Managing Distressed Customer Relationships

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

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?

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

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

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?

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?

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.

CARES Act Financial Assistance to Business Enterprises, States and Municipalities

After much anticipation, the Board of Governors of the Federal Reserve (“Federal Reserve”) on April 9, 2020 announced additional actions “using its full range of authorities” to provide US$2.3 trillion of credit to a wide variety of business enterprises, States and municipalities. The Federal Reserve’s actions in support of existing and new programs, as described below, leverage up to US$500 billion of investment by Treasury and leave substantial “dry powder” for the Federal Reserve to modify or provide additional financial support if and as needed after these programs take root. The guidance provided to date is both incomplete and subject to revision, with the Federal Reserve seeking public comment to its guidance on or before April 16.

Specifically, as part of its response to address the negative economic effects stemming from the COVID-19 pandemic, the Federal Reserve will:

  • Purchase up to US$600 billion in loans through the Main Street Lending Program, with the Treasury Department using US$75 billion available under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 (“Act”) to provide equity to the facility;
  • Expand the size and scope of the Primary and Secondary Market Corporate Credit Facilities (“PMCCF” and “SMCCF”), as well as the Term Asset-Backed Securities Loan Facility (“TALF”), allowing these three programs to support up to US$850 billion in credit backed by US$85 billion in equity investments (for credit protection) provided by the Treasury Department;
  • Establish a Municipal Liquidity Facility that will offer up to US$500 billion in lending to states, as well as cities with over one million residents and counties with over two million residents, with the Treasury Department providing US$35 billion in equity investments pursuant to the Act as credit protection for the facility; and
  • Through the Paycheck Protection Program Liquidity Facility (“PPPLF”), supply liquidity to banks making loans to small businesses under the Paycheck Protection Program (“PPP”). The PPPLF will provide term financing to such banks, backed by PPP loans, taking the loans as collateral at face value with the only recourse being to the underlying PPP loans to businesses

With the exception of the PPPLF and Municipal Liquidity Facility – and subject to restrictions on size, etc. (which are discussed in detail below) – only businesses created or organized in the US or under the laws of the US, and that have significant operations in and a majority of their employees based in the US, are eligible for financial assistance under these Federal Reserve programs.

Our colleagues James Barresi, Stacy H. Krumin, Alethia N. Nancoo, Tom Reems, James A. Schneider, David A. Zagore, James C. Sivon, and David Stewart have prepared a client alert that provides an overview of each of these programs and their respective term sheets, including as they relate to eligible assets and issuers, limits per issuer, and pricing, among other issues. As in our previous alert, this alert also discuss key considerations regarding the feasibility and costs, economic and otherwise, of obtaining such relief. A separate Squire Patton Boggs analysis addresses the responses and relief measures being provided by the Export-Import Bank of the US.  Read the full client alert below:

Coronavirus (COVID-19) Update: Trade, Supply Chain and Defense

Countries around the world continue to enact policies aimed at mitigating the spread of COVID-19 that both recognize the importance of trade to their respective economies, but also seek to address domestic demand for key goods – especially medical supplies – related to the crisis.  Similarly, some recent government policies around the world have shifted focus inward on ensuring domestic food security and this may contribute to food insecurity in other parts of the world that rely on imports.  In the US, administration officials and members of Congress continue their efforts to support US businesses impacted by the pandemic.

Our multidisciplinary team based in the US has prepared an in-depth update on trade, supply chain and defense issues amid the COVID-19 pandemic.  Read the full update below:

Considerations for Companies Interested in Manufacturing Hand Sanitizer to Fight Against COVID-19

As the COVID-19 pandemic continues, many businesses are manufacturing essential public health and/or medical supplies that are now in high demand.  Companies around the world—from global luxury brands like Dior and Givenchy to local distilleries throughout the United States—have been switching their alcohol-based product lines from the manufacturing of products such as perfume and spirits to the manufacturing of hand sanitizer.

