As the Spread of Coronavirus Slows, a Contagion of Class Actions Has Only Begun
Kelley Drye Client Advisory
Companies continue to reel from business disruptions caused by the spread of coronavirus, and in many cases have struggled to navigate the swiftly changing landscape in which they are required to operate (or not operate).
At the end of the first full month of the crisis, as infections appear to plateau in epicenters like New York City, class actions seeking to remedy consumers’ losses during the pandemic are spreading rapidly. As of April 30, 2020, more than 150 class actions have been filed directly relating to or stemming from the pandemic. Tens of millions of individuals have filed for unemployment, and the plaintiffs’ bar is eager to “help.” No amount of social distancing, and no impending treatment or vaccine, can insulate companies from the threat of class litigation.
While the specific factual circumstances underlying these claims are novel, the types of claims being asserted are not. The plaintiffs’ bar is largely defaulting to their usual causes of action (i.e., consumer fraud statutes, breach of warranty, unjust enrichment) and, not surprisingly, are focusing their efforts in plaintiff-friendly jurisdictions with broad statutory protection for consumers like California, New York and Florida. Companies should stay on top of the following pandemic-related class action trends and, wherever possible, get ahead of or try to prevent the additional strain of a class action during these already difficult times.
Pandemic-Related RefundsMillions of people throughout the United States hope to receive refunds for events and services that have been (or will likely be) cancelled or postponed as a result of coronavirus-related bans on large gatherings, stay-at-home orders and travel restrictions.
The strength of these cases will ultimately turn upon the specific cancellation, force majeure and limitation of liability clauses in the relevant contracts, with courts turning to common law doctrines of impossibility and impracticability where the contracts do not address these specific issues. Companies worried they might face future cancellations and similar claims should examine their contracts carefully and determine whether they can fulfill their obligations.
Rapid and widespread event cancellations have understandably tested companies’ abilities to fulfill their obligations. Tens of thousands of events were cancelled in the past month. For many companies that act as intermediate platforms for transactions—such as tickets to events and rental of vacation properties—handling refunds on such a scale is not manageable. This is often exacerbated by the fact that the most of the money consumers paid is forwarded to venues, festival promoters and other clients, who often control potential rescheduling.
These circumstances have led to a series of class action lawsuits (most filed in California and New York) alleging breach of contract, conversion, unjust enrichment, and similar claims. The first wave of these lawsuits were primarily against ticket resellers. More than one class action has been filed against Stubhub, the popular ticket exchange and resale website. Stubhub was forced to amend its cash-back refund policy because it was unable to recoup money paid for cancelled events from ticket sellers on such a massive scale. Other ticket resellers have faced public and governmental pressure to offer refunds to consumers as quickly as possible, even where events may potentially be rescheduled (and thus, under many agreements, consumers would not be entitled to a refund). In response to such pressure, Live Nation, the company that owns Ticketmaster, announced a new refund policy on April 17, 2020 whereby it would allow consumers to obtain refunds for postponed events within 30 days once a rescheduled date is set. Unfortunately, that same day, Ticketmaster was hit with a proposed class action in California alleging deceptive practices and that the company’s existing policies already required refunds for rescheduled events. And resellers are not the only targets—baseball fans filed a nationwide class action against Major League Baseball (MLB) and every MLB team (as well as ticket resellers), alleging violations of consumer protection statutes, civil conspiracy, and unjust enrichment arising out of a refusal to provide refunds for games that have been postponed or will likely be postponed.
Other pandemic-related cancellations have also led to class action filings. As campuses and student housing shuttered nationwide, students and their parents have filed lawsuits seeking a return of tuition and boarding costs. Subscription fitness, sport, and health companies have also found themselves faced with lawsuits as state and local governments mandated that their facilities be closed down. Similar lawsuits have been filed against owners of ski areas and theme parks by season ticket holders who are unable to reap the benefits of their memberships.
Getting there can be difficult too. While air travel has not been suspended entirely, cancellations and postponements, and general advisories against “non-essential” travel, have stretched airlines’ cancellation policies. There has been a surge of litigation against nearly every major airline concerning refund policies during the pandemic. The stress placed on airlines has led the United States Department of Transportation to issue an enforcement notice, which demanded that the airlines offer a “prompt refund” when they cancel a flight or make a significant schedule change and the passenger isn’t willing to accept it.
All other companies who offer monthly memberships but have been unable to offer the services for those memberships are also at risk for liability if customers were charged during pandemic-mandated closures.
All affected companies (and companies that expect to be affected) not only must navigate how to deal with existing liability, but how to reopen their business and charge their customers who return. Companies are walking a fine line between compliance with their refund and rescheduling policies, supporting their customers and maintaining a good public image, and remaining financially solvent. Examination of potential ways to maintain cash-flow, through government incentives, customer credits against future transactions, and other means, is an important first step.
