Friday, October 16th, 2020
A team of Gentry Locke litigators recently reached a settlement for $8 Million Dollars on behalf of a factory worker who was severely injured when her hair became entangled in the drive shaft and roller of the glue spreading machine she operated. The machine spun her hair around the shaft and roller, ultimately completely scalping her from eyebrows to the back of her neck and from ear to ear. Her life was saved by the Duke Medical Center but her injuries are permanent and debilitating.
The claim we asserted on our client’s behalf was initially focused on the way the machine was designed, manufactured, and shipped by the European manufacturer, and how it was installed at the furniture factory by a U.S. company. We developed evidence to support our contention that the machine was not equipped with appropriate guarding on the roller and the shaft. As we dug deeper into the evidence, we learned that the manufacturer had specified certain wall panels for the machine. Those panels would have been a barrier between the operator and the danger zone. While the manufacturer maintained that the panels were shipped in the same crate with the machine, the installer testified by deposition that the panels were not on the machine or with the machine when it arrived in the U.S and that nothing about the machine or its documentation alerted the installer that the panels were a part of the design. The manufacturer conceded that the panels were not attached to the machine during shipment and its documentation did not clearly confirm that the panels ever made it into the shipping container for the transatlantic voyage. This resulted in the manufacturer and the installer blaming one another for the fact that the machine was commissioned into operation at the furniture factory without these important safety components. Of course, both manufacturer and installer blamed our client for being in the danger zone.
The above description of the case is an interesting fact pattern, but it falls within the typical framework of a commercial product liability case. Manufacturer with the duty to avoid placing an unreasonably dangerous product into the stream of commerce, and the installer with a duty to use reasonable care in the installation and commissioning of the machine. Here’s what made this case different. Just 30 days before our client was injured, a sales representative for the manufacturer visited the plant and the inspected the glue spreader. He concluded that it was in need of replacement and hoped to sell a new machine. During the visit, he took photos of the machine on the factory floor and sent them back to the manufacturer in Europe. Those photos clearly revealed the absence of the wall panels from the location where they were supposed to have been attached to the machine. Yet, no one notified the furniture factory that the machine was not equipped with an essential safety component.
We immediately recognized that this omission could put serious pressure on the manufacturer, and its insurer, to avoid a jury trial if the law of Virginia recognizes a duty to warn after the sale and commissioning of a product. Our research led us to several federal court opinions in Virginia which forecast that the Supreme Court of Virginia would recognize such a duty. Those courts in most cases cited with approval a section of the Restatement of Torts—Product Liability which describes when the duty arises and how a product seller can satisfy its duty to warn. In essence, the duty arises when a seller learns that its product has a dangerous defect, has the ability to inform those who are affected by it, and has reason to believe that without a warning the user of the product will not appreciate the danger and protect herself from harm.
There are many unanswered questions that must be considered by those who would make a claim for failure to warn and those who would need to defend such a claim. Does an unequivocal disclaimer of warranty in connection with the sale defeat a claim for post-sale duty to warn? Does the claim “sound” exclusively in tort or do both contract and tort law principles apply? When does the statute of limitation begin to run? Does the rule differ for commercial versus consumer products?
If the attorneys at Gentry Locke can be of assistance in this developing area of the law, please contact us.
Tuesday, July 21st, 2020
The COVID-19 pandemic turned the world on its head just days after the 2020 General Assembly adjourned, all but guaranteeing that the General Assembly would reconvene for a Special Session sometime this year to reconcile the state budget and deal with the fallout from the outbreak.
Since then, the murder of George Floyd created a sense of urgency around the need for police and criminal justice reform, producing a second set of issues to address.
Governor Ralph Northam has now called the General Assembly back to Richmond on August 18 to take up both of these issues.
At a broader level, the COVID-19 pandemic and the death of George Floyd demonstrate how much of the Commonwealth’s politics and policy debates are driven by major moments – and how leaders are often slow to recognize, acknowledge, and address change. We looked in detail at the big-picture in our quarterly “State of Play” report released earlier this month. You can view that here.
In addition to understanding the big picture, it’s important to know what’s immediately on the horizon.
As we count down the days until the special session, here are five things you can expect.
The House and Senate will not operate normally.
Under normal circumstances, Special Sessions look and feel a lot like regular sessions.
Members of the House and Senate work out of their offices and convene in their chambers in the State Capitol. The General Assembly Building is teeming with lobbyists and advocacy groups looking to get in face time with legislators ahead of key committee meetings and votes.
