The coronavirus pandemic has caused millions of people to work from home and forced thousands of companies to adapt to an environment where all or most of their employees are working remotely. For the legal industry, this unexpected and sudden transition to a virtual office model is likely to have a lasting effect. Before the pandemic, most law firms had little or no experience with a virtual office component to their business. Now these firms, and their attorneys, paralegals and staff, are experiencing the virtual office environment first-hand.

As a partner with ten years’ experience working in a virtual law firm, founded in 2008 as one of the pioneers in the virtual office movement, I have personally experienced both brick and mortar and virtual workplace scenarios. Prior to joining the virtual model, I had sixteen years of experience working in large and small law firms, with little or no options for working remotely. Based upon my considerable experience with both models, I believe that it is very possible that the coronavirus pandemic will mark the end of the strictly brick-and-mortar law firm model where everyone is required to commute to work and sit at their office desk all day, where face-time is key to upward mobility, and where investing in opulent, marble-floored office space with exquisite and pricey paintings on the walls is a good business decision. Below is a discussion of the primary forces behind this tectonic shift in the industry.

Law Firms Are Acquiring the Tools Necessary to Operate On A Virtual Office Model. Whether they like it or not, law firms are being forced to figure out how to operate in a virtual office environment. They will be acquiring new technology and/or adapting existing technology to ensure that their people are able to work effectively from home for extended periods of time, rather than just on occasion. For example, many traditional firms do not have adequate online tech support to address the volume of questions and repairs that result from a large portion of the workforce working from home. They will learn this quickly and will find solutions, such as investing in system upgrades and hiring the necessary IT professionals to support such arrangements.

Firms will also need to adopt solutions to the data privacy and other cyber security challenges associated with people working remotely. Examples include the use of two-factor authentication, encryption through virtual private networks (VPN’s), drive and data encryption on mobile devices and enhanced identity management and access control.

Beyond technology concerns, firms will have to adapt their policies and procedures for monitoring and enforcing productivity, because in a virtual office you can’t see what people are doing by simply walking down the hall. Most people will be equally as productive working from home as they were in the traditional office setting. Many people will be even more productive because they will not need to waste time commuting to work, and they will not be interrupted by the distractions found in a traditional office setting. However, not every employee possesses the discipline and focus needed to work from home effectively.

Firms will also find that the more their attorneys, paralegals, and staff are working remotely, the more they will need to take proactive measures to maintain a positive firm culture. When people are not working in the same office space, they can feel isolated, lonely, and out of touch. Such feelings can reduce morale and become a major impediment to maintaining a healthy practice. For example, firms may begin to implement regularly scheduled office-wide or firm-wide video conference calls, frequent check-in calls by group managers, a dedicated email group to chat online about various non-work topics, and even virtual happy hours in an effort to maintain connections among colleagues. These and other initiatives have allowed VLP to effectively promote a culture of collegiality and collaboration among attorneys, paralegals, and staff despite each person working from his or her own remote office location.

Attorneys, Paralegals and Staff Will Work from Home During the Pandemic and Like It. Having worked in a virtual office environment for the past ten years and having spent the previous sixteen years working in the traditional office setting, I can say with great confidence that the vast majority of people I have worked with over all of these years prefer working from home. Among the many benefits are less time (and money) spent commuting to work and back, no office distractions, a more flexible schedule, less stress, and more time spent with family and friends.

Stereotypes Associated With “Working from Home” Will Further Fade. There are some in the legal industry that still associate working from home with a lack of ambition and low productivity. In general, those that hold this view have had little or no direct experience with a virtual office model. Due to the coronavirus pandemic, thousands of law firms are being forced to adopt a virtual office environment, and as a result, virtually everyone in the legal industry will either personally experience the virtual office model to some extent or will know someone who has. Many of the stereotype believers will learn firsthand that working from home can be equally productive as working in a tradition law office setting (or more so). At the very least, the stereotype believers will have to acknowledge that it is feasible to operate a law firm on a virtual model, and that law firms might be forced to adopt a virtual model again in the future if an event such as the coronavirus pandemic occurs again.

Conclusion. It is very possible that the combination of (1) law firms acquiring the tools necessary to operate on a virtual office model, (2) attorneys, paralegals and staff demanding more flexibility to work from home in light of their positive experience working from home during the coronavirus pandemic, and (3) the further fading of the stereotypes in the legal industry associated with working from home, will result in an unprecedented shift in the legal industry toward embracing some version of the virtual office model. I don’t expect hordes of brick and mortar firms to suddenly shed their offices completely and become entirely virtual, but I do expect two things. First, when the dust from the coronavirus pandemic settles, there will be an industry-wide shift in the number of attorneys, paralegals, and staff that work from home. The increase will be substantial, and I expect the number of people working from home to only increase over time. Second, the increased demand for greater flexibility to work from home will result in an increase in the number of attorneys, paralegals, and staff working in virtual law firms with no brick and mortar footprint. Brick and mortar firms will have varying levels of success marrying their traditional office model with a virtual office component, and people may find that a law firm that has fully embraced the virtual office model is a better fit for them.

This could be the dawn of the virtual office revolution in the legal industry.

No country appears to be immune from the spread of coronavirus. COVID-19 is now impacting individuals and businesses in Mexico, as it has impacted many of their trading partners in recent weeks. According to Mexican health authorities, coronavirus is not likely to peak in Mexico for a number of weeks, but precautionary measures are now being implemented. Just as Mexican individuals are adapting to the need for social distancing, so too are Mexican companies assessing how to lessen the impact of this pandemic, including reviewing the coverage afforded by insurance policies.

Health insurance: Coverage for illness related to COVID-19 is available both under Mexico’s public universal health care program, as well as through private health insurance. The Mexican Institute of Social Insurance (IMSS) affords health care coverage to persons registered with IMSS. Under the IMSS program, employers must register all employees with IMSS and pay a monthly fee giving employees access to the IMSS clinics. Individuals registered with IMSS will have access to those clinics for diagnosis and treatment of COVID-19. As in the United States, it is reported that these clinics lack supplies (personal protective equipment such as respirators, masks, gowns, face shields, and ventilators) needed to handle their patients.  

In connection with private insurance, the Mexican Association of Insurance Companies (“AMIS”) recently reported that 28 out of the total 32 private health insurers operating in Mexico will cover treatment of COVID-19 as a respiratory disease. According to AMIS, only the health insurance policies issued by 4 of these insurers have exclusions relating to diseases with pandemic effects (such as COVID-19). A review of the terms and conditions of a specific health insurance policy would be needed to fully understand the conditions of coverage; however, the main concern is that hospitals’ capacity may be insufficient to attend all cases if the contagious wave increases, as experienced in other countries, and as is anticipated in Mexico. In this regard, on March 30^th, President Lopez Obrador urged Mexicans to stay at home to help limit the COVID-19 spread, as the number of confirmed cases rose to 717. It is anticipated that this date may likely shift into April or further.

Life insurance: According to this AMIS report, life insurance policies issued in Mexico by Mexican insurers afford coverage for death resulting from COVID-19. Mexican authorized life policies do not exclude pandemic as a cause of death. It is possible that, as insurance regulators in other countries have noted, life insurance companies in Mexico may experience financial difficulties if the number of deaths covered by insurance policies rises to unexpected levels, and/or if the investment yields of these life insurers is impacted, as is presently the case, given the volatility in capital markets.

Travel insurance: Many travel policies in Mexico, which include health insurance coverage, likely will cover expenses for treatment of COVID-19 (e.g., cover expenses for diagnosis and treatment as a result of coronavirus infection incurred during travel). However, COVID-19, as a pandemic, has not generally been accepted as cause for cancellation of a trip or for trip interruption under those policies. Thus, there would be no coverage if an insured elects to cancel for fear of contracting the virus or for any other reason relating to COVID-19. Some travel insurance companies are now offering travel insurance plans with restrictive or limited coverage, and other travel insurance companies have disclosed that as of March 12, 2020, any coverage relating COVID-19 will be excluded. Therefore, it would appear that travel insurance policies are being amended in Mexico to exclude treatment of COVID-19. Also, travel insurance companies are offering information on travel restrictions as such information is provided to the IATA Travel Centre (their list is updated regularly.)

Business Interruption Insurance: This coverage is generally available as a rider or optional coverage included in commercial property insurance policies in Mexico. Coverage for business interruption in Mexico is usually triggered by the physical loss or damage caused to the property of the insured in certain situations such as fire, flood, earthquake, and hurricane. Determining whether loss of business income due to COVID-19 would be covered by these types of policies would require an analysis of the specific policy terms and conditions, and many policies expressly exclude loss caused by virus or bacteria, such as COVID-19, and COVID-19 contamination on business premises might not satisfy the physical damage to property requirement of many of these policies. Also, this coverage would need to be analyzed in light of any future government orders (i.e., civil authority) that may require businesses to shut down (or if civil authority imposes conditions denying access to buildings). It is also possible that other types of policies such as General Liability or Directors and Officers insurance, may offer some type of coverage whose conditions are met by the COVID-19 crisis, again dependent on the policy language in the context of possible policy exclusions. All of these coverages are available in Mexico; the insurers issuing these policies are regulated in Mexico by the Comision Nacional de Seguros y Fianzas (CNSF) and governed by the General Law of Insurance Companies. Given that Mexico insurance law does not regulate business interruption insurance specifically, any claim for business interruption or relating to COVID-19 arising under other these types of insurance policies would need to be interpreted under the general provisions in Mexico’s Insurance Contract Law. Recognizing that the interpretation as to availability of coverage relative to a particular type of policy derives from the Insurance Contract Law as opposed to case law, it is not clear, absent express business interruption coverage language in a policy, whether such coverage would be available in Mexico. 

