these times are almost certain to have lasting effects on how we do business for many years to come.

How Do I Know If What I Do Is An Essential Service?

Companies are asking whether, in the context of coronavirus disease 2019 (COVID-19) lockdowns, their business counts as an “essential service”.  Our colleague Matthew Kirk has prepared a client advisory that addresses this issue from a European perspective, gives a little background to what we see of governments’ approaches to this question so far, and suggests an approach companies and organisations can use to navigate this issue.  Click below to read more:

Restructuring Protections In A Time Of Coronavirus

“The problem in public life is learning to overcome terror…”
― Gabriel García Márquez, Love in the Time of Cholera

There is significant information circulating about how businesses should respond to COVID-19 and overcome the fear and uncertainty about the virus and what comes next. It is easy to find articles about important matters regarding how to protect employees, customers, supply chains and how to communicate about the virus. In this blog, we focus on how and what businesses and their lenders and investors need to do to minimize loss and to maximize long-term financial stability in this volatile and unprecedented environment.

It is a fact that businesses, even robust businesses, must consider the adverse impact on operations and cash flow resulting from the steps taken to slow the spread of the virus and “flatten the curve” of new cases. Some businesses are closed; others are suffering disruptions including reduced hours of operation from government restrictions; while still others are confronted with supplier or customer delays. Regardless of sector, the inability to generate adequate cash flow jeopardizes the ability to meet obligations to lenders, creditors and investors.

Survival and Loss Mitigation

1.  New Projections. While no one really wants to look, it is critically important that companies recast operating cash flow projections. This includes revising assumptions, forecasts and business plans that reflect the new reality facing the world. It is important to prepare current projections that consider the best and worst cases for the next few months and longer.

Revising projections that consider the current environment is an important part of making good operational and management decisions. While companies will now likely need to update projections more frequently to keep up with the near daily ramifications of the outbreak, it is important to keep thinking about best and worst cases. If there is a worst-case scenario that suggests a need for your company or a valued business partner to initiate a restructuring process, the sooner steps are taken to start the restructuring process, the more options your business will have. A proactive approach is critical, especially in these fluid situations. Management that hides its head in the sand likely will not survive. An ounce of prevention is worth a pound of cure. In that vein, hiring experienced legal professionals and financial advisors early can provide credibility in dealing with lenders, trade creditors and investors and preserve enterprise value.

2.  Develop A New Financial and Operating Plan. Triage is important. Often businesses are adept at managing operations in times of stress. However, few companies have ever faced the dramatic, escalating crisis now present. Companies have little choice but to pivot meaningfully and strategic planning is key to survival. This planning has to address the new reality reflected by revised and updated projections and should include:

  • Protecting working capital: This includes an inventory of existing working capital, drawing on existing lines of credit and developing and implementing a cost reduction plan to achieve rapid positive cash flow benefits. Cash is king and must be preserved.
  • Legal and business review of existing credit facility documents: It is important to review loan and bond indenture documents thoroughly with a particular emphasis on non-monetary covenants and those monetary performance covenants that could cause a default. If covenant breaches are possible, it is important to be proactive and to develop a strategy to discuss standstill and waiver agreements with the lender and determine whether covenant breaches create cross defaults in other company obligations. To the extent a company has multiple levels of financing, it is important to review the intercreditor agreements and include all tiers of lenders in discussions because if covenant relief is necessary, it will likely take a collective and collaborative effort.
  • Identify any collateral that could secure additional financing: Seeking additional financing may not be feasible given the current environment. That could change, however, and monitoring federal and state government relief initiatives is vital. However, to the extent a company has unencumbered assets, additional liquidity may be easier to procure. It is important to identify assets that might be available to secure additional financing including real property, inventory, and account receivables. Furthermore, securing new guaranties from principals or other entities in the corporate enterprise may help to secure additional financing. To the extent existing loan documents require lender consent to incur additional indebtedness, consider requests to lenders sooner rather than later.
  • Working with a professional legal and financial advisor team to open lender communications: Many times companies that need to obtain additional financing on an emergency basis think that engaging professionals to assist is a sign of weakness or requires expenditures that the company would prefer not to make. In fact, involving professionals in the process provides significant credibility to the “ask” or request to lender for relief. Lenders and investors may be more willing to respond quickly and positively if provided with information that has been reviewed by the company’s legal and financial advisors. Attempting to save money by not hiring a professional team can jeopardize the ultimate success of discussions with lenders and investors.

