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On September 30, 2020, the Third Circuit reversed a decision by the Eastern District of Pennsylvania ordering AbbieVie, Inc. (“AbbieVie”) and Besins Healthcare Inc. (“Besins”) to pay $448 million in disgorgement of ill-gotten profits for allegedly filing sham patent lawsuits to stifle competition. AbbieVie and Besins had filed patent infringement lawsuits against two developers of generic alternatives to its brand-name testosterone gel product AndroGel. The FTC sued AbbieVie and Besins in 2014 alleging that the patent suits were baseless and brought for no other reason than to block competition.

In reversing the District Court, the Third Circuit held that disgorgement is not an available remedy under Section 13(b) of the FTC Act, relying on the Supreme Court’s decision Liu v. SEC, 140 S. Ct. 1936, 1942 (2020). Among other things, the Third Circuit noted that Section 13(b) authorizes a court to enjoin antitrust violations, but says nothing about disgorgement, which is a form of restitution, not injunctive relief. The Third Circuit rejected the FTC’s contention that Section 13(b) “impliedly” empowers district courts to order disgorgement as well as injunctive relief, concluding that a district court’s jurisdiction in equity under Section 13(b) is limited to ordering injunctive relief.

Circuit Split

The FTC has used disgorgement with incredible success since the 1980’s and, until recently, federal courts were not troubled by the fact that the remedy is not expressly mentioned in the FTC Act. However, as the federal judiciary continues to drift rightward and more judges adopt a textualist approach, a Circuit split has emerged.

In AMG Capital Management, LLC v. FTC, the U.S. Court of Appeals for the Ninth Circuit held that disgorgement was an available remedy under Section 13(b). The Ninth Circuit reasoned that Section 13(b) “empowers district courts to grant any ancillary relief necessary to accomplish justice, including restitution.”  910 F.3d 417, 426-27 (9th Cir. 2018), cert. granted, No. 19-508, 2020 WL 3865250 (U.S. July 9, 2020).

Less than a year later, the Seventh Circuit reached the opposite conclusion in FTC v. Credit Bureau Center, LLC, holding that Section 13(b)’s permanent-injunction provision does not authorize monetary relief.  937 F.3d 764, 786 (7th Cir. 2019), cert. granted, No. 19-825, 2020 WL 3865251 (U.S. July 9, 2020), and cert. denied, No. 19-914, 2020 WL 3865255 (U.S. July 9, 2020). On July 9, 2020, the Supreme Court granted certiorari in both Credit Bureau Center and AMG Capital Management and consolidated the cases, teeing up the issue for resolution by the US Supreme Court.

The Upshot—A Weakened FTC? Not Necessarily

The FTC has fairly circumscribed authority to obtain money judgments from defendants in enforcement actions. The agency is typically restricted to civil penalties in limited circumstances and it has traditionally used Section 13(b) to get around these limitations and seek equitable monetary remedies such as restitution and disgorgement.

If the Supreme Court sides with the Third and Seventh Circuit decisions, as seems likely given the recent passing of Justice Ruth Bader Ginsberg and likely confirmation of Amy Coney Barrett, the FTC will lose the ability to obtain money from enforcement actions brought in federal court under its broadest statutory powers. Such a result will likely impact how the FTC investigates and prosecutes cases as well as the settlement positions of companies under investigation.

Before representatives of industry get too excited, however, if the Democrats win the Presidency (which also seems likely, but given what happened in 2016, far from certain) and are able gain a majority in Congress, it would not be surprising to see legislation enacted to amend the FTC Act and formally grant the FTC the enforcement powers that it has enjoyed by implication for over 40 years.