Mexican insurance companies will undoubtedly be impacted by claims derived from insurance policies relating to COVID-19. Mexico’s sovereign rating downgrade from BBB+ to BBB by Standard & Poor’s credit rating agency on March 27, 2020, coupled with the decrease in oil prices and the devaluation of the Mexican peso against the U.S. dollar, may be evidence of economic turmoil yet to come.

A recent California appellate court decision, Techno Lite, Inc. v. Emcod, LLC, et. al, (Cal. Ct App. 2d Dist. Jan. 21, 2020), involves the common law duty of loyalty of an employee to the employer, and the statute that voids most covenants not to compete.[1]

In this case, the only thing the “suspenders” (as in belt and suspenders) held up was an award of punitive damages, but I believe the court got it wrong and should have let the fraud cause of action drop.

The facts and procedural history of the case are both complex. For purposes of this analysis, I am limiting the background to the salient facts and law that focus on what became an award of punitive damages to the employer based upon the employees’ promise that, if they were allowed to conduct a side business selling the same products as those they were hired to sell for the employer, they would not do so in a manner that would compete with the employer’s business. It does not appear from the opinion that this promise was in a written document.

By way of further background, in the year I turned one year old, two major events happened (in addition to my first birthday party): the Japanese bombed Pearl Harbor, dragging the United States into WWII, and the California legislature passed a law that was signed by the governor and subsequently codified as Business and Professions Code section 16600: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” That seems pretty clear, unambiguous, and easy to understand, even for lawyers. What is “excepted” are, as explained by the California Supreme Court: “noncompetition agreements in the sale or dissolution of corporations (§ 16601), partnerships (ibid. § 16602), and limited liability corporations (sic) (§ 16602.5).”[2]

What I refer to as the “belt” in this article is the California common law doctrine of an employee’s duty of loyalty to his or her employer. Many cases focus on this duty, and a good number of them are cited to in the Techno Lite opinion in section A.1. of the discussion portion of the opinion captioned: “A Promise Not to Compete with an Employer While Employed Is Not Void.” California Labor Code section 2863 is the only codification I could find that partially addresses the employee duty of loyalty, and it provides: “An employee who has any business to transact on his own account, similar to that intrusted to him by his employer, shall always give the preference to the business of the employer.”[3]

As noted above, sometime after their employment began with Techno Lite, the three employees began a separate limited liability company (defendant Emcod, LLC) that was engaged in essentially the same business of selling lighting fixtures as Techno Lite. When Techno Lite’s owners learned of this activity, they obviously were concerned. This led to serious discussions that culminated in the three employees’ “agreement” that they would not conduct Emcod’s business in a way that would compete with Techno Lite. This subsequent agreement is what I refer to as the “suspenders” because the obligation to avoid competing with the employer was already an important part of their employment agreement which, by law, incorporates both the common law duty of loyalty and Labor Code section 2863.

Despite their promise that they would not compete with Techno Lite through the Emcod business, the employees not only did compete, but also diverted to Emcod customer inquiries directed to Techno Lite. Eventually this led to litigation, with Techno Lite suing the employees for a host of causes of action, and in an amended complaint adding causes of action for fraud and unfair business practices. The trial court found the three employees liable for fraud and unfair competition. On appeal, the employees argued that they could not be guilty of fraud (when they allegedly agreed to a covenant not to compete) because that agreement was void under section 16600. Without a finding of fraud, there was no basis for the trial court to impose punitive damages in the original amount of $625,926, but subsequently reduced to $29,321 each, for a total award of $87,963.[4]

Where the appellate opinion in Techno Lite goes off track is in its discussion of section 16600. For instance:

[S]ection 16600 has consistently been interpreted as invalidating any employment agreement that unreasonably interferes with an employee’s ability to compete with an employer after his or her employment ends. However, the statute does not affect limitations on an employee’s conduct or duties while employed.

(Citation omitted; emphasis in original.) And later, referring to the Edwards v. Arthur Anderson opinion: “Edwards did not address—much less invalidate—agreements by employees not to undermine their employer’s business by surreptitiously competing with it while being paid by the employer.” That last sentence is absolutely true. What is also true is that the Edwards court was not addressing a covenant not to compete that was effective during the person’s employment. The Edwards opinion, to the extent it pertains to section 16600, is limited to considering whether the Ninth Circuit’s “narrow restraint”[5] exception to section 16600 was the law of California. In addition, the court concluded it was not. One can deduce that the Supreme Court was reading the statute’s unambiguous language—“every contract” imposing a covenant not to compete, other than the three statutory exceptions, is void. A “narrow restraint,” and presumably a “current employee” exception, is inconsistent with that language.

This analysis presents yet another puzzling question. It would seem that the combination of the employee’s duty of loyalty with Labor Code section 2863 imposes, at the very least, a narrow restraint on the employee’s ability to engage “in a lawful profession, trade, or business”. The employee cannot work for a competitor of her employer. Each employment arrangement is based upon a written, oral, or implied contract between the employer and the employee. What is the logical reasoning that exempts employment contracts from the unambiguous language of section 16600? With this disconnect between the employment laws discussed above and section 16600, it would seem that the only way to avoid litigation over the confusing state of the law would be for the legislature to create a fourth exception to section 16600. The following is proposed for that exception: “Section 16602.6: Section 16600 does not apply to any employer-employee agreement, whether written or oral, during the period of the employee’s active employment.”

However, that simple clarification runs smack into another confounding California innovation: AB5. This new law, effective January 1, 2020, mandates that any worker who cannot be shown to be outside the law’s ABC test[6] must be treated as an employee in California, irrespective of the intent of the hiring entity and the worker with regard to their relationship. AB5 has already generated massive litigation concerning truckers, “gig” workers such as Lyft and Uber drivers, stringers for publications, singers, dancers, etc. Assuming it applies to Uber and Lyft, for example, tens of thousands of those drivers will be classified as employees of both companies. Does that give either company the right to demand adherence to the duty of loyalty? Alternatively, consider the highly skilled winemaker who works for three or four different wineries. As an independent contractor, he or she has no obligation to refrain from working for a competitor of one of his or her winery clients; as an employee, there is that duty of loyalty that can create a messy and unintended situation.

Taking this issue to the level of the absurd (but why not, we are in California), how does a literal reading of section 16600 square with the duties of partners to one another? How does it not make void any provision in a partnership agreement such as: “Each partner shall devote his or her full time and attention to the conduct of the Firm’s business and account to the Firm for any compensation or payment received from any person if the work performed is within the scope of the Firm’s usual business activities.”? If you are in one of the many states that are considering legislation similar to section 16600, as has been reported in recent legal publications, it will behoove you to ensure that the statute actually adopted addresses these issues with appropriate carve-outs for all relationships that business people believe should be allowed to be protected by a covenant not to compete.

[1] Niesar & Vestal LLP. The author acknowledges the valuable contributions to this article made by Carolina Juvin, Esq., associate with Niesar & Vestal LLP.

[2] Edwards v. Arthur Anderson LLP, 44 Cal. 4th 937, 946 (2008).

[3] Forgive the rather dated language; this section was added to the Labor Code in 1937.

[4] In 1988, a California court of appeal held that there is no cause of action for “tortious breach of contract,” which had been used in lower courts to establish a basis for awarding punitive damages in a breach of contract action. Pugh v. See’s Candies, 203 Cal. App. 3d 743, 250 Cal. Rptr. 195 (1988) (review denied).

[5] The restrictive covenant in Edwards would have prevented him from: (a) working for any client he had worked for while at his employer, for a period of 18 months following end of employment; and (b) soliciting any client of the employer to whom he had been assigned, for a period of 12 months post-employment. The services were advising wealthy clients on financial matters. The trial court determined, in ruling that the restrictions were a permitted “narrow restraint”: “There were more than enough of these wealthy folks . . . in L.A. for all CPAs to do the kind of work [Edwards] was doing. . . . There wasn’t even perhaps a minimal restriction on his ability to work.”

[6] The worker will be a statutory employee if he or she fails to satisfy any one of the following tests: (a) the worker is free from control and direction from the hiring entity; (b) the work performed is outside of the usual course of the hiring entity’s business; and (c) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Having served as a mediator for twenty-plus years, I am generally a proponent of having the mediation take place in person, with all decision makers physically present. I have always believed it was important to be able to see people during the mediation in order to secure trust and develop rapport, and also to read and evaluate micro-expressions during the process. Humans by nature connect and evaluate one another in various ways, including through eye contact and body language, both of which are visual cues, as opposed to voice inflection, which can, of course, be detected over the phone. Yet, from time to time, I have conducted mediations by telephone, although I have tried to limit those to instances where the issues were discrete enough that telephonic shuttle diplomacy would still get the job done. However, in the face of COVID-19, at a time when so many courts are not even allowing in-person hearings or any hearings at all, finding a way to conduct online mediations becomes essential for many to continue their business.