Not this year. All of the work ahead of the special session will be done remotely. The House and Senate likely won’t meet in their regular chambers. Very few legislators will even go to their offices. The public may not even be allowed back in the currently closed General Assembly Building and State Capitol.
Existing relationships and a deep understanding of the legislative process will be more important than ever for those attempting to influence the legislative process. It’s safe to say that more lobbying will occur over text message during this Special Session than ever before in Virginia history.
The Budget picture will be both better and worse than expected.
The two-year state budget was largely left in limbo due to the pandemic after the General Assembly adopted most of the governor’s budget amendments in April. The legislature rolled back over $2 billion in proposed spending.
Throughout the special session, you can view the budget picture as both better and worse than expected. Confused by that? Here’s what we mean.
The General Assembly ended the fiscal year (June 31) with a shortfall of $236.5 million. That was way better than the expected $1 billion shortfall that was originally estimated. And even though it’s a shortfall, it’s only a deficit against the projected increases. The state still collected more money this year than the previous year. In that sense, the budget picture is better than expected when COVID-19 first emerged.
Going forward, what really matters are new revenue projections. Virginia only budgets in a given year what it expects to bring in as tax revenue. There’s a complicated methodology that goes into calculating projected tax revenue, but the important thing to know is that it’s compounding.
So originally, the state expected to receive a certain amount in the fiscal year that just ended. And what the state expected to receive in the next two fiscal years was based on that number – a number that just came in $225 million below expectations.
Many states are revising their projections down by 10-20%. If Virginia did the same, it could mean a $2-3 billion cut in projected revenues. That means the General Assembly would have to make corresponding spending reductions relative to the most recent budget. Those changes could turn out to be worse than expected for many who are hoping to escape this special session with their funding intact.
Legislators will have their priorities, but the budget is where you will see the most attention given to addressing COVID-19. People and organizations with funding needs will have to make the case that the services they offer are essential and directly tied to the pandemic or some other core function of government.
It will also be important to understand the budget cycle – and the long list of tricks that budget writers have up their sleeve – if you want to preserve your position in a $40 billion annual budget.
Members of the Black Caucus will decide the fate of criminal justice and police reforms.
Democratic leaders in the House and Senate have both said they will make policing and criminal justice reforms top priorities in the special session, following the death of George Floyd.
The list of policy options is already long – and will only grow as more legislators throw their ideas into the ring closer to August 18.
The reality is that given the compressed timetable and the complexity of these matters, most of these policy choices will be made by a few key players in the General Assembly – and for the first time since at least Reconstruction and probably ever, the decisions will be made by now powerful members of the Legislative Black Caucus.
Senator Mamie Locke chairs the Senate Democratic Caucus. Delegate Lamont Bagby chairs the Legislative Black Caucus. Delegate Charniele Herring chairs the House Courts Committee. Senator Jennifer McClellan and Delegate Jennifer Carroll-Foy are both running for Governor. Delegate Jay Jones is running for Attorney General. Delegate Jeff Bourne serves on the House Courts Committee as Chairman of the Civil Law Subcommittee and as Vice Chairman of the Committee on Public Safety. Senator Louise Lucas serves on both the Senate Judiciary and Senate Finance and Appropriations Committees.
Speaker Eileen Filler-Corn and Senate Majority Leader Dick Saslaw will, of course, be influential power brokers as they manage their respective caucuses. But Legislative Black Caucus members may have a more influential voice in terms of what policies will take priority and which ones get punted until 2021.
COVID-19 is an imposing backdrop for everything.
There is still an immense amount of uncertainty around COVID-19 itself, and the issues stemming from the pandemic reach far and wide.
There will be discussions, debates, and speeches around rent relief and evictions, new state workplace regulations, local government permitting deadlines and extensions, unemployment benefits, colleges, child care, transportation, and workforce development, all of which will stem from the COVID-19 pandemic.
Amidst the focus on the budget and criminal justice issues, many have lost sight of the long list of new laws affecting businesses and employers, who are now facing the added burden of adhering to Virginia’s new COVID-19 workplace safety laws, which was the first state to do so.
Don’t be surprised to hear lawmakers express how important these issues are before admitting they just do not have the time or the bandwidth to tackle them during the special session. Much as the virus has lingered, so will its fallout.
Republicans will try to interject K-12 education.
Republicans in the General Assembly will be at the mercy of the Democratic majority, a sharp reversal of where things were one year ago when the General Assembly convened for a special session last July. The Republican leadership surprised the world by adjourning the special session without forewarning – setting off a round of fury from Democrats eager to address firearm safety and gun laws.