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There are cybersecurity lessons to be learned from high profile data breaches and the ensuing regulatory responses. The recent well-publicized Twitter hack is no different. According to the New York State Department of Financial Services (“NYSDFS”) investigation and report, on July 15, 2020, a 17-year old hacker and his accomplices easily misled Twitter’s employees into disclosing their credentials resulting in a breach of Twitter’s network and the hackers’ takeover of accounts assigned to high-profile users in just a 24-hour period. The NYSDFS concluded that Twitter’s cybersecurity safeguards were inadequate, permitting the hackers to impersonate politicians, celebrities, entrepreneurs and several cryptocurrency companies by abusing their Twitter accounts to solicit bitcoin payments in a “double your bitcoin” scam. The top takeaways were that social media and consumer organizations should conduct comprehensive workforce cybersecurity training, have strong cybersecurity leadership that effectively manages account access and authentication and utilize a Security Incident Event Management (SIEM) solution to detect and respond to threats in real time. Notably, in light of its findings, the NYSDFS is now calling for the dedicated cybersecurity regulation of large social media companies akin to the NYSDFS cybersecurity regulation for financial services organizations because “[t]he risks posed by social media to our consumers, economy, and democracy are no less grave than the risks posed by large financial institutions.”

The NYSDFS found that the hackers acted like garden variety fraudsters by duping Twitter employees into entering their credentials on a phishing website by pretending to be calling from the Help Desk of Twitter’s Information Technology department about recent issues with Twitter’s VPN. The employees were directed by the hackers to sign into a website, which looked identical to the Twitter VPN website and was hosted by a similar domain, but was in reality a phony website controlled by the hackers. As the employees entered their credentials in the phony website, the hackers simultaneously entered their credentials in Twitter’s real VPN website. The hackers gained account access after the false login generated a 2nd factor notification to the employees’ mobile phones to authenticate themselves, which some of the employees did. After gaining access to the network, the hackers successfully escalated their attack by targeting other Twitter employees who had a higher level of privilege with access to internal tools permitting the takeover of high profile user accounts.

The NYSDFS concluded: “The Twitter Hack is a cautionary tale about the extraordinary damage that can be caused even by unsophisticated cybercriminals. The Hackers’ success was due in large part to weaknesses in Twitter’s internal cybersecurity protocols.” The NYSDFS found that Twitter had no chief information security officer since December 2019, seven months before the Twitter hack. The report also found that the hackers directly exploited Twitter’s shift to remote working during the pandemic. According to the NYSDFS: “The ramp up to total remote working in March 2020 put a strain on Twitter’s technology infrastructure, and employees had frequent problems with the VPN connections to the network. The hackers took advantage of these issues and pretended to be calling from Twitter’s IT department about a VPN problem.” The hackers had researched Twitter’s organization learning basic functions and titles of Twitter employees, so they could more effectively impersonate Twitter’s IT department. Despite public guidance by numerous regulatory authorities, including NYSDFS, to identify and respond to cybersecurity risks during the pandemic, NYSDFS found that Twitter did not implement any significant compensating controls after March 2020 to mitigate this heightened risk to its remote workforce, and the hackers took advantage. The hackers here sought to commit garden-variety financial fraud, but the report emphasized that a similar “hack, when perpetrated by well-resourced adversaries, could wreak far greater damage by manipulating public perception about markets, elections, and more.”

The NYSDFS concluded that although Twitter is subject to generally applicable data privacy and cybersecurity laws, such as the California Consumer Privacy Act, the New York SHIELD Act, and the European Union’s General Data Protection Regulation, all of which regulates the storage and use of personal data, “there are no regulators that have the authority to uniformly regulate social media platforms that operate over the internet, and to address the cybersecurity concerns identified in this Report. That regulatory vacuum must be filled.”

While it remains to be seen if the NYSDFS’ report will ultimately result in momentum for the appointment of a new national cybersecurity regulator, social media and other consumer facing organizations should look at their own practices in light of the Twitter hack, and take steps now to address the risks to a remote workforce as outlined in our recent blog “Cybersecurity In The Age Of The Covid-19 Remote Worker and Beyond.”