Many practitioners are turning to existing tools, such as WebEx and Zoom. These programs still satisfy that “in-person” touch that so many mediators and participants desire because they allow the parties to hear and see each other via webcams, and they also allow for separate sessions to be created, thereby mimicking joint and private caucuses. While these are great options, there are a few considerations that users should keep in mind. First, no matter which platform you choose, you must be facile with the program and have the ability to not only use it yourself, but also be able to guide the participants who may not be as familiar with the platform so that they are equally comfortable. To that end, aside from taking the many training sessions that are popping up, be sure to practice the use of the technology yourself. There is nothing more frustrating to a mediation advocate or participant than technology that impedes rather than enhances the mediation process. Thereafter, I would recommend that you set up a time before the actual mediation to virtually “meet” with each side, including clients, to be sure they are equally comfortable with the technology. Just as you would ensure that participants are comfortable in your conference room and understand where the amenities are located, they need to be sure they know how to use the mute button, or discretely request, set up and/or participate in a private caucus session. Second, as the mediator you need to ensure that all parties are comfortable with the confidentiality of the online process. It is easy to gauge confidentiality when you are sitting in a private conference space and can determine that what is being said is only being heard by the actual participants who are present in that room. With online programs, there is a limited view of where the other participants are physically sitting. Moreover, all of the platforms have recording features, which you should ensure are turned off and you should request that all participants do the same. You should review and identify the confidentiality expectations with all the participants and stress the importance of maintaining confidentiality of the process; whatever presentation you normally give for confidentiality should be modified for this new format. Further, you should stress, in advance, that the parties themselves should be in a private space where they cannot be overheard. The parties should not be on public WiFi and should be in an area with good connectivity to avoid disruptions to the process. Third, you need a contingency plan in case the technology does not work and/or the participants, despite prior testing, cannot get it to work.

Mediation is always dependent upon the parties having trust in the mediator and the process. It is important to keep in mind that not everyone is comfortable with or trusts technology. Therefore, in order for the process to work while utilizing these alternative methodologies, it is up to you as the mediator to do your part to properly set the stage, and establish the trust in you, the technology method, and the process. Any good mediator spends time setting the stage in advance by reading position statements and speaking to the parties in advance; now mediators should add a review of the technology to ensure that the parties are comfortable as one more step to achieving a successful process. How you build that extra time into your fee structure must be decided by each of you, but presently, my thought is not to charge for X hours of technological preparation.

Meredith Ritchie, general counsel and chief ethics and government affairs officer of Alliant Credit Union and co-chair of the Governance Subcommittee of the ABA Credit Union Committee, sat down with three accomplished general counsels to discuss the issue of diversity and inclusion. Faith Anderson is general counsel of American Airlines Federal Credit Union and is former chair of the ABA Credit Union Committee. Lisa Washington is SVP and chief legal officer of WSFS Bank. Jacquelyne Belcastro is VP and general counsel of Hydro Extrusion North America.

 Meredith Richie: What does diversity and inclusion mean to you (or your company)?

Faith Anderson: To me, diversity and inclusion means having a diverse workforce where everyone is allowed and encouraged to participate.

Lisa Washington: In my opinion, it’s important that the composition of the workforce reflect the current marketplace in order to properly serve our customers. Additionally, diversity and inclusion goes beyond gender and race but also encompasses socioeconomic and physical abilities.

Meredith Richie: What are the benefits of having a diverse workforce (or legal department)?

Jacquelyne Belcastro: The benefits of having a diverse workforce and legal department include encouraging the voicing of different views and opinions. Research demonstrates that diverse teams are smarter because they are more likely to remain objective, reexamine facts, question assumptions, and overcome biases.

Faith Anderson: By having a diverse department, you begin to mirror your credit union members (customers) that you are actually serving. You learn to be more empathetic to issues that you may not have experienced; diverse team members can bring a different skillset to the workforce. Most importantly, your members see that you are valuing them when you hire people that they relate to and that look like them.

Lisa Washington: An organization needs diverse experience to grow as an organization! In today’s world, we have so many media choices and can filter what we want to see and what we do not want to see, which can lead to a sheltered existence and point of view. We need to make sure that our workforce and legal departments are diverse so that we consider all perspectives and therefore make better informed decisions.

Meredith Richie: How can the legal department drive diversity and inclusion?

Jacquelyne Belcastro: There are a number of ways that a legal department can drive diversity and inclusion. First, the legal department can demand that its outside counsel firms include diverse attorneys working on matters. The best way I’ve found to do this is to include a requirement in requests for proposal when seeking out counsel on new matters. Do not be afraid to be direct with outside counsel firms on this issue. Second, start a diversity committee at your organization or in the legal department. I just spearheaded this effort at my company. Third, participate in summer intern programs like the Association of Corporate Counsel Chicago Chapter’s Diversity Summer Internship Program.

Faith Anderson: A legal department can drive diversity and inclusion in many ways: by hiring firms that are diverse and inclusive, mentoring diverse law students, hiring diverse candidates, and volunteering.

Lisa Washington: Try to identify in firms strong attorneys who are diverse and work with them. It’s important that as GC we ensure that the diverse attorney bringing in business or working on a matter at a firm is getting credit that results in compensation.

Meredith Richie: What steps have you taken personally or in your role to help with diversity and inclusion?

Faith Anderson: As a diverse general counsel (petite Asian woman), I am always aware of the types of people that I am with at any given time. This came about from growing up in a small town of 2,000 people where my family and I were the minorities. Even today when I attend meetings or conferences, I always notice if the attendees and speakers are diverse. The ABA Business Law Section does a very good job of being diverse and inclusive. I am proud that my department is very diverse and inclusive. For example, in my department we have employees who are African American, Asian, White, Indian, and Hispanic.

Meredith Richie: Is there a difference, in your opinion, between diversity and inclusion? If so, what is the difference?

Faith Anderson: Yes, there is a big difference. One of the analogies that I have heard and like is that “diversity” is being asked to the dance, and “inclusion” is being asked to actually participate and dance!

Meredith Richie: If you had to give advice to a new general counsel on diversity and inclusion, what advice would that be?

Faith Anderson: It’s tempting to hire someone who is a clone of yourself. Be open to working with all different types of people and you will enrich yourself and your department. You will be surprised how much you can learn from others, maybe because they take a different approach, come from a different background, or are more technology savvy, etc. It opens your mind to a different approach and way of thinking. To begin, you need to look at and be aware of what is around you and start by making small changes.

The Black Death stole people’s identities. Sweeping through Europe and Asia periodically from the 14^th to the 18^th century, the disease erased entire cities, and individual graves were traded for huge trenches with scores of nameless bodies. Spread by traders and human travel that brought disease carriers everywhere, people were reduced to numbers, as not only the sick disappeared but so did everyone who might have remembered them.

COVID-19 is unlikely to cause such a demographic catastrophe, but it may have an effect on our identities, stripping away privacy protections in the name of pandemic control. Our most significant technology companies are leading the charge to harness data and the newest industry tools to both fight the spread of this disease and to reduce our personal privacy in the process.

Two social benefits are in direct conflict right now, and the business of technology is tipping the scale from one to the other. On one hand, actions needed to slow the spread of COVID-19 can save countless lives depending on how soon and how effectively they are deployed. On the other hand, many of these same actions target individuals and pull them from anonymity or isolate their information in databases and bring them to public attention.

The most significant privacy infringements are playing out on a macro scale as governments and businesses join together to track and halt the spread of the disease. China locked down more than 500 million mostly healthy people to keep COVID-19 in check, and it has been using unmanned aerial vehicles to scan crowds and spot feverish people from hundreds of feet away, signaling to watchers on the ground. Chinese state television noted that people in Shanghai who were ordered to sequester have digital monitoring devices attached to the doors of their homes.

Giant search engine company Baidu developed an algorithm for the Beijing subway police to quickly identify commuters not wearing masks. Baidu’s online doctor consultation platform has handled over 15 million inquires and hosts over 100,000 doctors answering questions. Chinese law does not seem to limit what Baidu may do with this health information about its users.. The world’s largest e-commerce company, Alibaba, launched a drug delivery service to treat people with chronic diseases to relieve hospitals burdened by COVID-19 overcrowding. This takes patients’ health information out of the hospital setting into an extensive database that also tracks their online purchases. Chinese gaming company Tencent, operator of WeChat, is providing a chatbot to people seeking basic diagnoses and the company has launched free online health consultation services. We have seen no reporting on what personal information is required to receive these services.