Despite this disadvantage, Republicans will do their level best to interject K-12 education and school reopening as a critical issue.
Virginia Republicans have been beating this drum since late June, castigating the Governor for what they see as weak and ineffective guidance and support for local school districts. Boasting support from the American Academy of Pediatrics and parent groups, they are championing calls for a path to 5-day classroom learning this fall.
Look for Republicans to attempt to divert Democrats attention to this issue. And look for Democrats to set up roadblocks by limiting the types and topics of legislation that can be filed during the Special Session. The procedural votes at the start of session will determine whether Republicans get to make their case at all.
Monday, June 22nd, 2020
The 2020 Virginia General Assembly enacted significant changes to Virginia’s most widely used exemption statutes in Title 34. In 2020 Virginia House Bill 790, which becomes effective on July 1, 2020, the legislature expanded both the amount of and procedure for claiming what is commonly referred to as the “Homestead Exemption” by simplifying the procedure for debtors claiming those exemptions in a pending bankruptcy case.
Currently the Homestead Exemption under section 34-4 of the Code of Virginia permits an individual (a “householder”) to exempt from creditor process real and personal property up to $5,000 in value (or $10,000 in value if the householder is 65 years of age or older), plus an additional exemption of $500.00 for each dependent (a dependent is an individual who derives support from the householder and does not have assets sufficient to support himself). Under the amended section 34-4, an individual may also exempt from creditor process “real and personal property used as the principal residence of the householder or the householder’s dependents in an amount not exceeding $25,000.00 in value.” As an example, a person who is 65 years old and has two dependents, could exempt equity in their home in a total of $36,000.00 by using the former existing exemption and the new “principal residence exemption.”
The procedure for claiming the exemptions under section 34-4, section 34.1 and section 34-13 (dealing with personal property not used as the principal residence) in bankruptcy proceedings will be simplified under the new law. House Bill 790 also amends sections 34-6 to provide that in a case filed under Title 11 of the United States Code (the Bankruptcy Code), the debtors’ claim of exemptions listed on an Official Form Schedule C (entitled “Schedule of Property Claimed as Exempt that is filed in the United States Bankruptcy Court”) will be sufficient to claim the exemptions under Virginia Code sections 34-4, 34-4.1 and 34-13. This change eliminates the requirement of section 34-6 that a debtor in bankruptcy file a “Homestead Deed” in the city or county where the debtor resides or the real property is located. Under the current law, the Homestead Deed must be filed within five days of the conclusion of the meeting of creditors in a bankruptcy case. Note that outside of the context of a bankruptcy case, this procedural change does not modify the need to record a Homestead Deed to claim an exemption under sections 34-4 and 34-13..
Prior to July 1, 2020, any portion of the Homestead Exemption claimed was forever exhausted. However, House Bill 790 also amends section 34-21 to provide that any exemption under sections 34-4, 34-4.1 or 34-13 shall be counted against the maximum individual exemption limit only for a period of eight years from the date of such claim of exemption. To the extent used or exhausted, after the passage of eight years from the date of the claim of an exemption, the householder is able to use any portion of that claimed Homestead Exemption again. This change is consistent with the Bankruptcy Code’s time limits on an individual’s ability to obtain a discharge after receiving a discharge in a prior case.
The effect of these changes are not yet known. However, the larger Homestead exemption amount (coupled with the ability to use the exemption again after eight years), will decrease funds available to pay creditor claims in Chapter 7 cases. Fewer Chapter 7 bankruptcy cases will include distributions to creditors. It is reasonable to expect that individual cases filed under Chapter 7 of the Bankruptcy Code will increase, with a concomitant decrease in cases filed under Chapter 13 of the Bankruptcy Code and that the number of Chapter 7 cases in which distributions are made to creditors and the amounts distributed in Chapter 13 cases will each decrease. Financial institutions that extend unsecured credit will probably respond with more rigorous lending requirements. As a result, it will become more difficult for lower income individuals to obtain unsecured credit.
Friday, June 19th, 2020
Change is coming July 1, 2020. Do you know how Virginia’s new laws impact your business? We do.