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Mark Twain once said: “Trial by jury is the palladium of our liberties. I do not know what a palladium is, but I am sure it is a good thing!” If Mr. Twain were alive today, he wouldn’t be quite so sure that jury trials conducted during the COVID-19 pandemic are really such a good thing.

Recent news reports suggest that a vaccine may not be available until next spring at the earliest, and it may take months before that vaccine can be widely distributed. But the demands of justice do not rest, and courts—already overburdened with growing dockets before the pandemic—are struggling to reconcile the need for jury trials with the demands of social distancing. As a result, courts around the country have become laboratories, experimenting to find the right combination of remote video conferencing and traditional in-person proceedings while testing long-held assumptions about jury social dynamics, the right to confront witnesses, and due process.

Some courts are trying to press ahead with traditional, in-person jury trials, but are being thwarted by the pandemic. In West Virginia, for example, drug distributors are seeking to delay a bellwether opioid MDL trial, calling it a potential “super-spreader” event in the making. This follows an Ohio federal court indefinitely delaying another opioid MDL trial that was set to begin on November 9th because of COVID-19 concerns.

Other courts have fully embraced virtual trials. In August, a Texas court held a full jury trial via Zoom video conference. Jurors who did not have access to a video-enabled computer were loaned iPads so they could participate in the trial. In Arizona, hundreds of indictments have been handed down by grand juries that convene, not in a courtroom, but over video conference.

Between these extremes, New Jersey is trying a “hybrid” approach to jury selection and trials. Under this approach, potential jurors are first pre-screened for their ability to participate in the virtual selection process, and attend trial in person. Jurors who are older than 65, or have an underlying medical condition (such as kidney disease, COPD, organ transplant, obesity, certain heart conditions, sickle cell disease, or type 2 diabetes) are excused and rescheduled for a future date. Final jury selection and trial are then conducted in person at the courthouse. Limited observers are permitted to assemble in a separate space in the courthouse and observe the proceedings via video feed. This “hybrid” approach recognizes the importance of in-person interaction at trial, where a juror is expected to read a witness’s expressions and body language when evaluating credibility, just as an attorney needs to see the faces of jurors who make up the attorney’s audience.

This sounds great in concept, but it’s not working too well so far. New Jersey’s bellwether “hybrid” trial—a criminal case captioned State v. Wildermar Dangcil—has ground to a halt after the defense challenged the constitutionality of the court’s new jury selection procedures. The defendant contends that pre-screening for the ability of potential jurors to participate in virtual selection “resulted in the elimination of roughly 75% of the jury pool, leaving a substantially smaller than anticipated array.” The defendant also contends that pre-screening of potential jurors produces a jury pool that is neither random, nor representative. To the contrary, the defendant contends, it skews toward jurors who are younger, healthy, and who have a level of wealth and sophistication that enables them to participate in jury selection by virtual means. The trial judge rejected these arguments and denied the defendant’s motion for a stay, but the Appellate Division granted an interlocutory appeal. The appellate court is expected to issue a decision before the end of October.

The confusion over whether and how to proceed with jury trials does not bode well for complex commercial litigation for a number of reasons. The first concern is delay. Trials have essentially been on pause across the country since the lockdown began in mid-March. (The authors of this article, for example, had complex commercial trials scheduled for March and October of this year, and both have been indefinitely delayed.) Even if jury trials now were to resume with normal frequency, there would be a six-month backlog of cases. That backlog grows every day. And once jury trials fully resume, criminal cases will be given priority over civil cases because of public safety and Sixth Amendment “speedy trial” concerns. If a vaccine is not widely available until next spring or later, courts will likely be looking at years of backlog for commercial cases.

And certainly the backlog will affect settlement negotiations. As every judge and litigator knows, there is no better way to encourage settlement than holding the parties to a firm trial date. If the status of jury trials remains in doubt well in to 2021, litigants will have little incentive to take settlement negotiations seriously. Courts, on the other hand, will be more likely to order mediation (over the parties’ objections, if necessary) in the hope (probably vain) that they can clear their dockets.