South Korea is often cited as handling its virus response better than most other countries—its government employed disinfectant-spraying drones and thermal goggles that read people’s temperature from a distance. South Korea also “rolled out a ‘Self-Quarantine Safety Protection’ tracking app to keep digital eyeballs on the roughly 30,000 people officials told to stay home for two weeks. If a person brings their phone out of the permitted area, a mobile alert gets beamed to the individual and their government case officer.” The country has also worked with industry to introduce a mobile app based facial recognition system that allows health providers and others quickly identify the names of patients. The secrecy, religious practices, and fingerprint scanning requirements of a South Korean sect fell under international scrutiny when a high number of its members filled the country’s COVID-19 statistics.

The State of Israel gave an order to shelter at home to all of its citizens and used a cell phone tracking tool previously only used by the government for fighting terrorism. This tool notes movement of mobile phones so the government can tell if you are defying its orders and track your activities. Prime Minister Netanyahu said,  “We will very soon begin using technology… digital means that we have been using in order to fight terrorism.” Opposing politicians criticized mobile phone monitoring as an assault on the privacy of Israelis.

Established biometric company SuperCom, headquartered in Israel, sees the COVID-19 pandemic as a way to sell its biometric infected population monitoring system, explaining, “The solution is a scalable electronic monitoring and tracking platform ready for deployment. It includes a waterproof, hypoallergenic Bluetooth ankle bracelet, a smartphone and SAAS software in the cloud, but is also customizable such as for smartphone-only monitoring. SuperCom says is already speaking with a number of government organizations to roll out the solution globally.” Japan has used temperature scanners for all incoming airplane passengers. Singapore worked with local technology companies using QR codes to track citizens.  

The U.S. is not immune to acceleration of government surveillance to fight the novel coronavirus. According to the Wall Street Journal, data mining company Palantir is working with the Centers for Disease Control to model the viral spread, and, “Other companies that scrape public social-media data have contracts in place with the agency and the National Institutes of Health.” The same article points out, “Crimson Hexagon, now part of Brandwatch, has a $30,000 contract with the CDC that was initiated last fall, according to government records. Crimson provides companies and governments with ‘social listening’ tools, meaning it scrapes public Facebook, Instagram and Twitter posts in part to gauge sentiment.” Social media databases can be used to look for symptoms people discuss like shortness of breath, fever, or cough.

That Google-sponsored website noted by President Trump, called Project Baseline, will link the information of people seeking testing with the other data Google collects about them. The Washington Post writes that the U.S. government is working with Facebook to track people’s movements and with Google to find insights through personal use of mapping applications. We also know that federal law enforcement has purchased large cell phone location databases from Verizon and AT&T, likely at least in part a reaction to the SCOTUS Carpenter decision, limiting the government’s subpoena-free access to this information. No word of what kind of government databases will be left in the hands of the administration after the crisis is over.

Facial recognition database giant Clearview A.I., the current (and justified) boogie man of privacy intrusion, is, according the WSJ, “in discussions with state agencies about using its technology to track patients infected by the coronavirus.” This would entail states tracking individuals using facial recognition and matching to public or business cameras. It is likely that license plate recognition operated by nearly all state law enforcement agencies will be harnessed for this task as well.

All of these new biometric-based technology implementations run counter to a trend in privacy law. The EU’s General Data Protection Regulation, as well as laws in U.S. states like Illinois, Washington, and Texas, have restricted the use of biometric identifiers by businesses. The clear utility of biometric readings as a practical security and health care tool fights against lawmakers’ suspicion of capturing our physical characteristics. The conflict will likely intensify thanks to our use of privacy-threatening, COVID-19-fighting biometric tools.

Our individual health information may also be at risk. Group health protection trumps individual privacy protection. At this stage, the U.S. is failing to provide adequate testing resources to properly measure the growth of COVID-19 infections. If you should be tested, or if you have been tested positive, what happens to that information? Reports of your illness are dropped into aggregated statistics for national, state, and local governments, but some people need more specificity to protect them from your contraction of this highly contagious illness. 

Your employer, for example, will likely find out, and what will the company do with the information? Will HR keep your name under wraps—formally and informally? Even if they don’t use your name, but announce that someone has contracted the disease, or several people contracted it, how easy will it be to figure out that one of them was you? The same may be true for your neighborhood association, the schools that your children attend and other social groups. If you attended a conference, everyone you contacted may be alerted to your condition. Climbing off a cruise ship can get you quarantined and tracked by government. Protecting the community from infection runs entirely counter to your desire to hide your contraction of a seriously infectious disease.

Containing the COVID-19 outbreak is vital, and, in such crises, the health of the many outweighs the privacy of the one. But will this incident simply push us three steps further into a complete surveillance community? It has allowed China to test technological methods for social control, and I doubt those tools will be shoved back in the closet. Our own government is building many new types of databases and analytics for learning about the population, including individual people and small communities. Will these tools be maintained or ditched? State and local police are bringing more surveillance technology to bear as well. They will surely keep using the information they learned even after the viral threat is gone.

The fight against COVID-19 has triggered implementation of extensive new electronic and data-focused technology that will clearly help save lives. As this technology is implemented, we must also be careful of what we lose. Thanks to the attention paid to changes in the European and California privacy laws, companies are building internal practices for protecting the privacy of the people they encounter.

Fighting the virus places some of this private information at risk. COVID-19 threatens our health and the fight to contain it threatens our economy. We can only hope that what remains of our privacy emerges from this disaster intact.

Early in 2018, Business Law Today published an article of mine dealing with the legal ethics implications of border search policies of the Customs and Border Protection (CBP) and Immigration and Customs Enforcement (ICE) relating to portable electronic devices. The article adverted to a then-recently filed lawsuit in federal court in Boston challenging the validity of these policies as a general proposition (i.e., not related to any issues of professional ethics). Nominally brought on behalf of 11 travelers whose smartphones and other electronic devices were searched without a warrant at the U.S. border, the case was funded by the ACLU, the Electronic Frontier Foundation, and the ACLU of Massachusetts.

The case was originally styled Alasaad v. Duke because the initial suit was filed against Elaine Duke, then acting secretary of DHS. Summary judgment was granted late in 2019 for the plaintiffs under the case name Alasaad v. Nielsen (because Kirstjen M. Nielsen had been substituted as secretary of Homeland Security (until earlier this year) pursuant to Fed. R. Civ. P. 25(d)).

Bear in mind that we are talking here about forensic searches of electronic devices, not the less intrusive manual searches. The latter have previously been upheld by federal appellate decisions in the 4th Circuit and the 9th Circuit. Alasaad is the first case to consider the question with regard to forensic searches.

Prior to summary judgment, the court denied the government’s motion to dismiss and in the process made several critical rulings about how the Constitution protects digital privacy and free speech at the border. The district court relied heavily on the Supreme Court’s 2014 decision in Riley v. California, which balanced the privacy interests in cell phones against the government’s interest in conducting warrantless searches incident to arrest, to wit: officer safety and preservation of evidence. Riley held that the Fourth Amendment requires police officers to get a warrant before searching an arrestee’s cell phones.

Privacy at the border, however, presents more difficult questions. The Fourth Amendment to the U.S. Constitution protects “the right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures.” Nevertheless, border searches of international travelers are a well-settled exception. It implicates the sovereign’s right to control who and what may enter the country and is justifiable from a number of different perspectives, including territorial integrity, national security, and interdiction of criminal conduct ranging from contraband to terrorism. The U.S. border is not a Constitution-free zone, however, and those sovereign interests must be balanced against individual rights, including the right to privacy.

On the privacy side of the balance, the Alasaad court explained that “electronic devices implicate privacy interests in a fundamentally different manner than searches of typical containers or even searches of a person.” U.S. District Court Judge Denise Casper quoted from the Riley decision extensively:

• “The sum of an individual’s private life can be reconstructed through a thousand photographs labeled with dates, locations, and descriptions . . .”
• A person’s internet browsing history, historic location information, and mobile application software (or “apps”) “can form a revealing montage of the user’s life.”
• “[A] cell phone search would typically expose to the government far more than the most exhaustive search of a house.”

Warrantless searches of a “particular category of effects” such as cell phones must be sufficiently “tethered” to the government’s interests, the Alasaad court concluded. At the border, the government’s interests in conducting warrantless searches are to collect duties and to prevent the entry of contraband and other harmful items. The key inquiry became whether warrantless searches of electronic devices sufficiently advance these interests. Agreeing with plaintiffs that there is an important difference between border officers conducting warrantless searches for “contraband” (where tethering is stronger), as opposed to conducting warrantless searches for “evidence” of contraband or other unlawful activity (where tethering is weaker), the court found unpersuasive the government’s claim that child pornography is a form of digital contraband that justifies warrantless searches of electronic devices.

The court then emphasized that border searches of electronic devices burden travelers’ First Amendment rights to free speech and association by exposing membership in organizations, unmasking anonymous speech, and intruding on freedom of the press. In light of these substantial First Amendment interests, the court held the government must prove a “substantial relation between the governmental interest and the information required to be disclosed.”

The court thus denied the motion to dismiss but left open the issue of the appropriate level of individualized suspicion a border officer must have before searching an electronic device: “reasonable suspicion” or a warrant based on probable cause. Resolution of this question had to await summary judgment.