If your company wants to assist in manufacturing critical supplies like hand sanitizer to fight against the spread of COVID-19, there are several regulatory and legal considerations it should be mindful of during these uncertain times.

FDA Guidance for Preparing Hand Sanitizer

The Food and Drug Administration (FDA) has regulatory oversight of over-the-counter drugs, including alcohol-based hand sanitizers, and producers of such products are typically required to register with the FDA.  On March 27, 2020, the FDA released updated guidance, entitled Temporary Policy for Preparation of Certain Alcohol-Based Hand Sanitizer Products During the Public Health Emergency (COVID-19).  The FDA guidance provides that the FDA does not intend to take action against businesses “that prepare alcohol-based hand sanitizers for consumer use and for use as health care personnel hand rubs for the duration of the public health emergency[,]” provided that businesses follow certain requirements, including:

  • The hand sanitizer is generally manufactured using: (1) alcohol that is not less than 94.9% ethanol by volume or isopropyl alcohol; (2) food grade glycerin; (3) hydrogen peroxide; and (4) sterile water.
  • The hand sanitizer is manufactured according to the formula provided in the guidance.
  • Records are kept to ensure the correct amount of the active ingredient (alcohol) is used, and that each batch of hand sanitizer matches the provided formula.
  • Sanitary conditions and appropriate equipment are used during manufacturing.
  • The alcohol content in samples of the finished product is verified before each batch is distributed.
  • The hand sanitizer is labeled appropriately.
  • Businesses register with the FDA Drug Registration and Listing System (DRLS).  Once firms receive confirmation of registration from the FDA, they may begin operations.

Of particular note for distilleries and other companies using consumable alcohol, the alcohol must be “denatured” (by incorporating an additive to make the product unfit for consumption) before the hand sanitizer may be distributed.

Labeling and Marketing Concerns

In addition to following the FDA’s guidelines, businesses should be aware of labeling and marketing issues that can lead to enforcement actions, as well as civil or criminal litigation.  An instructive case involves GOJO Industries Inc. (“GOJO”), which makes PURELL® hand sanitizer.  On January 17, 2020, the FDA issued GOJO a warning letter regarding labeling and marketing statements, including statements that “suggest that PURELL® Healthcare Advanced Hand Sanitizers, which are formulated with ethyl alcohol, may be effective against viruses such as the Ebola virus, norovirus, and influenza.”  The FDA noted that, given these statements, PURELL® Healthcare Advanced Hand Sanitizers qualify as new drugs under section 201(p) of the FD&C Act, 21 U.S.C. 321(p), and that they may not be distributed or sold in interstate commerce without the FDA’s prior approval.

On February 1, 2020, a class action was filed against GOJO in the Southern District of New York, citing the FDA warning letter and bringing claims for negligent misrepresentation, violations of state consumer protection laws, violation of the Magnusson-Moss Act, and fraud and unjust enrichment.  Gonzales v. Gojo Industries, Inc., Case No. 1:20-cv-00888 (S.D.N.Y., filed Feb. 1, 2020).  Gonzales seeks certification of a nationwide class of all purchasers of PURELL® Healthcare Advanced Hand Sanitizers, and similar class actions against GOJO have now been filed in Ohio and California as well.

Businesses may also be criminally liable for producing and/or distributing falsely or misleadingly labeled or advertised products.  Under the Federal Food, Drug, and Cosmetic Act of 1938, for example, it is illegal to distribute a covered product (such as hand sanitizer) in interstate commerce that is “misbranded”—that is, if the product labeling does not meet set requirements. See 21 U.S.C. § 331(a)-(c).

This serves as a timely reminder that any business producing or distributing hand sanitizer should ensure its labeling and/or marketing claims are true, accurate, and in strict compliance with regulatory requirements.  Before undertaking this transition, businesses should consult with an attorney to fully examine their potential exposure.  During these unprecedented times, employees should be encouraged to remain vigilant and follow internal protocols on reporting suspected fraudulent activity and/or procedures not adhering to federal requirements.

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