Also, the resumption of trials virtually or through a “hybrid” approach may create strategic concerns. Our colleagues Theodora McCormick and Robert Lufrano already examined some of those strategic and practical issues here. Distinct issues will arise in hybrid trials. For example, how does a jury pool pre-screened to minimize the risks of COVID-19 impact the demographics of the jury ultimately selected? In the New Jersey bellwether “hybrid” trial, the appellate court will have to decide whether such a jury skews younger, better educated, and wealthier (as the defendant contends) and whether that creates a barrier to a fair trial. Even if such skewing of the jury pool does not rise to the level of a due process violation, future litigants will have to evaluate how such issues will impact jury selection and the unique demographic questions that every trial presents.

Finally, courtrooms are not laboratories (at least in the short run) because experimentation inevitably leads to appeals, appeals, and more appeals—as the New Jersey bellwether case has already shown. Even jury trial experiments that appear to be successful at first will likely result in appeals, and some of those appeals will result in reversals that start the process over from scratch. Instead of the “palladium of liberties” that Mark Twain talked about, some jury trial experiments may prove to be fool’s gold.

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The Third Circuit recently affirmed the significant discretion that district court judges have to manage their dockets when it confirmed that “good cause” must be shown under Federal Rule Civ. P. 16(b)(4) to add a party or amend a pleading after the deadline in a district court’s scheduling order has passed rather than Rule 15(a)’s more liberal (“[t]he court should freely give leave when justice so requires”) standard. In Premier Comp Solutions, LLC v. UPMC, 970 F.3d 316 (3d Cir. 2020), the plaintiff made a motion to amend its complaint and add a party, relying on Rule 15 of the Federal Rules of Civil Procedure. The district court denied the motion, reasoning that because the deadline in the court’s scheduling order had passed, Rule 16(b)(4) required the plaintiff to show good cause.

In the underlying case, the plaintiff filed suit alleging violations of federal antitrust and state unfair competition laws. Nearly five months after the deadline in the district court’s scheduling order for amending pleadings or adding new parties, the plaintiff deposed an employee of the defendant who testified regarding an illegal bid-rigging agreement between the defendant and a third party. Plaintiff then moved to file a second amended complaint asserting a new antitrust count and adding the third party as a defendant. In the motion, the plaintiff asked the district court to apply Rule 15(a) of the Federal Rules of Civil Procedure and did not mention Rule 16(b)(4).

The defendant countered that the plaintiff’s motion relied on the wrong rule and plaintiff had failed to show diligence, which is relevant to a court’s determination of “good cause” under Rule 16(b)(4). In reply, defendant conceded that Rule 16(b)(4) applied and argued for the first time that it had been diligent.

The district court denied defendant’s motion, noting that it had failed “to even discuss due diligence, relying instead on Rule 15(a).” Thus, the district court concluded, defendant had “utterly fail[ed] to establish good cause” under Rule 16(b)(4).

On appeal, Judge Hardiman writing for the Court, first noted that “we take this opportunity to clarify that when a party moves to amend or add a party after the deadline in a district court’s scheduling order has passed, the ‘good cause’ standard of Rule 16(b)(4) applies. A party must meet this standard before the district court considers whether the party also meets Rule 15(a)’s more liberal standard.”

The Third Circuit went on to reject plaintiff’s two arguments on appeal: (1) that Rule 16(b)(4)’s “good cause” standard does not require a party to show diligence and (2) if such a showing is require, its reply brief sufficed. It found that because plaintiff failed to present the first argument to the district court it forfeited it on appeal. Likewise, the Third Circuit concluded that the district court did not abuse its discretion when it found plaintiff forfeited the second argument by only raising it on its reply brief.