In her November 2019 summary judgment opinion, Judge Casper held that border agents must have “reasonable suspicion” that a device contains digital contraband before searching or seizing the device. The traditional border search exception to the warrant requirement applies only to routine searches, but searches of personal electronic devices are nonroutine given the magnitude of the privacy and First Amendment interests at stake. The “reasonable suspicion” standard is a common-sense approach, the court held, and is met when border agents can point to specific, articulable facts—more than just a hunch—and the inferences reasonably to be drawn therefrom, suggesting that the device contains contraband.

As to relief, the court entered a declaratory judgment that the CBP and ICE policies violate the Fourth Amendment to the extent that they do not require reasonable suspicion that the devices contain contraband and that noncursory searches and/or seizures of electronic devices, without such reasonable suspicion, violate the Fourth Amendment. The court declined, however, to enter any nationwide injunctive relief.

With only one (thus far) decision at the trial court level on forensic border searches, where does that leave traveling with electronic devices containing confidential client information (CCI), which, as a lawyer, you have a special responsibility to safeguard?

The professional responsibility advice in the earlier article remains on point and is worthy of consideration. Here is a short recapitulation of the key suggestions, along with a few elaborations:

1. If you can (especially if you are traveling for vacation), leave the devices containing CCI at home.
2. Consider having a portable device designated for international travel that does not contain CCI. Mobile phones using the GSM standard (common in most countries) let you switch a SIM card from one phone to another, so you can keep your phone number while using a temporary travel phone. In addition, some laptop brands minimize the data stored on the device itself and are particularly easy to clear or reset.
3. If a separate device is not possible, and you bring with you one or more devices containing CCI, try to scrub them of the CCI (using software professionally designed by IT experts for that purpose and not merely by pressing the “delete” button) or better yet, have a teenager do it. If you will have reliable internet access where you are going, you will not need to bring the CCI on your device. Be aware, however, that moving data to the cloud is not a panacea: border agents or other government officials may try to search your cloud data without your knowledge by dealing directly with the service provider (but if they do, in all likelihood under the Electronic Communications Privacy Act and relevant case law, such demands will be subject to a higher legal standard (i.e., a warrant based on probable cause) than a border search.
4. Encryption of CCI is not sufficient to comply with your ethical obligations. Border agents may demand that you provide password or other decrypting information, and failure to do so can lead to unpleasantness for you and, at a minimum, your device being seized and detained for a period of time.
5. Familiarize yourself with, and stay up to date on, ethics rules and opinions relating to:
   1. confidentiality (cf. Model Rule 1.6)
   2. professional competence on technology matters (cf. Model Rule 1.1)
   3. disclosure obligations to clients (cf. Model Rule 1.4)
   4. supervisory responsibilities for ethical compliance by subordinate attorneys in your law firm or corporate law department (cf. Model Rule 5.3)

      in the jurisdiction(s) in which you are admitted. Be mindful as well of pertinent ABA ethics opinions. If you are too busy (as many lawyers are) to do this research yourself, ask your firm’s general counsel or a legal ethics expert for assistance.

6. If any of your clients or the firm’s clients or any jurisdiction in which you are admitted requires you to take extra steps to safeguard the confidentiality of information on a portable electronic device, be sure you have fully complied with those requirements in advance of travel.

Beyond that, here are some additional helpful pointers:

• If the device(s) in question are not your property but belong to your employer, consult the appropriate person about data security and relevant policies. A border agency may be (slightly) more sympathetic if you can honestly say that the data belongs to your employer and your employer prohibits access by anyone else.
• Back up the data on your device before you leave. If you don’t and your device is seized, you may experience difficulties in obtaining access to critical information for the duration of the seizure.
• As a matter of both professionalism and common sense, be polite to border agents. They have a difficult (and frequently thankless) job, and most of them are doing their best to protect all of us. Yes, you will encounter them when you’re tired and cranky after a long international journey—all the more reason to be conscious of the benefits of civility.
• If you are not a U.S. citizen, like many of the ABA’s wonderful foreign lawyer members, be aware that refusing to comply with a border agent’s demand that you unlock your device, provide your device password, or disclose your social media information may raise special concerns. If you are a foreign visitor, you may be more easily denied entry into the country. Even if you are a lawful permanent resident, you do not want to explore the government’s ability to challenge your continuation in that status.
• If you have traveled to certain countries regarded by the U.S. government as problematic (e.g., those connected to terrorism, narcotics trafficking, or sex tourism), you may draw additional scrutiny from border agents.
• If your international travel is frequent or of significant duration, you may be subject to added screening.
• Border agents may seek access to your device by demanding that you enter your password, furnish your password, or (if you use a fingerprint key) press your finger to the sensor, all of which will give them access to information stored on your device. They may also ask you to disclose your social media identifiers, with which they can examine your public social media content even when they do not have access to your devices. In advance of your trip, reflect, perhaps in consultation with your employer and/or with ethics experts, on how you should respond to such requests. In that regard, recall that under existing official policies, CBP agents (but not necessarily ICE agents) must consult with the CBP Associate/Assistant Chief Counsel’s Office before searching devices allegedly containing privileged or work product protected information.
• Be wary of implicit consent. If the border agent is vague about whether he or she is asking or ordering you to unlock your device, provide a password, or furnish social media identifiers, politely establish whether it is a request or a command.
  • If the former, you have the ability to courteously but firmly withhold your consent.
  • If the latter, inform the agent that you are complying under protest and that you do not consent; this is even more effective if you have someone with you who can be a witness. If you fail to protest, then in the event you subsequently seek to mount a legal challenge to the search, the government may claim that you consented.
  • Under no circumstances should you lie to a border agent or seek physically to interfere with the agent’s performance of official duties.
• Do not succumb to the blandishments of “techies” or others who recommend concealing data on your devices by “hidden volume” features or other techniques designed to vary the data that will appear depending on the password that is used. Border agents may characterize this as making a false or fraudulent statement to them or obstructing their investigations or the proper administration of their duties, each of which is a serious federal criminal offense.
• If any of your devices is seized, you are entitled to a property receipt.
• If, in response to a demand, you provide any passwords or identifiers or other account credentials to a border agent, nothing requires you to leave them unchanged afterwards. If you do nothing, the government will have continued access to your accounts, and, for what it is worth, there is an article in the popular media that suggests they will use it. Therefore, promptly after re-entering the country you should change all such passwords, identifiers, and credentials.

In the valedictory words of the morning roll call on an iconic 1980s police drama, “Let’s be careful out there.”

The author, in addition to serving as BLT’s Executive Editor for Ethics & Professional Responsibility, has been the Business Law Section’s liaison to an ABA Border Search Task Force that was organized in 2017 by former ABA President Linda Klein. He also served on the ABA Standing Committee on Ethics and Professional Responsibility and was a former chair of the Section’s Committee on Professional Responsibility. The views expressed herein are, however, entirely the author’s own.

As concern over COVID-19, the novel coronavirus, increases and restrictions are being imposed on public gatherings, U.S. public companies have been weighing risks associated with holding in-person annual stockholder meetings. While the vast majority of U.S. public companies continue to hold annual stockholder meetings at a physical location, in light of the COVID-19 outbreak, many corporations are now considering whether to hold the meeting solely by means of remote communication or to hold a hybrid meeting in which stockholders may choose to participate either in person or remotely.  Several states, including Delaware, have adopted emergency legislation designed to facilitate virtual meetings of stockholders, and the Securities and Exchange Commission (the “SEC”) has issued guidance for companies that have already mailed proxy materials to stockholders but, in light of worsening COVID-19 conditions, now wish to modify the schedule or format of their annual meetings.

If a corporation determines that it should hold its annual meeting either entirely by means of remote communication or both in person and remotely, management should carefully consider applicable state law establishing the procedural requirements for holding a virtual or hybrid meeting, as well as the form and timing of the notice that must be sent to stockholders. Special consideration should be given when an annual meeting has already been noticed as a meeting to be held at a physical location and later moved to a virtual location. Considerations for Delaware corporations in connection with the holding of a virtual meeting as well as for corporations incorporated in other states are set forth below in light of recent guidance from the SEC and an emergency order issued by the Governor of the State of Delaware on April 6, 2020 (the “Order”).  The Order allows corporations subject to the reporting requirements of §13(a) or §15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) to change the format of a meeting currently noticed for a physical location to a virtual meeting solely by filing a document with the SEC pursuant to  §13, §14 or §15(d) of the Exchange Act and issuing a press release, which release shall be promptly posted on the corporation’s website.

Virtual Meeting Considerations for Delaware Corporations

Procedural Requirements for Holding a Virtual Meeting under Delaware Law

If a corporation’s organizational documents grant the corporation’s board of directors the discretion to determine the place of the meeting or do not otherwise prohibit the holding of a virtual meeting, a corporation’s annual meeting can be held online or telephonically. However, Delaware law requires corporations to implement reasonable measures to ensure that stockholders may meaningfully participate in virtual stockholder meetings through a secure and verifiable process. These measures focus on meeting access and voting as well as access to the stockholder list.

