Jason A. Levine, Giles Judd, and Stephen Tagert, Alston & Bird LLP
OVERVIEW
This week’s top developments in COVID-19 litigation include a securities suit against Inovio Pharmaceuticals and a refund suit against United Airlines that survived motions to dismiss; two new securities suits against biotechnology companies for allegedly overinflated promises during the pandemic; and a legal battle between New York State and Amazon over workplace protections.
1. Securities Suit Against Inovio Pharmaceuticals Survives Motion to Dismiss
Overview: The U.S. District Court for the Eastern District of Pennsylvania held that Inovio Pharmaceuticals, Inc. and three of its executives must face claims for allegedly misleading investors about a COVID-19 vaccine under development.
Complaint: A class of shareholders alleges that Inovio and three individual executives made false or misleading statements regarding Inovio’s vaccine, in violation of the Securities Exchange Act and SEC Rule 10b-5. The alleged false statements include a claim in February 2020 that Inovio was able to construct its vaccine within three hours of accessing COVID-19’s genetic sequence, and an assertion in March 2020 that Inovio had fully constructed its vaccine within three hours, which was followed by a 70% increase in the company’s stock price. Afterward, Inovio conceded it had merely designed a vaccine, and its stock price declined.
Plaintiffs allege that the difference between “constructing” and “designing” is material. Other alleged misstatements included press releases relating to relationships with manufacturers, a stock prospectus discussing production capability, and an announcement that Inovio’s vaccine was “selected” for Operation Warp Speed when it was not. During this period, two of the defendant executives sold over $4 million of company stock.
Decision: Defendants moved to dismiss all claims, arguing that the complaint did not adequately plead falsity or satisfy Rule 9(b)’s particularity requirement. The court disagreed, holding that plaintiffs had stated claims regarding some, but not all, of the challenged statements.
Our Take:Companies must be especially careful not to overpromise regarding product development or production capacity, especially when there is a high degree of interest in the product, as with COVID-19 vaccines. Extra scrutiny is likely in such situations. We will continue to monitor this case for further developments regarding class certification, summary judgment, and settlement.
2. Refund Class Action Against United Airlines Survives Motion to Dismiss
Overview: An Illinois federal judge partially denied United Airlines’ motion to dismiss a proposed class action brought by passengers seeking refunds for flights canceled during the COVID-19 pandemic. The court also denied United’s motion to stay one named plaintiff’s claim pending arbitration, finding that Department of Transportation regulations prohibited United from relying on Expedia’s arbitration clause.
Background: Plaintiffs claim that United breached its contract of carriage (“COC”) by failing to provide refunds for flights canceled during the pandemic. Under the terms of the COC, flights canceled due to an involuntary force majeure event entitle passengers to receive a “travel credit, but no refund,” whereas cancellations due to schedule changes or irregular operations entitle passengers to receive a refund “upon request.” United asserts that the pandemic was a force majeure event, and the passengers claim the cancellations were based on “pure economics.”
Decision: The court held that United’s interpretation of its force majeure clause was too broad, and agreed with passengers that it would allow the airline to “disqualify affected passengers from receiving refunds” for any “unforeseen” change. The court further noted that “there must be some point where a Force Majeure Event ends, and a Schedule Change or Irregular Operation begins.” Further, even if the cancellations qualified as a force majeure, United would not be excused from providing refunds unless those events “directly and proximately caused the cancellations,” yet the court found it plausible that some of United’s cancellations arose out of a “desire to save on operating expenses.” Accordingly, while the court partially granted United’s motion to dismiss with respect to certain claims, the motion was otherwise denied.
The court also denied United’s motion to stay one named plaintiff’s claim pending arbitration. United conceded that Department of Transportation regulations prohibited it from including an arbitration clause in its own COC, but claimed that it could nevertheless rely on an arbitration clause included in Expedia’s terms of service. The court rejected this argument, stating that it would not allow United “to do indirectly what federal regulations prohibit it from doing directly.”