There are a couple of important takeaways from this succinct but significant decision for anyone litigating in the Third Circuit. First, be mindful of scheduling orders and deadlines for adding parties or amending pleadings. To the extent possible, litigants need to expeditiously conduct discovery as early as possible so as that if they discover a basis for adding new claims or a new party it won’t be potentially time barred from doing so. To the extent that the deadline for amending a pleading or adding additional parties has passed, litigants must be prepared to show “due diligence” and “good cause” in support of the motion to amend. Litigants should also be able to explain to the court why they were unable to discover the facts supporting their new claims or adding a new party sooner. Finally, while not a new principle, this is a good reminder not to raise arguments for the first time on reply briefs.

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Congratulations. You’ve been sued in court in New Jersey. To make matters worse, the complaint is full of lies. Not distorted versions of the truth or someone’s interpretation of events that actually occurred, but outright false statements of fact. The kind that make you look bad in your personal and business communities. The kind that hurt your reputation and cause people to think twice about doing business with you or your company.

You are understandably upset and want to go on the offensive, but your lawyer tells you the playbook is empty. She explains that there is an “absolute litigation privilege” and that the New Jersey Supreme Court said in a case called Hawkins v Harris, 141 N.J. 207 (1995), that you can’t sue someone for defamation for any communication: “(1) made in judicial or quasi-judicial proceedings; (2) by litigants or other participants authorized by law; (3) to achieve the objects of the litigation; and (4) that have some connection or logical relation to the action.”

It is time for a new playbook—and maybe a new lawyer. Although it is true that you cannot sue someone for defamation based on false statements contained in a pleading (and frankly, we think that Hawkins should be revisited) you still have options.

First, both the state and federal courts impose penalties for filing frivolous pleadings. N.J.S.A. 2A:15-59.1 governs sanctions against a party, and New Jersey Rule 1:4-8 governs sanctions against an attorney. The courts recognize that these rules were put in place to deter baseless litigation without discouraging honest, creative advocacy. Ellison v. Evergreen Cemetery, 266 N.J. Super. 74, 85 (App. Div. 1993). Federal Courts have a similar provision, Rule 11 of the Federal Rules of Civil Procedure, which requires that attorneys investigate the factual basis of their pleadings and refrain from making pleadings intended to harass their litigation opponents.

Second, attorneys have an ethical obligation not to file frivolous or false pleadings. New Jersey Rule of Professional Conduct 3.3 imposes a duty of candor, and requires attorneys to correct any misstatements of fact in their pleadings. Therefore, if the statements contained in the complaint are demonstrably false, an aggrieved litigant should strongly consider bringing ethical charges against the lawyer who brought them in the first place. Attorneys are required to act as vigorous advocates, but they have a responsibility to occasionally act as a check on their client’s worst impulses. Wronged litigants should take advantage of New Jersey’s robust system to discipline attorneys who shirk their ethical obligations.

Third, New Jersey recognizes a common law counter-action for “malicious use of process” arising from an underlying civil proceeding. In LoBiondo v. Schwartz, 199 N.J. 62 (N.J. 2009), the New Jersey Supreme Court held that a plaintiff who files a frivolous suit can be held to account if the defendant can prove, after the favorable termination of the case, that the plaintiff acted with malice and had no probable cause to bring the lawsuit. Unfortunately, this claim cannot be perfected until the underlying litigation is successfully terminated, but the threat may be enough to force a settlement.

Finally, some state and federal statutes include a fee shifting provision that, if pursued aggressively, can deter a frivolous plaintiff from instituting or continuing a baseless lawsuit. The Lanham Act, for example, provides that in “exceptional cases” the court can award reasonable fees to the prevailing party, 15 USC § 1117(a), and courts have interpreted “exceptional cases” to include frivolous pleadings or conduct of the litigation. See Securacomm Consulting, Inc. v. Securacom Inc., 224 F.3d 273, 280 (3d Cir. 2000) (“culpable conduct on the part of the losing party” is required but it can “come in a variety of forms and may vary depending on the circumstances of a particular case.”).

