COVID-19 Related D&O Litigation

COVID-19 Related D&O Litigation
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Earlier this year, when the scale and potential impact of the coronavirus outbreak became apparent, many observers and commentators predicted that we could see a significant wave of COVID-19-related D&O claims. There have, in fact, been a number of COVID-19 related securities class action lawsuits filed so far, as well as several other types of pandemic-related D&O claims. However, the amount of COVID-19-related D&O litigation filed to date has been relatively low, at least by comparison to the level of litigation seen, for example, during and after the global financial crisis. The question is whether we will see more litigation in the months ahead as the economic and financial impact of the pandemic continues to ripple through the economy.

Volume and Types of Lawsuits

As of September 1, there was a total of 20 COVID-19-related securities class action lawsuit filings in the United States. As a general matter, the cases tend to fall into one of three categories: 

  1. Lawsuits against companies that experienced a COVID-19 outbreak in one of their facilities (for example, cruise ship lines and private prison systems).
  2. Lawsuits against companies that made public statements suggesting the companies could profit from the pandemic (such as vaccine development companies, as well as manufacturers of personal protective equipment or diagnostic tests).
  3. Companies whose revenues or operations were disrupted by the pandemic or government shutdown orders (such as REITs and other property-related businesses).

In addition to the securities class action lawsuits, there have been other types of COVID-19–related D&O claims filed, including several shareholder derivative lawsuits and a small number of SEC enforcement actions. All of the companies against which derivative suits were filed are also involved in parallel securities litigation involving substantially the same allegations.

A total of 20 securities suits represents a substantial litigation phenomenon, but, in the context of annual filings in excess of 400 lawsuits a year, a tally of 20 lawsuits over the course of six months is a relatively modest number. There has not, at least so far, been anything that we would describe as a wave of coronavirus-related litigation.

What’s Next?

The question at this point is the extent of the COVID-19-related litigation that may be ahead. One potential risk is that, as companies reopen, struggle to attract returning customers or reinvigorate supply chains, the companies may make statements about their financial condition or prospects that later appear to have been overly optimistic. In addition, as the crisis continues to unfold, companies that had thus far been able to get by may find themselves stretched to the point that they can no longer continue. The pandemic's overall economic impact remains to be seen, and the toll the crisis and economic downturn could have on businesses, especially in terms of the number of bankruptcies, is still unknown.

In short, at least so far, the coronavirus outbreak’s litigation impact has been relatively modest. How significant the litigation impact will ultimately prove to be will depend on the uncertain duration of the crisis, the extent of the economic impact and how that the economic recovery plays out. To the extent there are significant numbers of bankruptcies ahead, a meaningful number of D&O claims might emerge.

The contents of this blog were sourced directly from RT ProExec Insights Volume XXI, Issue 1, Fall 2020.

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