Our Take: This decision clarifies that force majeure clauses cannot be construed so broadly as to include nearly any unforeseeable event. Defendants in refund cases need more targeted force majeure arguments. Further, the ruling makes it more likely that similar proposed class actions against airlines will survive dismissal on the ground that plaintiffs can satisfy the plausibility standard by alleging that cancellations were made for solely economic reasons. In addition, the decision limits the ability of airlines to rely on the arbitration clauses of booking companies.
3. SEC and Investors Sue Biotechnology Companies Over Statements About Healthcare Products in Development
Overview:The SEC filed a complaint in the U.S. District Court for the Northern District of California against Arrayit Corporation for allegedly failing to file required financial reports and making materially false statements about the status of the approval process for its COVID-19 tests. Relatedly, investors in bluebird bio, Inc. filed a proposed class action against the company for allegedly making materially false statements about its ability to apply to the FDA so that its product could be sold.
Arrayit Complaint:The SEC’s complaint alleges that Arrayit and its CEO misled investors through statements about delinquent financial reports and the status of the company’s development of a COVID-19 test. According to the complaint, Arrayit has not filed a financial report since November 2015. Yet the CEO told investors that Arrayit would soon become current with its required reports despite allegedly knowing this was false. These assurances allegedly drove up Arrayit’s stock price and daily trading volume. The company also allegedly made false and misleading statements saying that its COVID-19 test was pending emergency approval before it had applied for an Emergency Use Authorization. The SEC asserts violations of Sections 10(b) and 13(a) of the Securities Exchange Act, and SEC Rules 10b-5, 13a-1, and 13a-13.
Bluebird Complaint:Investors in bluebird sued the company in the U.S. District Court for the Eastern District of New York. The complaint alleges that bluebird announced plans in May 2020 to apply for FDA approval of a treatment for sickle cell disease (driving up the stock price), but then disclosed in November 2020 that it had delayed its timetable to the second half of 2021 (depressing the stock price). Plaintiffs also allege that bluebird and its executives made false and/or misleading statements by failing to disclose that the data supporting the FDA submission were insufficient, and that bluebird had downplayed the foreseeable impact of disruptions to its timetable resulting from the COVID-19 pandemic. The complaint alleges violations of Section 10(b) and 20(a) of the Securities Exchange Act and SEC Rule 10b-5.
Our Take: Similar to the Inovio case, companies need to be careful about overpromising on their regulatory status and approval timetables during the COVID-19 pandemic, particularly given the obvious and predictable impact statements on this topic will have on stock prices. The situation is all the worse if insiders sell large stockholdings after having driven the price up through statements later subject to factual dispute. Similarly, companies that delay announcing adverse regulatory developments run the risk of litigation for the later stock-price impact.
4. Amazon Contests New York’s Efforts To Regulate Workplace Safety
Overview: Amazon filed suit against New York in federal court, seeking a declaratory judgment that the State is unlawfully attempting to subject it to “state oversight of activities governed by federal law and enforced by federal regulators.” Several days later, the State filed suit against Amazon for its purported failure to protect workers at two of its facilities during the pandemic. Amazon seeks to remove the case to federal district court.
Amazon’s Complaint: Amazon alleges that federal law preempts the State’s efforts to regulate COVID-19 workplace safety responses and claims of retaliation against workers. It also claims that under the doctrine of primary jurisdiction, the State’s claims “fall[] within the primary and exclusive jurisdiction of federal regulators.”
New York’s Complaint: New York asserts several claims for Amazon’s alleged violations of state labor laws, including the requirement of “reasonable and adequate protection to the lives, health, and safety of [its] employees,” as well as alleged violations of whistleblower protection and anti-retaliation laws. The supposed failures run the gamut from cleaning and disinfection of facilities, to identification of and notification about infected workers. In addition to equitable relief, New York seeks monetary damages on behalf of Amazon employees.
Our Take: Amazon asserts that the Attorney General’s state labor law claims fall within the federal jurisdiction of OSHA and the NLRB. Should the federal court reject this argument, then manufacturing and warehouse businesses may face an increase in similar suits filed by state attorneys general throughout the nation.
Jason Levine is a commercial and antitrust litigation partner in the Washington, D.C. office of Alston & Bird LLP. Giles Judd and Stephen Tagert are litigation associates at the firm.