It is never comfortable to be the target of a lawsuit, and facing frivolous and false allegations is even more frustrating. Although courts are rightly concerned with stifling access to justice, there is no reason that dishonest litigants—and the attorneys who enable them—should avoid the consequences of their bad actions, and defendants have options.

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EBG attorney Edward J. Loya, Jr. was recently named Chair of the Hispanic National Bar Association’s Criminal Law Section. I recently sat down with him for a Q&A regarding this honor, his work with the HNBA, and his white collar criminal practice at EBG.

Q: Most of our readers are probably familiar with the Hispanic National Bar Association, but for those who may not be, can you tell us a little about HNBA’s history and mission?

A: The HNBA, which was founded in 1972, is a nonprofit, nonpartisan, national membership organization that represents the interests of Hispanic legal professionals in the United States and U.S. territories. In addition, on behalf of the 58 million people of Hispanic heritage living in the U.S., the organization advocates on issues of national importance to the Hispanic community. The HNBA’s membership includes members of local, state, and federal judiciaries, government attorneys, private sector attorneys (ranging from solo practitioners to “Big Law” attorneys), and corporate in-house counsel.

Q: Can you tell us what it is about your background and experience that makes you uniquely qualified for this leadership position with the HNBA?

A: I would say that my unique personal experience and my extensive experience as both a federal prosecutor and a white-collar criminal defense attorney make me uniquely qualified for this position. When I was 12 years old, my mom served as a juror in the Rodney King Trial in Simi Valley, California. You can say I had a front-row seat to one of the most explosive criminal trials of my lifetime. I grappled with the question of why justice was not done even though my mom had fought hard for a conviction. From that early age, I recognized that criminal law, when properly administered, is the lynchpin of our free and civil society and I have remained fascinated by this topic. After graduating from Stanford Law School, and immediately following my federal district court and appellate court clerkships, I joined the Public Integrity Section of the Criminal Division of the U.S. Department of Justice. As a public corruption prosecutor, I handled investigations and trials throughout the country and in the U.S. territories of Puerto Rico and American Samoa. At my previous firm and at EBG, I have continued to maintain a national practice in the area of white-collar criminal defense and investigations. I have extensive experience representing organizations and individuals under investigation for, or charged with, alleged violations of business-related federal and state criminal laws, including securities fraud, healthcare fraud, public corruption, embezzlement, financial improprieties, and theft of federal grant funds. I have also conducted internal investigations on behalf of corporations, hospitals, and nonprofit organizations facing potential action by local, state, and federal agencies.

Q: What are you hoping to achieve during your tenure as Chair of the HNBA’s Criminal Law Section?

A: My goal as Chair of the HNBA’s Criminal Law Section is to create a network of in-house attorneys, white-collar investigations attorneys, and criminal defense attorneys from different regions of the U.S. who can learn from one another and build relationships that can grow into business and professional opportunities.

Q: How will your HNBA role enhance your day-to-day practice at EBG?

A: I look forward to using my position as Chair of the Criminal Law Section to enhance my practice by developing my network among potential clients and leading practitioners in the field.

Q: Where can readers go to get more information the HNBA and become involved in its activities?

A: I would be delighted to be a resource for anyone interested in HNBA. Additionally, folks can find information at HNBA’s website: https://hnba.com/. HNBA also has regional affiliates in most cities where EBG has offices and I would encourage readers to research local HNBA affiliate organizations for additional opportunities.

On July 8, 2020, the California Court of Appeals held that when an employee fails to initial a specific part of an arbitration agreement, but still signs it, the agreement is still enforceable.