Virginia Values Act
Virginia Clean Economy Act
Virginia Whistleblower Protection Law
Virginia Human Rights Act
Virginia Business Returns to Work
Monday, June 15th, 2020
A slim majority of the Supreme Court of Virginia recently affirmed a judgment in favor of a supplier against a general contractor for materials that a subcontractor had ordered from the supplier but not paid for. The case, Davis v. FTJ, is a cautionary tale for those who expect their legal obligations to end with the contracts they make. Under this case, “implied” contracts – i.e., fictional contracts implied by law – may carry those obligations much further.
The general contractor in Davis engaged a subcontractor to provide drywall and metal framing for a project in Arlington County, Virginia. The subcontractor agreed to purchase materials for the project from a specific supplier. The subcontractor then completed a “Credit Application and Agreement,” through which it promised to pay the supplier for the materials.
For its part, the general contractor executed a joint check agreement (“JCA”) with the subcontractor and supplier. By virtue of the JCA, the general contractor agreed to add the supplier as a payee of any checks cut to the subcontractor for materials. The JCA “[did] not constitute an assignment of fund[s],” and it did not “create any contractual relationship or equitable obligation between [the general contractor] and Supplier.” The JCA basically just prevented the subcontractor from absconding with money it received from the general contractor for the materials provided by the supplier.
The supplier began shipping materials in 2016 and, after repeated payment delays, reached out to the general contractor in November 2016, December 2016, and January 2017. Each time, the general contractor responded that a joint check had been or would be written. The supplier, in turn, shipped more materials.
In early 2017, the general contractor learned that the subcontractor was having “payroll payment problems,” and was struggling to supply enough manpower to complete the project. By March, it was clear the subcontractor could not pay for materials, either. The supplier knew none of this, however.
On March 22, 2017, the general contractor notified the supplier that it was having problems with the subcontractor. During the call, the general contractor did three things: 1) it asked the supplier not to ship any more materials on the joint check account, 2) it requested a credit application for purposes of ordering materials directly, and 3) it assured the supplier that there were ample funds to pay the outstanding invoices.
The general contractor never ordered any materials directly from the supplier. It did, however, continue to discuss payment of the outstanding invoices with the supplier, and informed the supplier that those invoices were being processed.
Meanwhile, the general contractor terminated the subcontractor and hired a replacement to complete the project. The cost of doing so resulted in the general contractor paying slightly more to complete the subcontractor’s scope of work than the general contractor would have otherwise paid the now-insolvent subcontractor. Because there were no longer “ample funds” to cover the subcontractor’s scope of work, the general contractor never paid the supplier for the materials it had provided for the project.
The supplier sued the general contractor under a theory of unjust enrichment and won. The general contractor appealed.
A majority of the Supreme Court affirmed. It “emphasize[d] the limited scope of [its] decision,” noting that ordinarily “a supplier of labor or materials to a subcontractor will not be able to obtain a judgment against an owner or a general contractor.” But this case was different. The majority emphasized that the general contractor “knew of the subcontractor’s difficulties and past due invoices, and, to ensure a continued flow of supplies, interacted directly with the supplier and led the supplier to believe that payment for those supplies would be forthcoming.” The majority felt that these “distinct circumstances” permitted the supplier to obtain relief from the general contractor because, based on the parties’ communications throughout, the supplier reasonably expected to be paid by the general contractor for the materials, and the general contractor should have reasonably expected to pay the supplier for them.
Three justices dissented. The dissent questioned how the general contractor could have been “unjustly enriched” when it “fully paid the defaulting subcontractor everything the subcontractor was owed and suffered a loss on top of that.” The dissent also noted that the general contractor never agreed to be liable in the event that its subcontractor did not pay the supplier. This was particularly troubling to the dissent because the supplier neither provided materials directly to the general contractor nor provided any materials after the general contractor’s prediction that there would be ample funds to pay the supplier. From the dissent’s perspective, the general contractor’s payment obligation was to the subcontractor only, and it should not have been stuck with the bill that the subcontractor was contractually required to pay.
Take-aways:
This case opens the door for suppliers and sub-subcontractors in certain circumstances to bring unjust enrichment claims against general contractors who they do not have a contract with, and potentially for subcontractors and suppliers to bring unjust enrichment claims against owners, as well.
Owners and general contractors should be careful not to deal directly with parties they are not in contractual privity with, as much as possible, and not to promise or guarantee payment to anyone they are not in contractual privity with, whether they have a joint check agreement or not. They should avoid “climb[ing] down the chain of privity to deal directly with a supplier in order to keep supplies flowing.” If they decide to climb down that chain, their legal obligations might not end with the contracts they actually make.