If there are existing covenant breaches, a legal and financial team can guide proposals for relief. Many lenders will require appointment of financial advisory teams and are not comfortable negotiating with a company without the assistance of counsel. It is also very important that a company’s board be involved and approve the requests for financing and the strategy to address covenant noncompliance.

Lastly, a company usually has several avenues for relief available–standstill and forbearance agreements, amendments, extensions, restructuring, increased indebtedness—all of which may provide the needed relief. It is more efficient to start the conversation with existing lenders sooner rather than later. In this environment, legal and financial teams will need to be open to suggesting new and creative options. The growing level of financial stress and distress is expected to make lenders more receptive to new options because lenders have to manage defaults to preserve value.

3.  What if maintaining existing financing is not viable? Once management is aware of its company’s inability to perform, management must work with its board to establish strategies for each of its consistent groups, including, employees, lenders, trade creditors and suppliers, customers and investors. This strategy must also include developing communication plans for each of these groups. Professional advice is also necessary to manage financial disclosure required by regulators and oversight bodies, including the Securities and Exchange Commission.

Retaining legal and financial advisors is critical to address an impending default or forecasted inability to perform on contracts or other obligations. Management must have a strategic plan in place to address these serious issues and outside counsel and financial advice is necessary to consider options, minimize risk and maximize value. Management operating in a normal environment is not usually confronted with these challenges. Outside advice is critical to a board’s exercise of its duty of care to the company and its stakeholders. A board’s awareness of fiduciary duties based on experienced professional advice can avoid serious consequences down the road.

While management often is very skilled at “business as usual,” it is important to recognize that for most companies facing the current crisis outside help is needed in this abnormal time. It may also be appropriate to consider a crisis management team and a government relations team depending on the industry sector and whether the business is heavily-regulated. Multi-disciplined professional teams are skilled at generating options and finding creative solutions that add value.

Once the board approves a strategic plan, initiating discussions with lenders and other stakeholders will require financial disclosure including projections. Lenders will need to verify financial and operating information in order to consider requests regarding covenant relief, standstill and forbearance of defaults and restructuring the debt. The plan will likely include restructuring strategies.

It is important to determine what “asks” or requests for relief of lenders are necessary to allow the business to continue to operate in this unpredictable environment. These “asks” include what is needed to avoid default on short and long term financing obligations and what is needed to maintain relationships with vendors and suppliers. This includes “asks” that reflect reduced operations. Relationships with lenders, investors and other creditors can be more easily maintained if communication is open, candid and if there are professional advisors helping the company to determine what “asks” are likely to be successful.

This blog merely scratches the surface of the complexity companies are facing because of COVID-19. It is likely that this crisis will rewrite the playbook for restructuring. It is clear credit providers and companies, in order to survive, have to be united in focusing on preserving value until such time the “new normal” economy emerges. Charting a course, challenging as it is, will overcome our terror.

Coronavirus and US Litigation Involving Multinational Corporations

The globalization of business, combined with the rapid spread of the coronavirus disease 2019 (COVID-19), commonly referred to as the “coronavirus,” renders multinational corporations highly susceptible to litigation in US courts.

US companies that have been damaged by COVID-19 issues will likely seek redress through litigation, and foreign businesses operating in the US must be prepared to defend themselves against a broad range of potential complaints relating to their business operations. While there may be no way to completely immunize non-US companies from US litigation, they may be able to raise some jurisdictional defenses and keep their coronavirus-related disputes out of US courts.

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Cross-Post from the UK Finance Disputes and Regulatory Investigations Blog: Coronavirus Insurance Issues for UK Businesses and Insurers

Our colleague in our Birmingham office, Garon Anthony, has prepared a detailed update of coronavirus related insurance issues for UK businesses and insurers.

Earlier this week we looked at the effect that Coronavirus may be having on events cancellation, travel and personal accident insurances.

However, businesses should now consult with their professional advisers and insurance managers over the extent of the wider insurance programme that they might have in place to cover other financial losses caused or contributed to by Coronavirus.

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