Meeting Access and Voting. In connection with a meeting held solely by means of remote communication, such as a webcast, a Delaware corporation must:

• Implement reasonable measures to verify that each person deemed present and permitted to vote at the virtual meeting is a stockholder or proxyholder; 
• Implement reasonable measures to provide stockholders and proxyholders a reasonable opportunity to participate in the virtual meeting and vote on matters, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings; and
• Maintain a record of a stockholder or proxyholder’s vote or other action taken at such meeting.

Stockholder List. If an annual meeting of stockholders is held solely by means of remote communication, the list of stockholders entitled to vote at the meeting must be open for examination during the entire meeting on a reasonably accessible electronic network. The information required to access the electronic list of stockholders must be provided with the notice of the annual meeting, and the corporation must take reasonable steps to ensure that the list of stockholders entitled to vote at the meeting is available only to stockholders of the corporation.  The list of stockholders also must be available for inspection by any stockholder during the 10-day period prior to the date of the meeting either at the corporation’s principal place of business or on an electronic network provided that the information required to gain access to such list is included with the notice of meeting.

Corporations which are unable to make the list available for the 10-day period prior to the meeting on a secure electronic network or at their principal place of business should consider making the list available prior to the meeting by e-mail provided that the requesting stockholder submits information, verifying his, her or its status as a stockholder or, in the case of a beneficial holder, submits a legal proxy from a stockholder of record.

Contents and Timing of Notice. Under Delaware law, stockholders must be given between 10 and 60 days’ notice of an annual meeting of stockholders except for meetings held to vote on the adoption of a merger agreement, which require at least 20 days’ notice. Where the meeting is to be held virtually, the notice of meeting must include the date and time of the meeting, as well as:

• The means of remote communication by which stockholders and proxyholders may be deemed present in person and vote at such meeting; 
• Instructions on how to join the meeting, vote, and verify that such participant is a stockholder or proxy holder; and
• Information required to access the list of stockholders entitled to vote at the meeting.

How It Works. Stockholder services companies are able to assist in setting up virtual platforms to accommodate Delaware law requirements and ensure that:

• Stockholders receive meeting invitations and instructions for accessing the virtual meeting in their proxy mailings; 
• Using a control number, stockholders can conveniently sign into the virtual meeting from their home, office, or mobile device; 
• A meeting page delivers streaming audio or video of the meeting, and also allows stockholders to access the list of stockholders, cast votes, enter questions, and view messages; and 
• Meeting pages are also able to include welcome letters, video bios, call-in numbers or links to other stockholder materials. 

Changing from an In-Person Meeting to a Virtual or a Hybrid Meeting

While some corporations may have determined prior to sending a notice of meeting and proxy statement to hold a virtual meeting of stockholders, others that decide to change the format from an in-person to a virtual meeting will be required to distribute an additional notice informing their stockholders of the change of format of the meeting and details on how to participate in the meeting.

• If the corporation has already mailed the notice of meeting, and the corporation has sufficient time to give its stockholders 10 days’ notice of the virtual meeting, a new notice ordinarily must be distributed to stockholders by a physical mailing or by e-mail.[1] However, pursuant to the Order, any Delaware corporation that is subject to the reporting requirements of 13(a) or §15(d) of the Exchange Act may notify stockholders of the change of the format of the meeting solely by filing a document with the SEC and issuing a press release, which shall be promptly posted on the corporation’s website after release.  The notice should contain the information required for a notice of a virtual meeting described above. 
• If the corporation has mailed the notice of the annual meeting and there are fewer than 10 days’ before the meeting or it is otherwise impracticable to convene a currently noticed meeting, the meeting could be held but adjourned to another place (i.e., a virtual location).  Ordinarily, notice of an adjourned meeting is not required so long as the date, time and place or means of remote communications by which stockholders and proxyholders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken and the adjournment is for no more than 30 days.  Pursuant to the Order, a public company also may adjourn the meeting by providing notice of the date and time of the virtual meeting and the means of remote communication by which stockholders may participate in the meeting solely by filing a document with the SEC and issuing a press release, which shall be promptly posted on the corporation’s website after release.
• Where there is insufficient time to send out a new notice and/or it is impracticable to adjourn or postpone the meeting, another option for corporations is to simply hold the physical meeting as planned, but to stream the meeting over the internet so that stockholders have the opportunity to hear or view the meeting remotely. Because the meeting is considered a meeting held at a physical place, stockholders, who do not come to the physical meeting but participate in the webcast, must submit their proxies in advance of the meeting according to the instructions set forth in the original proxy materials in order to have their votes count for quorum and voting purposes. 

Other Considerations. In addition to concerns about notice, corporations should carefully consider when moving the location of a meeting for which proxy materials have already been mailed whether the original proxy cards sent to stockholders grant the proxyholders sufficient agency to vote the proxy at the corporation’s annual meeting irrespective of its location. Often proxy cards reference a physical location, but the proxyholder’s discretionary authority is broad enough to allow the proxies to vote at a virtual meeting.  If a corporation intends to use the original proxy cards at the virtual meeting, the supplemental materials should expressly inform the stockholders of the corporation’s intention to do so.

Another concern is whether the record date for the annual meeting may be maintained when a meeting is adjourned or postponed to a later date.  A Delaware corporation is not required to set a new record date for an adjournment under Section 213 of the General Corporation Law of the State of Delaware. 

Other States

Corporations organized in jurisdictions other than Delaware must review relevant state law to determine whether virtual or hybrid meetings are permissible. According to a 2018 white paper published by the Best Practices Committee for Shareowner Participation in Virtual Annual Meetings:

• Virtual-only meetings are allowed in 30 states, including Massachusetts, Minnesota, Ohio, Pennsylvania, Texas, Virginia and Washington (although certain states impose conditions on virtual-only meetings that make them impractical or unrealistic);
• Forty-two states in total, including New Jersey, North Carolina and Connecticut, as well as the District of Columbia, permit remote participation in stockholder meetings (i.e., hybrid meetings); and 
• The remaining fewer than 10 states preclude virtual or hybrid stockholder meetings and require in-person meetings.

While there is variance from state to state, most states that permit virtual stockholder meetings require that the corporation:

• Verify each person deemed present and permitted to vote at the virtual stockholder meeting is a stockholder or proxyholder;
• Maintain a record of the vote or other action taken at the stockholder meeting; and
• Implement reasonable measures to provide a stockholder participating virtually with the ability to:
  • Participate in the meeting and vote on matters submitted at the meeting;
  • Maintain a record of the vote or other action taken at the stockholder meeting; and
  • Communicate with the other participants of the meeting contemporaneously.

In addition, corporations that conduct virtual stockholder meetings in these other states generally must make their stockholders lists available for examination by stockholders during the meeting. In response to COVID-19, states such as Connecticut, Georgia, New Jersey, New York and North Carolina have taken steps to remove barriers to virtual annual meetings under existing state law.

Recent SEC Guidance

On March 13, 2020, the SEC issued guidance describing certain accommodations for public companies that have already mailed proxy materials to stockholders but, in light of worsening COVID-19 conditions, now wish to modify the schedule or format of their annual meetings. Specifically, those public companies may change the date, time, or location of their meeting—or change from an in-person meeting to a hybrid or virtual meeting—without mailing additional materials to stockholders if they (1) issue a press release announcing the change, (2) file the announcement as definitive additional soliciting material (i.e., a DEFA14A) on EDGAR, and (3) take reasonable steps to inform other intermediaries in the proxy process and other relevant market participants (such as securities exchanges) of the change. These actions are to be taken “promptly” after a decision to change is made, but no specific deadlines are imposed.

Public companies must of course also continue to comply with state law requirements regarding the timing, content, and manner of delivery of proxy solicitation materials, including notices of meetings, as well as state law restrictions on whether meetings may be held virtually. For Delaware corporations, the SEC’s new guidance, when considered together with the Order, allow a Delaware corporation to change the format of a stockholders meeting from an in-person meeting to a hybrid or virtual meeting by the filing with the SEC of a supplemental notice and a press release and the prompt posting of the press release on the corporation’s website. The corporation must also take reasonable steps to inform other intermediaries in the proxy process and other relevant market participants of the change in format of the meeting.

The SEC encourages public companies that have not yet mailed proxy materials to consider including disclosures regarding the possibility that the date, time, or location of their annual meetings will change due to COVID-19.

The SEC guidance acknowledges challenges that may be faced by stockholder proponents that need to attend a meeting in order to present a proposal, as required by Rule 14-8(h) of the Exchange Act. Public companies are encouraged, to the extent feasible under state law, to provide stockholders with alternative means, such as telephone conferencing, by which to present their proposals. If COVID-19 complications preclude a stockholder proponent from attending an annual meeting, the SEC will consider this to be “good cause” should a public company assert Rule 14a-8(h)(3) as a basis to exclude a proposal made by the stockholder proponent for any meeting held in the next two calendar years.

[1] Delaware generally permits the sending of notices by electronic mail. However, U.S. publicly-traded corporations will also need to comply with the rules of the SEC relating to the distribution of proxy materials.