Thursday, May 21st, 2020
As companies start to reopen and more workers are brought back to the workplace, the federal Occupational Safety and Health Administration (“OSHA”) changed its position and is now requiring businesses to be proactive in determining how workers who test positive for COVID-19 became exposed.
The new guidance released on May 19 reversed OSHA’s April directive and now requires all employers with 11 or more employees who must maintain OSHA injury and illness logs to determine if a worker’s COVID-19 case is job-related.[1] This new Guidance can be found here.
This requirement applied initially only to health-care employers, emergency-response providers, and corrections facilities. Given the continued increase in the number of positive cases across the country and as outbreaks are occurring in multiple industries, OSHA decided that all employers need to determine if positive cases are work-related and thus recordable.
OSHA admitted that in many circumstances it will be challenging to determine whether a COVID-19 illness is work-related, especially when a worker has experienced potential exposure both in and out of the workplace. To help guide employers on how to determine if an employee’s positive case is work-related, OSHA identified that the three following factors will be used in determining whether an employer made a reasonable and good faith determination:
- The reasonableness of the employer’s investigation into work-relatedness.
It should be sufficient investigation – in most circumstances – if the employer (1) asks the employee how he believes he contracted the COVID-19 illness; (2) reviews the employee’s work and out-of-work activities that may have led to contracting the illness (but must keep the employee’s privacy in mind), and (3) reviews the employee’s work environment for potential exposure.
- All evidence available to the employer is considered.
Employers must consider all evidence that is reasonably available in making its determination, and must update its determination if new information comes to light.
- The evidence that suggests a COVID-19 illness was contracted at work.
Recognizing that there is not a one-size-fits-all formula, OSHA provides multiple examples of situations that tend to show that an employee’s COVID-19 case is or is not work-related.
Examples of COVID-19 illnesses that are likely work-related include (1) where several cases develop among workers who work closely together, (2) if the illness is contracted shortly after lengthy, close exposure to a customer or coworker who has a confirmed case, and (3) if the employee’s job duties include frequent, close exposure to the public which ongoing community transmission.
Examples of COVID-19 illnesses that are not likely work-related include (1) if a worker is the only one to contract COVID-19 in his vicinity and his job duties do not include frequent contact with the general public (regardless of community spread) and (2) if the worker closely and frequently associates with someone outside of the workplace who is not a coworker, has COVID-19, and exposes the worker during period in which the person is likely infectious.
It is important to remember that recording a COVID-19 illness does not, of itself, mean that the employer has violated any OSHA standard. But failing to conduct a reasonable investigation once it is known that an employee has tested positive for COVID-19 could land an employer in hot water.
You can find additional OSHA information and guidance concerning the coronavirus at its website: www.osha.gov/coronavirus.
[1] This record-keeping requirement does not apply to all employers. Employers with 10 or fewer employees and certain employers in low hazard industries have no recording obligations. Rather, these businesses are only required to report work-related COVID-19 illnesses that result in a fatality or an employee’s in-patient hospitalization, amputation, or loss of an eye.
Thursday, May 21st, 2020
A new Executive Order signed by President Donald Trump is designed to ease regulatory enforcement on businesses amidst the COVID-19 pandemic. While helpful, this executive action falls short of granting any new liability protections to businesses, and leaves that action to Congress, which is divided over whether to grant legal protections from lawsuits. It also does not apply to actions by state regulatory agencies.
The Order, signed Tuesday, May 19, encourages federal agencies to rescind, modify, waive, or provide exemptions to regulations and requirements that may slow economic recovery and discourages federal enforcement actions for businesses acting in reasonable good faith.
The President’s Order is part of the administration’s commitment to fighting “the economic consequences of COVID-10 with the same vigor and resourcefulness with which the fight against COVID-19 itself has been waged.”
The Order declares it to be the policy of the United States to address the economic emergency by “rescinding, modifying, waiving, or providing exemptions from regulations and other requirements that may inhibit economic recovery, consistent with applicable law and with protection of the public health and safety.”
Federal agency heads are also directed to use to the fullest extent possible all emergency authority previously invoked to combat the coronavirus outbreak to support the economic response to the virus.
The Order calls for fairness in all administrative enforcement actions, and outlines 10 specific criteria agencies should follow when considering enforcement actions, including that the “Government should bear the burden of proving an alleged violation.”
To read the full order, click here.
Tuesday, May 19th, 2020
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.
Friday, May 15th, 2020
Virginia Values Act poses significant legal risks to Virginia Employers. See article published by Gentry Locke partner Todd Leeson in Law360 on May 15, 2020.