Plaintiff Joseph Martinez brought a series of employment claims against his former employer, BaronHR, Inc., which moved to compel arbitration. Martinez opposed the motion to compel arbitration on the ground that he did not initial the provision outlining his agreement to waive his right to a trial by jury. Martinez argued that the absence of his initials expressed an intent not to arbitrate despite the fact that he actually signed the bottom of the agreement. The trial court agreed with Martinez, and BaronHR appealed.

The Court of Appeals reversed the trial court’s decision and compelled Martinez to arbitrate his claims. The Court found that the absence of Martinez’s initials on one specific provision was “of no legal consequence” because Martinez’s signature at the end of the agreement supported his intent to agree to all the terms therein.

The Court distinguished this holding from the holdings in Esparza v. Sand & Sea, Inc. and Mitri v. Arnel Management Co. The Court noted that in both of those cases, the employer sought to compel arbitration on the basis of an agreement included in an employee handbook, and they were not “stand-alone” agreements signed by the employee. The Court held that a signed stand-alone agreement evidences an intent to abide by the terms of the agreement.

Arbitration agreements are one of the best defenses an employer can implement against class actions and costly legal battles. This case presents yet another example of the variety of novel arguments being pursued by plaintiffs’ attorneys in an effort to avoid enforceability of arbitration agreements in California.

This decision, while beneficial for employers, stands as yet another reminder for employers to ensure that their arbitration agreements are stand-alone agreements, executed by the employees—and also to ensure that their agreements comply with the multiple requirements under California law.

The Racketeer Influenced and Corrupt Organizations Act, better known as “RICO,” was enacted to fight organized crime but has evolved into the bane of legitimate businesses. Along with criminal penalties that can only be enforced by federal prosecutors, RICO contains a provision allowing for civil lawsuits. The rewards for a successful civil RICO claim include mandatory treble damages and attorney’s fees. For this reason, civil RICO lawsuits have become a favorite of overzealous plaintiffs hoping to make headlines and scare legitimate businesses into quick settlements. And since private plaintiffs have a greater incentive to be “creative” than federal prosecutors, civil RICO cases often push the statute’s limits. But the Supreme Court’s recent decision in the infamous “Bridgegate” case, Kelly v. United States, may help decelerate this trend by limiting civil RICO claims in important ways.

In the Bridgegate case, three New Jersey state officials were charged with exacting political revenge against a local Democratic mayor for failing to endorse the Republican governor’s reelection bid. In what could have been a deleted scene from The Sopranos, the state officials ordered a “traffic study” that closed down some lanes for commuters in Fort Lee, New Jersey (the home of the Democratic Mayor) traveling across the George Washington Bridge into New York City. The “traffic study” had the predictable result of creating hours of gridlock that ensnared commuters, school buses, and even ambulances. That gridlock was, of course, the goal all along. In fact, upon hearing the news that the Democratic mayor would not endorse the Republican governor, one of the state officials emailed the other, advising: “Time for some traffic problems in Fort Lee.”

Federal prosecutors felt that this was more than petty political retribution and charged the trio of state officials with criminal violations of the federal wire fraud statute, which makes it a crime to use interstate wires (such as telephones and email) to effect “any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” 18 U.S.C. § 1343. One of the officials pleaded guilty, and the other two were convicted at trial. The convictions were later affirmed on appeal by the Third Circuit. Continue Reading Supreme Court’s “Bridgegate” Decision May Limit Civil RICO Lawsuits

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We are pleased to present Commercial Litigation Update, the newest blog from law firm Epstein Becker Green (EBG), which will offer engaging content about emerging trends and important developments in commercial and business litigation.

Commercial Litigation Update will feature thought leadership from EBG litigation attorneys and provide insightful and practical commentary and analysis on a wide range of timely litigation issues that affect businesses. Areas of interest will include trends and developments in antitrust, contract, defamation and product disparagement, white collar, fraud, Lanham Act, merger, partnership and shareholder, securities, unfair competition, and business tort litigation; noteworthy developments in insurance coverage and reinsurance disputes involving commercial policyholders; and rapidly evolving COVID-19-related legal issues, such as new federal and state liability protections for businesses.