Disagreements between parties over the purchase price in an acquisition often can be driven by their differing views of the selling company’s future performance and cash flows. To get to “yes,” parties may bridge their valuation differences by agreeing to an earnout, meaning they set agreed-upon metrics regarding the company’s post-closing performance and measure those metrics after closing. The seller then “earns” additional payments if the post-closing performance validates its valuation position. Parties must carefully define the details of how they will measure the earnout payment. The 2019 ABA Private Target Mergers and Acquisitions Deal Points Study (which examined 151 deals valued between $30 million and $750 million from 2018 and the first quarter of 2019) found that approximately 27 percent of those deals included earnout provisions.

The well-documented problem is that the earnout bridge the parties take to close their valuation differences often leads to litigation over whether the earnout was met or why it was not met.[1] Two recent decisions from the Complex Commercial Litigation Division of the Delaware Superior Court demonstrate how careful drafting affects the resultant litigation risk.

Collab9, LLC v. En Pointe Techs. Sales, LLC

In Collab9, LLC v. En Pointe Techs. Sales, LLC,[2] a seller argued that the implied covenant of good faith and fair dealing required the purchaser to maximize an earnout provision in an asset purchase agreement (APA). The seller alleged the purchaser breached the duty of good faith and fair dealing by “maintaining financial records in a way that made it impracticable to accurately determine the correct amounts of Earn-Out payments; creating a sham entity to move revenue off [its] books; and renewing certain contracts or transferring sales persons or accounts as a means of minimizing Adjusted Gross Profit.”[3]

The APA provided, however, that the “Purchaser shall have sole discretion with regard to all matters relating to the operation of the Business. Purchaser shall have no express or implied obligation to the Seller, . . . to seek to maximize the Earn Out payment . . . .”[4]

The purchaser moved to dismiss, pointing to the “sole discretion” provision it bargained for as defeating any implied covenant claim. The court agreed and dismissed the claim. Such “comprehensive and explicit” terms “demonstrate that the parties contemplated that a dispute might arise concerning the operation of the business post-closing, specifically whether the purchaser was acting in a manner that maximized the Earn Out.”[5] The terms that “granted broad rights to the purchaser to operate the business as it sees fit” meant the implied covenant could not give the seller rights it had “failed to secure for themselves at the bargaining table.”[6]

Merrit Quarum v. Mitchell International, Inc.

In Merrit Quarum v. Mitchell International, Inc.,[7] specific contractual language imposing post-closing obligations on the purchaser led to a different outcome. At issue was an earnout agreement, entered into by the parties in connection with a stock purchase agreement, that contained three provisions addressing the post-closing obligations of the purchaser. First, although it had “the power to direct the management, strategy, and decisions” post-closing, the purchaser agreed it would “act in good faith and in a commercially reasonable manner to avoid taking actions that would reasonably be expected to materially reduce the” earnout.[8] Second, the purchaser agreed to “act in good faith and use commercially reasonable efforts to present and promote the [acquired company’s products] to customers that could reasonably be expected to utilize” them.[9] And third, the purchaser agreed to upgrade or build a bridge between the companies’ systems, within six months of closing, to allow the purchasers to sell the acquired products to its existing customers and to assist in calculating the earnout.[10]

In an action asserting, among other things, noncompliance with the earnout agreement, the seller asserted breach of contract, not implied covenant, claims. Unlike Collab9, the court denied the purchaser’s motion to dismiss for some of the seller’s earnout allegations, focusing on the first and third obligations in the earnout agreement.

As to the first obligation in the earnout agreement, the court viewed the provision as a negative covenant requiring the purchaser to refrain from “positive action[s]” that reasonably could be expected to reduce the earnout or impede calculating the earnout. That obligation did not extend, however, to “avoiding inaction” because extending that obligation would “place the power to manage the company in” the hands of the seller.[11] In analyzing the complaint’s specific allegations, the court found that many fell short of asserting positive action. Those allegations focused on “decisions and strategies [the purchaser] could have pursued but did not,” such as consulting with the seller on marketing.[12] The claims that survived the motion to dismiss focused on positive actions such as “routinely cancel[ing] regularly scheduled calls to prevent [the seller] from promoting and selling” the products, and improper accounting decisions concerning minimum thresholds for bills, and diverting revenue to different products to avoid paying the earnout.[13]

With respect to the third obligation in the earnout agreement, the purchaser argued the seller could not plead damages resulting from the purchaser’s decision to build an alternative bridge between the parties’ systems. Relying primarily on Delaware’s minimal pleading standard for damages—which does not require pleading “damages with precision or specificity”—the court concluded it was reasonable to infer from the agreement that a specific solution was necessary to provide services to customers and calculate the earnout amount, and failing to build that solution could constitute damages.[14]

Takeaways

These decisions reflect how Delaware courts understand the incentives underlying, and details of, earnout provisions and hold parties to their bargain. Concessions today might get the deal done, but purchasers must be aware that they may be agreeing to significant restrictions on how they run the business post-closing, and as Merrit Quarum demonstrates, concomitant litigation risk if the earnout is not met. That holds true for sellers, who have the opposite incentives, and could give away their ability to hold the purchasers accountable post-closing. Said differently, through the lens of analyzing future litigation (especially at the pleading stage), purchasers face more risk (and sellers have stronger leverage) from having to comply with specific earnout provisions that impose post-closing obligations on the purchaser. In analyzing earnout provisions that do not require specific obligations and grant the purchaser significant discretion to operate the business, implied covenant claims are an uphill climb because Delaware courts refuse to use the covenant to give parties “contractual protections that they failed to secure for themselves at the bargaining table.”[15]

The 2019 ABA Private Target Mergers and Acquisitions Deal Points Study indicates that, at least in the available data, purchasers are “winning” these negotiations when they occur. Of the subset of deals containing earnouts, only about 30 percent include a covenant to run the business consistent with past practice or to maximize the earnout.

[1] Aveta Inc. v. Bengoa, 986 A.2d 1166, 1173 (Del. Ch. 2009 (“Earn outs frequently give rise to disputes, and prudent parties contract for mechanisms to resolve those disputes efficiently and effectively.”).

[2] 2019 WL 4454412 (Del. Super. Ct. Sept. 17, 2019).

[3] Id. at *1.

[4] Id. at *2.

[5] Id. at *2.

[6] Id. at *3 (quoting Aspen Advisors LLC v. United Artists Theatre Co., 843 A.2d 697, 707 (Del. Ch. 2004)).

[7] 2020 WL 351291 (Del. Super. Ct. Jan. 21, 2020).

[8] Id. at *2.

[9] Id.

[10] Id.

[11] Id. at *5.

[12] Id.

[13] Id.

[14] Id. at *7.

[15] Aspen Advisors LLC v. United Artists Theatre Co., 843 A.2d 697, 707 (Del. Ch. 2004), aff’d, 861 A.2d 1251 (Del. 2004).

I. INTRODUCTION

COVID-19 is having a dramatic effect on everyone’s lives. Our thoughts go out to all those who have been infected and their loved ones. While health has to be the first priority for everyone, this situation also raises significant economic and business issues. Businesses are seeing interruptions in supply, and many contracts can no longer be performed. Businesses are trying to decide whether and how to “push the pause button.” Others are unable to perform their contractual obligations and are trying to determine their legal rights. This article discusses some of the legal issues that inform the decision-making process.

II. Governmental Actions Are Restricting Business Activity

A. State of Emergency

As of March 20, 2020, there have been state of emergency declarations from the federal government in all 50 states and in all populated American territories because of the COVID-19 pandemic. Many of these emergency declarations have closed schools, limited public gatherings, and limited restaurant activities to takeout or delivery.

B. Shelter-in-Place Orders

Many states, including California, New York and Illinois, have also initiated shelter-in-place orders.  Hundreds of cities and counties have also entered such orders. In the event of a shelter-in-place order or a state’s COVID-19 mitigation initiative, the distinction between “essential” and “nonessential” is crucial in assessing whether a business may have to reduce operations (to a state known as “minimum basic operations”) or close for a period of time.

There is uncertainty as to what is a “nonessential” business state-to-state, and authorities may not approach this consistently. California has referenced the Memorandum on Identification of Essential Critical Infrastructure Workers During COVID-19 Response from the US Department of Homeland Security, Cybersecurity & Infrastructure Security Agency (CISA). CISA identifies 16 sectors considered to be “essential,” and is part of the National Infrastructure Protection Plan (NIPP). This listing is advisory by CISA, but the California Order implements it as is in its listing of “essential businesses.”

However, some orders have listed different definitions of “essential business”—for example, the Alameda County order that affected San Francisco differs from the state-wide California Order. Pennsylvania and New York have each taken different paths on defining “essential business,” so there will be no “one size fits all” solution. Determining whether a particular business is required to close requires case-by-case analysis.

