Top Developments in COVID-19 Litigation

January 19, 2021

Jason A. Levine, Ryan Martin-Patterson, and Stephen Tagert, Alston & Bird LLP

OVERVIEW

This week’s Roundup covers the dismissal of a putative class action seeking a refund for participant fees paid to the Ironman race organizer, a securities fraud class action over public statements about development of a COVID-19 antigen test, and multiple class actions filed by restaurants in California and New York challenging government orders that forced them to close as “non-essential” but provided no offsetting compensation.

1. Federal Court Dismisses Putative Class Action Against Ironman Race Organizer

Overview: On January 7, 2021, Judge Barber of the Middle District of Florida dismissed a purported class action complaint seeking refunds from the company that organizes Ironman triathlons, on the grounds that the “no refunds” clause of the contract signed by Ironman participants was clear and enforceable.

Background: The named plaintiffs, Mikaela Ellenwood and Jorge Casanova, signed up for Ironman races on April 5 and May 9, 2020.  Both events were cancelled due to local government ordinances spurred by the ongoing COVID-19 pandemic.  The Ironman organizer offered both plaintiffs the opportunity to transfer their registrations to future races, but did not offer any refunds.  The plaintiffs sued for breach of contract, unjust enrichment, and violations of Florida’s unfair trade practices statute.

Decision: Judge Barber dismissed all of the plaintiffs’ claims.  He held that the breach of contract action should be dismissed because the participant contracts contain a clear and unambiguous “no refunds” clause, which barred any suit for refunds.  Judge Barber also concluded as a matter of law that the contracts did not lack mutuality and were not unconscionable.

In addition, Judge Barber held that plaintiffs’ unjust enrichment claim was foreclosed by the existence of a valid, enforceable contract.  Finally, he concluded the plaintiffs had not pled a deceptive or unfair practice sufficient to run afoul of Florida’s consumer protection laws; instead, they merely re-stated their untenable claim for breach of contract.

Our Take: This straightforward decision may have significant implications for other organizers of outdoor athletic events that were affected by COVID-19 and accompanying shutdowns.  Like Ironman races, these events often come with contracts containing similar or identical “no refund” provisions.  Judge Barber’s rulings that such provisions are enforceable may strongly support event organizers’ defenses to other suits by disappointed prospective participants seeking refunds for a variety of cancelled events.

2. Shareholders Sue Sona Nanotech for Alleged Securities Fraud Over COVID-19 Test

Overview: Shareholders filed a purported class action complaint against Sona Nanotech, Inc. (“Sona”) for violations of the securities laws through statements concerning Sona’s development of, and subsequent failure to obtain approval for, a rapid COVID-19 antigen test.

Complaint: According to the complaint, Sona issued a press release on July 2, 2020, touting the effectiveness of and likely future approval of its new rapid COVID-19 antigen test.  Sona later announced on August 6 that the results of systematic testing necessary for FDA approval would be delayed.  Sona then announced on October 29 that the FDA was de-prioritizing emergency authorization of Sona’s rapid COVID-19 antigen test, and the company finally announced on November 25 that it had withdrawn its emergency use application from Health Canada.  Each of these announcements was followed by large decreases in Sona’s share price.  Plaintiffs seek damages for alleged securities fraud by Sona.

Our Take: Sona’s example is a cautionary tale for investors and companies seeking to provide new laboratory services in response to COVID-19.  Initial hype and even well-founded optimism within a company, when communicated publicly, can be used against the company if necessary regulatory approvals are not obtained.  Although the lawsuit against Sona is at the initial stages, its example may cause companies to consider very carefully their public statements about the prospects for and timing of regulatory approval for COVID-related tests.

3. Restaurants Sue California Counties and State Agency Over Operating Fees

Overview: California restaurants in Orange County, Sacramento County, and San Diego County filed proposed class actions in state courts against their respective counties and county health departments, as well as the California Department of Alcohol Beverage Control, over permit and licensing fees they have been required to pay despite being forced to remain closed due to the COVID-19 pandemic.

Complaints: The three virtually identical complaints allege that Defendants required restaurants to pay public health permit and licensing fees throughout the pandemic, even though many of these restaurants were legally required to stay closed.  Plaintiffs assert that the public entities also threatened to revoke licenses and permits if fees were not paid, and never refunded those fees.  The restaurants argue that the counties and county health departments violated two state laws that govern when restaurants may be taxed, that the California Department of Alcohol Beverage Control had a mandatory duty under state law to refund the fees, and that the public entities were unjustly enriched through these ill-gotten fees.  The complaints seek declaratory and injunctive relief, preventing the public entities from continuing to receive the fees, as well as damages in the form of refunds or credits on behalf of the proposed classes of restaurants.

Our Take: Restaurants have been hit hard throughout the pandemic, and logically wish to avoid paying fees normally required when they are operating.  Regardless of whether the lawsuits ultimately succeed, restaurants elsewhere may consider using similar tactics to generate press coverage in an effort to leverage legislatures to enact further economic relief as the pandemic continues and closure orders remain in place.

4. New York Restaurants Sue to Invalidate City and State COVID-19 Closure Orders

Overview: New York City restaurants filed a proposed class action in federal district court against Governor Andrew Cuomo, Mayor Bill de Blasio, and the City of New York, asserting constitutional challenges to their Executive Orders closing businesses deemed “non-essential.”

Complaint: The restaurants allege that the Executive Orders constitute regulatory takings without compensation, in violation of federal and state law, by arbitrarily labeling certain businesses as non-essential throughout the 10 months since the pandemic began. The complaint recounts the events of the pandemic and the actions taken by Governor Cuomo and Mayor de Blasio that prevented the restaurants from operating, even when New York City had met the metrics required for reopening, while providing restaurants with no compensation.  Meanwhile, the complaint observes, businesses deemed “essential” continued to operate and turned historic profits.  The restaurants further claim that they retrofitted their businesses to comply with the Executive Orders and have been forced to bear the brunt of a public burden. 

The complaint asserts claims under the United States and New York Constitutions for violations of due process and equal protection through Defendants’ arbitrary designations of which businesses are “essential,” without any public hearing.  Plaintiffs also seek recompense under the Takings Clause, because they were forced to shut down for a public purpose without any compensation.  The complaint requests an injunction against further enforcement of the Executive Orders, plus compensatory and punitive damages.

Our Take: Similar lawsuits have previously been filed elsewhere nationwide, with limited success, and others are still pending.  If this complaint survives a motion to dismiss, it could become a template for future litigation by restaurants and other businesses deemed non-essential that have been forced to shut down during the pandemic.  The court’s ruling on the constitutionality of the New York Executive Orders could likewise be important regarding the limits of state power in deciding which businesses can stay open and which cannot.