Mindful Marketing & Measured Decisions: Navigating Your Business in the Face of COVID-19 Enforcement Actions

The current pandemic brings unparalleled challenges to business operations in Virginia, with nearly every sector struggling to strike the right balance between protecting the employee and public health, and surviving impact of mass shutdowns.

That struggle poses the greatest risks to businesses, whose choices during this crisis receive increased attention, all while navigating often unfamiliar laws, regulations, and standards.

This particular crisis impacts industries unaccustomed with operating under the glare of heightened scrutiny that accompanies declarations of emergency, disbursements of federal stimulus funds and new designations of what comprises the nation’s “critical infrastructure” under the Defense Production Act.  Typical commercial practices and routine advertising could suddenly be subject to a lengthy and costly legal fight.

Federal and state officials have made plain they will vigorously police businesses receiving federal funds and providing critical COVID-19 resources.  The risk to owners and managers is clear: “business as usual” will not be an adequate defense.

Familiar Enforcement In a New Arena

Federal and state officials routinely mobilize fraud task forces and surge enforcement resources in the wake of natural disasters.  This emergency is no different.  Fraud task forces are in place in every state, led by designated federal prosecutors with federal and state investigators.

The “Virginia Coronavirus Fraud Task Force” is pursuing individual complaints of fraud, price-gouging, and hoarding.  The declaration of emergency on March 12, 2020, automatically triggered the Virginia Post-Disaster Anti-Price Gouging Act. Thirty-five states have similar provisions, and the federal government has an arsenal of enforcement available under the Defense Production Act, which prioritizes performance of government contracts and controls pricing for resources key to the “critical infrastructure” needed to respond to this unique threat.

Prosecutors nationally moved swiftly to make good on warnings issued loudly by officials since March.  Federal criminal charges in New York focused on price-gouging in violation of the Defense Production Act for one selling N95 masks with a 50% markup, and for a sneaker store that created a special “COVID-19 Supplies” section.  Prosecutors in Pittsburgh charged a businessman with mail and wire fraud for selling allegedly fake COVID-19 test kits.  The New York Attorney General launched an inquiry into Amazon workplace safety amid whistleblower allegations that the business giant was not doing enough to protect employees from the virus.

As federal stimulus payments rolled into company bank accounts, prosecutors were primed for  “pay and chase” enforcement.  Well-known to those receiving federal funds for healthcare, grants, or contracts, money is “paid” quickly, and agencies use audits and investigations to “chase” fraud and abuse, measuring whether decision makers were diligent stewards of taxpayer dollars.

By mid-May, federal prosecutors in Georgia, Texas, and Rhode Island already had charged cases related to either fraudulent statements in applying for funds, or misusing the funds.  At least one cases involved less than $500,000, significantly lower than the highly publicized $2 million benchmark that triggers an automatic audit.

More stimulus enforcement is coming.  The President appointed a special prosecutor for COVID-19 funds, and businesses can expect a bevy of investigations to follow.  The oversight of TARP funds for the 2008 economic crisis delivered more than 300 criminal prosecutions.

Avoiding Missteps: The Business of COVID-19

What would seem like a sound business practice in a normal market during the pandemic can draw intense scrutiny – whether it is a marketing pitch or a financial decision.

Take, for example, testing for COVID-19.  On March 16, 2020, the FDA allowed manufacturers and laboratories to bypass the typical regulatory process to bring a virus test to market.  To fall under this exception, the FDA required, among other things, independent validation, and consumer warnings about both the limits of test accuracy and reliability and the lack of FDA authorization.

As more than 170 COVID-19 tests hit the market, Congressional committees and independent groups began scrutinizing test efficacy, finding a high percentage lacking in accuracy and reliability.  This prompted the FDA to announce increased scrutiny of COVID-19 testing in early May, giving laboratories and manufacturers 10 days to prove efficacy, or face removal from the market.

Federal officials started aggressively pursuing companies suspected of misleading the public, scouring websites, social media, and press releases of businesses offering COVID-19 products or services.  The Securities and Exchange Commission suspended stock trading for 26 companies suspected of making misleading statements, and cited at least one company’s failure to exercise due diligence in reviewing claims made by a third-party supplier.

In the rush to meet demand for COVID-19 products and services, particularly among businesses grasping to maintain a safe workplace and continue operations, things like FDA requirements can get lost in marketing.  Savvy advertising can cross easily into the realm of overselling efficacy, overreaching on value, or misunderstandings of official “authorization.”

Where does that leave businesses that relied on these statements to craft an operating plan?  Or providers that marketed and sold these products?  In the harsh light of hindsight, how will investigators evaluate the due diligence of the business?

Businesses receiving funds under the Payroll Protection Program will face “pay and chase” enforcement action.  The loan forgiveness application for PPP funds, released Friday, will be a critical touchstone for oversight.  Businesses need to examine whether their actions – especially all of their financial decisions – will be viewed as those of a “diligent steward.”

Can applicants still claim, in “good faith,” that “uncertain” economic conditions made the loan “necessary”?  What about businesses that did not suffer immediate harm from the pandemic, but are anticipating a later downturn?  What about those that did have access to other capital?

What about companies who had banner years in 2019 – and would ordinarily distribute those profits to owners and partners during this time?

Companies need to pursue actions that can shield them from the harsh light of hindsight in the coming investigations.  The end of the COVID-19 outbreak is still nowhere in sight.

The best defense is a good offense: the key to defending against any complaint of violations later is to act now to incorporate these principles into policies and decision-making.

Erin Harrigan, a former federal and state prosecutor, is a Partner in the Criminal & Government Investigations at the Richmond office of Gentry Locke, a Virginia-based law firm serving the needs of businesses for more than 97 years. For more information, call 804.297.3700 or visit gentrylocke.com.