III. Contractual Defenses

It is basic contract law that a party that fails to perform is liable to pay damages for breach of contract. “Non-performance of a valid contract is a breach thereof … unless the person charged … shows some valid reason which may excuse the non-performance…” Cater v. Barker, 172 N.C. App. 441, 447, 617 S.E.2d 113, 117 (2005); see also Tejas Power Corp. v. Amerada Hess Corp., No. 14-98-00346-CV, 1999 WL 605550, at *2 (Tex. App.-Houston [14th Dist.], Aug. 12, 1999) (noting that while “a seller is bound to deliver the thing to the buyer… and, as a necessary consequence of this obligation, to do so at his own expense…” but also noting “extraordinary circumstances…may excuse the seller’s breach”); In re Appraisal of Metromedia Intern. Group, Inc., 971 A.2d 893, 900 (Del. Ch. 2009) (noting that a valid contract will be enforced “unless a party’s non-performance is excused.”)

Contractual defenses fall into three primary categories: (a) impossibility/impracticality; (b) frustration of purpose; and (c) force majeure.

 A. Impossibility/Impracticability

The common law often recognizes a defense of impossibility. A party should not be held liable for breaching a contract that they could not perform. For example, laryngitis may make a singer’s concert performance impossible. Death and disability make personal service contracts impossible.

Some of the government orders surrounding COVID-19 may in fact render performance impossible. A contract committing to put on a theater show on March 30 is now impossible in locations where theaters have been ordered to shut down.

Some courts also recognize a defense of impracticability. Here, a party must show that performance has been made excessively burdensome by a supervening event. Generally, the supervening event must be: 1) unforeseeable (but not inconceivable); 2) not the fault of the excused party’s; 3) inconsistent with the basic assumption of the parties at the time of contract; and 4) something that a reasonable party would not have guarded against in the contract.

B. Frustration of Purpose

Some courts also recognize a separate doctrine called “frustration of purpose,” which is similar to the impracticality defense. Under this doctrine, performance is excused when a supervening event fundamentally changes the nature of a contract and makes one party’s performance worthless to the other. Unlike the other defenses, this doctrine has nothing to do with inability to perform. For example, if a contract called for cleaning a theater after a performance, the cancellation of the performance frustrated the purpose of the contract. The contract can still be performed (i.e., the cleaning personnel are available and the theater is available for cleaning), but the purpose (cleaning up after a performance) has been frustrated, making cleaning a wasted effort.

IV. Force Majeure Clauses

Unlike the preceding defenses, which arise under common law and potentially apply without regard to the language of the contract, the defense of force majeure is based on a contractual provision. Accordingly, companies should check their contracts, and those with their suppliers, for force majeure clauses. The clauses generally take two forms. The most general form excuses performance under the contract when it is due to any circumstance outside the party’s control, which presumably would include performances prevented by coronavirus. The second type of force majeure clause lists specific events that trigger the clause.

In most cases, force majeure events are contemplated to cover acts of God, extreme weather events, riot, war or invasion, government or regulatory action including strikes, terrorism, or the imposition of an embargo. It is less common to see force majeure clauses that expressly contemplate a global health emergency, pandemic, or epidemic as a force majeure event.

In addition to the force majeure event, many courts also require that the party shows an attempt to perform the contract regardless of the triggering event (here the epidemic), perhaps by finding an alternative source of supply.^[1]

A. Practical Considerations

Contracting parties must be cautious in declaring a force majeure event on the basis of the recent coronavirus outbreak and ceasing performance of their obligations. Incorrectly declaring a force majeure event may result in a contracting party repudiating the contract; it may also provide the other party with a right to damages.

The China Council for the Promotion of International Trade has apparently already issued over 3,000 force majeure certificates. However, these certificates are not dispositive. Instead companies, and ultimately arbitrators and courts, will have to examine each contract and the specific circumstances to determine if a force majeure clause applies and performance under the contract is excused.

Some states in the U.S. have specific rules regarding notice of force majeure claims, including when notice must be given. Companies should check with counsel about the proper timing and format of the notice, based on the jurisdiction, choice of law provisions in the contract, and specific notice language in the contract.

Finally, companies asserting these defenses, suffering damages from breach, or generally impacted by COVID-19, should keep good records regarding the factual circumstances and damages incurred because these documents will be central to any later legal proceedings. Counsel should also consider whether litigation is “reasonably foreseeable” such that it triggers an obligation to implement a litigation hold.

V. Insurance Coverage Issues

A. Business Interruption Insurance

Business interruption insurance can be purchased as part of a commercial property insurance policy or as a stand-alone policy or provided through a captive insurer. General business interruption insurance is intended to protect a business against profits that are lost as a result of unintended interruptions to the business or its supply chain. Typically, business interruption policies are triggered when the company suffers some sort of direct physical damage, and that physical damage leads to the interruption of its business operations.

If your policy contains a requirement of physical damage, as most do, a determination will have to be made regarding whether the COVID-19 virus is deemed to be physical damage. However, some policies do not have a requirement of physical damage if the loss arises from certain diseases. A determination will have to be made whether the virus rendered a facility totally or partially unusable or required additional costs such as testing or cleaning. COVID-19 is not a disease that has ever been mentioned in any policies.

Other policies contain contingent business interruption coverage. Rather than requiring the policyholder to suffer a direct physical loss, contingent business interruption coverage responds to some losses that impact a company’s supply chain. To the extent that a supply chain is impacted by slow-downs or stoppages in the United States, China, Europe, or within the NAFTA free trade area, a company may see more benefit from contingent business interruption coverage than from traditional business interruption coverage. However, this coverage ordinarily requires physical damages to a supplier or customer’s property by a peril covered under the company’s policy.

Another type of business interruption insurance which may have broader applicability is civil authority coverage. The coverage applies when you are unable to operate your business due to the order of local, state, or federal authorities. Several months ago, some insurers began writing limited and optional coverage for COVID-19, particularly for “civil authority” orders, where governments or health officials issue orders restricting the use of businesses or properties. If you purchased this coverage, it is likely to have certain sub-limits (which may be relatively low), but it will need to be closely reviewed. This supplemental coverage may also apply without the physical presence of COVID-19 on your premises.

B. Commercial General Liability/Professional Liability

A company’s commercial general liability (“CGL”) insurance is typically the first thought when people ask general questions about insurance. CGL coverage responds to claims that the policyholder acted in a way that caused personal injury or bodily harm to a claimant. The typical example is a slip and fall of a patron in a public building, a products liability claim, or other physical injury caused by the policyholder that resulted in injury to another.

If businesses are sued by customers or patrons for causing, spreading, or failing to take adequate steps to prevent COVID-19 transmission, the CGL policy will be the first line of defense. However, many CGL policies contain exclusions for viral and bacterial-related bodily injury. On the other hand, CGL policies for certain industries that are more susceptible to contagious disease outbreaks (including restaurants, event centers, and hotels) are more likely to be sold with optional coverage that may include bacterial and viral infection, as these industries have historically demanded optional coverage for contagious disease.

C. Workers’ Compensation

Workers’ compensation insurance is required of most employers; either explicitly by statute or implicitly by business contracts. Workers’ compensation insurance generally covers jobsite injuries, as well as occupational diseases that are peculiar to a trade, occupation, or employment. For example, the hallmark occupational diseases include asbestosis and mesothelioma for those who worked with asbestos and black lung disease for underground coal miners.

Individual state law will control whether an “ordinary disease”—i.e., one which the general public is exposed to outside of employment—will be covered by workers’ compensation. Typically, an employee who contracts an “ordinary disease” will not be covered under worker’s compensation insurance. Some states apply the “peculiar risk” approach to determine whether the risk was increased because it was related to the employment. To the extent that your employees are hospital workers, nursing home workers, or other front-line healthcare workers who may be exposed to COVID-19 on a heightened basis, your business workers’ compensation insurance may cover those employees. Law enforcement, firefighters, and other emergency responders may also have similar claims.  Employees of grocery stores, or those providing childcare to medical professionals would potentially be covered, but they would be a step further down the chain.  The farther your particular employees are from the “peculiar risk” of being exposed to COVID-19 in the workplace, the less likely it would fall within your workers’ compensation insurance. Employees bringing workers compensation claims for COVID-19 will also have to prove that they were exposed at the workplace, rather than as members of the general public, which could be difficult in areas where community spread is apparent.

D. Directors & Officers Liability Insurance

Directors & Officers (“D&O”) liability insurance almost always contains exclusions for bodily injury. However, as the COVID-19 pandemic begins to negatively impact financial markets, credit markets, and share prices, shareholders may bring claims that a company’s executive leadership grossly mismanaged the company. Against the background of the turmoil currently roiling the financial markets, these claims may be specious at best, but the D&O policy may respond to such claims that are based on the drop of a public company’s stock prices.

Regardless of what you see, hear, or read about insurance coverage for COVID-19, you still need to have your policy read by an attorney experienced in the area of insurance coverage. And if you believe you have a claim, you need to notify all of your insurance companies as soon as possible.

VI. CONCLUSION

Due to the broad impact, companies need to evaluate whether their contractual performance, or that of their suppliers, has been impacted by COVID-19 and the governmental response to the pandemic. If the parties cannot negotiate a mutually acceptable “pause button” postponing performance, then companies should evaluate whether there are defenses to performance which will reduce or eliminate liability for breach.

[1] See, e.g. Gulf Oil Corp. v. F.E.R.C., 706 F.2d 444, 452 (3d Cir. 1983)