Negligence in Addressing the Threat of CoronavirusClass actions have also been filed alleging negligence and inaction to respond to and prevent harm arising from the coronavirus pandemic. Thus far, these actions have largely been focused on cruise lines, alleging that the ships maintained business as usual despite increasing knowledge of the danger posed to passengers and crew. Allegations include failure to provide employees or customers with protective equipment, failure to enforce social distancing measures, failing to follow other safety precautions, and failing to notify customers of potential infection.
It is easy to imagine additional lawsuits against other companies that continued operations as the coronavirus spread (or were forced to continue throughout the shutdown). It is also expected that similar allegations will arise as the economy reopens and people resume their normal activities. Companies must design and implement a careful plan to minimize risk when they resume operations—by not opening too soon, providing adequate protective equipment and training to staff, and effectively warning customers of ongoing risks despite the business reopening.
False Advertising of Health BenefitsWith consumers anxiously seeking products that can help them protect themselves during this public health crisis, it is important that companies are mindful of claims that may potentially overstate the effectiveness of a given product in treating or preventing the virus. A number of companies have already seen warning letters from federal agencies or class action lawsuits concerning the alleged lack of evidence that hand sanitizers can effectively prevent the spread of disease, including coronavirus. These lawsuits, asserting claims for consumer warranty and unfair competition, will likely spread from hand sanitizers to other products. It is unclear how courts will evaluate the objective “reasonable consumer” under present circumstances. Thus, companies should closely examine their existing advertising claims (both express and implied) to ensure they are not misleading in light of the “new normal.”
Price GougingAnother area where class actions have been slow to file, but are expected to increase, is price gouging. The pandemic has caused sharp spikes in demand for disinfecting products (like wipes and hand sanitizer), basic necessities (like toilet paper) and essential food staples (like beans, eggs, and flour). Empty shelves—both in brick and mortar stores as well as online shops—have increased consumer’ willingness to pay a premium for these types of products and the plaintiffs’ bar has noticed.
While there is no federal law with strict guidelines for price gouging, more than half of the states have laws the prohibit charging excessive prices on certain products after a triggering event, such as a declaration of a state of emergency. If companies choose to raise prices during an emergency period, they must be able to justify the increase by showing an increase in the price of their supplies and/or changes in market trends.
A few class actions alleging price gouging have already been filed. For example, an action was filed in California against Amazon alleging that sellers on Amazon unlawfully increased prices of critical high-demand items during the COVID-19 pandemic, including face masks, disinfectants, pain relievers, cold remedies, and food staples like flour.
Companies should closely monitor prices they charge both during the crisis, and after the crisis resolves, and ensure that any increases to their prices comply with applicable law. And while third party sellers like Amazon may be able to pass liability through to the ultimate seller in certain circumstances, it may be wise to actively monitor the pricing activities of their sellers and try to curb price gouging activity before getting hit with litigation.
PrivacyTo alleviate the pains of social distancing, companies, schools, and families have turned to video conference apps to stay connected. As usual, with increased popularity comes increased scrutiny and, unfortunately, increased litigation.
Popular videoconferencing apps Zoom and Houseparty have already been hit with several class actions challenging their privacy practices. Not surprisingly, these actions have been filed in California, where the California Consumer Privacy Act (“CCPA”) went into effect earlier this year. The actions claim that the companies sell consumers’ personal identifying information to companies like Facebook, who combine that information with other data to create a unique advertising profile. While the CCPA only provides for a private right of action under limited circumstances, such as an actual data breach, these actions demonstrate consumers’ ability—or at least attempt—to use other provisions of the CCPA as underlying statutory violations to support other California consumer protection claims, such as California’s Unfair Competition Law.
Technology companies whose platforms have seen a surge in popularity during the pandemic should closely monitor potential vulnerabilities. Abnormally high use may require reexamination of privacy protections that may no longer be adequate in this new virtual economy.
Securities Class ActionsShareholder class actions have also been filed against a number of companies for both affirmative representations and omissions relating to the pandemic. These include actions against cruise lines that allegedly downplayed the risk of coronavirus to investors, pharmaceutical companies that allegedly overstated their ability to develop a treatment or vaccine, and technology companies that allegedly withheld privacy concerns that have come to light with increased use.
These early cases illustrate why publicly traded companies must exercise great care when discussing their products and business both to the public and to their investors. It remains to be seen how defenses deflecting blame for decreases in stock prices to the pandemic (similar to those asserted in the wake of the mortgage crisis) will play out.