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Please see our full announcement, “Epstein Becker Green Launches Commercial Litigation Update Blog to Highlight Litigation Concerns for Businesses and Organizations.”

Following up on our recent post about a business interruption insurance decision by a Washington D.C. court, a federal judge in Missouri ruled last month, in Studio 417, Inc., et al. v. The Cincinnati Ins. Comp., No. 20-cv-03127-SRB, that businesses can sue their insurance carrier for business interruption losses caused by COVID-19.

Plaintiffs, owners of a hair salon and various restaurants (the “Insureds”) purchased an all risks policy from Cincinnati Insurance Company (the “Insurer”). As a result of losses sustained due to COVID-19, the Insureds sought business income, civil authority, ingress and egress, dependent property and sue and loss coverages under their policies. The policies did not include a virus exclusion. After the Insurer denied their claims for losses related to COVID-19, the Insureds brought a putative class action against the Insurer for breach of contract and declaratory judgment.

“Plain and Ordinary Meaning” of “Direct Physical Loss”

Unlike in Rose’s 1 LLC, the Insureds alleged, among other things, that COVID-19 “is a physical substance,” that it “live[s] on” and is “active on inert physical surfaces,” and is “emitted into the air.” (Order at 4.) Additionally, the Insureds alleged that the presence of COVID-19 “renders physical property in their vicinity unsafe and unusable” and that the Insureds “were forced to suspend or reduce business” at the covered premises. (Id.) They also alleged that the presence of COVID-19 and the closure orders caused a direct physical loss or direct physical damage to their premises “by denying use of and damaging the covered property, and by causing a necessary suspension of operations during a period of restoration.” (Id.)

The Insurer moved to dismiss arguing that the policies provide coverage “only for income losses tied to physical damage to property, not for economic loss caused by governmental or other efforts to protect the public from disease . . . the same direct physical loss requirement applies to all the coverages for which Plaintiffs sue.”

The policy did not define “direct physical loss” and the court, applying Missouri law, relied on the dictionary definitions of “direct,” “physical,” and “loss” to determine the “plain and ordinary meaning” of the phrase “direct physical loss.” (Order at 8.) The court determined that direct means, in part, “characterized by a close, logical, causal, or consequential relationship.” (Id.) It next found that physical means “having material existence perceptible especially through the senses and subject to the laws of nature;” and that loss is “the act of losing possession” and “deprivation.” (Id.) 

Relying on these definitions, the court ruled that the Insureds had provided sufficient allegations of the virus’ physical presence at the premises such that the property was unsafe and unusable and thus satisfied the requirement of direct physical loss. The court also relied on case law from the Eighth Circuit and other courts that held that a physical loss “may occur when the property is uninhabitable or unusable for its intended purpose.” See, e.g., Mehl v. Travelers Home & Marine Ins. Co., Case No. 16-CV-13250 CDP (E.D.Mo. May 2, 2018); Port Auth. Of New York and New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226, 236 (3d Cir. 2002). (Order at 9-10.) Accordingly, the court denied the motion to dismiss and allowed the case to proceed to discovery.

The court also distinguished the cases relied upon by the Insurer, including the recent decision in Gavrilidies Mgmt. Co., LLC v. Michigan Ins. Co., Case No. 20-258-CD (Ingham County, Mich. July 1, 2020) because, among other reasons, those cases did not allege actual contamination of the premises. (Order at 10-13.)

Key Takeaway

We will have to wait to see if other courts will adopt this position and, if so, what facts sufficiently establish direct physical loss. But, at a minimum, this ruling establishes a road map for insureds to follow in their efforts to invoke coverage for COVID-19 loses. There are hundreds of cases involving business interruption coverage for COVID-19 losses still pending and continue to monitor this space for new developments.

(This post originally appeared on the Workforce Bulletin Blog.)