You Can’t Sue a Germ: Comparing the 2008 Financial Crash to the COVID-19 Economic Crisis
While some lawyers may be able to indict a ham sandwich, and all of us can sue for fraud, none of us can serve process on a germ. Severe economic crises inevitably translate into upticks in legal industry work, but how much and what kind depend on the unique nature of each economic crisis.
Many legal commentators have pointed to the 2008 economic crisis as a model for today’s COVID-19 crisis. However, there are fundamental differences between these economic crises that will result in material differences in the legal work generated.
The most significant difference is the root cause for each crisis. The cause of the 2008 crisis was a structural distortion of the housing market that financial institutions and other market participants had manufactured, masked, and misrepresented.
When that bubble inevitably burst, those harmed by this irresponsible and fraudulent misconduct had obvious deeppocketed architects and beneficiaries to target for redress.
In contrast, the current economic crisis was caused by a germ. You cannot sue a germ. There are no obvious and practical targets to blame for the direct and immediate harm the pandemic has and will continue to cause.
Thus, the current crisis is more analogous to natural disasters like hurricanes and earthquakes, or other unique disruptions like the 9/11 attacks. In those and the current crisis, litigation is about allocating the “risk of loss” among parties not responsible for the losses than it is seeking compensation from those who caused the losses.
Another critical distinction, hopefully, will be the event’s duration and long-term (or perhaps lack thereof) harm. The 2008 crisis was caused by a real and non-transient distortion in the financial markets for which a long-term market correction was unavoidable.
Although the government ultimately intervened in an unprecedented and controversial manner to keep the financial markets from collapsing, this critical, eleventh hour triage did little to cure the root cause of the economic collapse, which the markets (and lawyers) took years to work through.
In contrast, a “cure” for the pandemic’s root cause will happen through a combination of natural forces and human ingenuity.
And this will almost certainly occur much sooner than it took to work through the 2008 financial crisis.
In addition, government intervention has been quicker, more substantial, and more directly targeted at mitigating the economic harm the pandemic is causing, instead of merely triaging the financial markets.
Moreover, while the stock market initially declined dramatically, it has rebounded substantially, and many other sectors of the economy that were doing well before the crisis have managed to tread water during the crisis, and are poised to support a recovery.
It is reasonable to expect a more rapid economic rebound than in 2008, and it is not clear what percentage of lost economic activity will be permanent.
Of course, specific sectors, businesses, and individuals will suffer concrete and disparate harm making litigation necessary, and others will do so opportunistically, but the financial sector is less exposed to that risk and more able to provide commercial solutions for situations for which litigation was the only solution in 2008.
There are, no doubt, predicable similarities between the crises, but ironically some lead to yet another distinction between the two. Those who lived through the 2008 crisis have applied more quickly and effectively the lessons they learned more slowly and painfully in that previous crisis.
In the real estate industry, for example, landlords and lenders have moved proactively to adjust terms and avoid defaults, evictions and foreclosures, and similar steps have been taken in a myriad of commercial relationships.
These private efforts, like the government’s aggressive financial intervention, have materially mitigated the pandemic’s immediate harm, and thus the likelihood and magnitude of litigation.
Also different is that today’s crisis does not present the same large concentrated claims involving unique and complex financial instruments that the 2008 crisis involved. Instead, the initial economic harm in this crisis has been inflicted on a wider range of businesses and people with a wider distribution of claim sizes.
However, its severe and disparate effect on certain large industries, and its pervasiveness throughout the economy overall, nevertheless may generate litigation and restructuring work on a comparable scale to the 2008 crisis.
The hospitality, airline, education, entertainment, sports, real estate, retail, and health care industries have all suffered major disruptions and face potential material long-term changes to their business models that at this moment are impossible to predict.
Any of these sectors could see substantial litigation and restructuring events depending on how the pandemic progresses and what changes in economic and other behavior it leaves behind.
How the differences and similarities between these crises ultimately unfold, only time will tell. But there are certain reasonable predictions based on what we do know at this time.
BANKS WILL BE SUED, BUT NOT AS MUCH
In any major financial crisis it is inevitable that large financial institutions will bear a brunt of the resulting litigation because of their integral role in the economic system, their interaction with, or impact on, virtually all market participants, and their deep pockets.
But because the root cause of this economic crisis is not the financial markets themselves, the litigation risk and likely load for these institutions is, relatively speaking, materially lower than in 2008.
Nevertheless, the normal risks that are inherent in the business of financial institutions are magnified in this environment. Their own investments and those they manage or facilitate may suffer and sweep them into related litigations.
For some time, many have predicted additional waves of litigation over structured products such as automobile and student loans, and the impact of this crisis on the borrowers of such debt very well may precipitate litigation by investors in those products.
Nevertheless, it is unlikely that these risks will pose the same legal exposure to financial institutions as in 2008, especially since the banks are far better capitalized than in 2008 and the economy has already begun to, and will likely continue to, rebound more quickly than they did after 2008.
That said, there is a unique distinction between this crisis and the 2008 crisis that does pose a new risk to banks.
Unlike 2008, financial institutions played a central role as a conduit for the government’s economic intervention and were remunerated for doing so.
Litigations have already been filed alleging that they did so unfairly and illegally by using their position to benefit themselves and their customers. Given the sheer size of these programs, this is not an insignificant legal risk.
Likewise, regulators have announced they will be scrutinizing how financial institutions implemented these relief programs. But compared to 2008, litigation and regulatory scrutiny do not pose an existential risk.
RESTRUCTURING AND BANKRUPTCY WILL BE CENTRAL
While the legal exposure to financial institutions will be far less in this crisis, many other industries face daunting headwinds that seem impossible to overcome without substantial litigation and restructuring. While many significant bankruptcies have already been filed, there is every reason to believe these are just the tip of the iceberg.
Government intervention, widespread (but temporary) forbearance among commercial relationships, deployment of private capital, and uncertainty as to the pandemic’s scope and duration have all stalled its immediate fallout and delayed many reckonings.
But for many industries, while the music is still playing, it is clear there will not be enough seats when it stops. It seems inevitable that the wide swath of industries like hospitality, travel, retail, entertainment, sports, education, and healthcare the pandemic already has significantly impacted and may continue to impact will generate litigations and restructurings these industries did not experience in the 2008 crisis.
THE INSURANCE INDUSTRY WILL BE BUSY
Since litigation in this crisis is more about allocating risk of loss, insurers will be front and center. Already they have been flooded with business interruption claims and this will continue as long as the pandemic’s effects continue.
Most carriers have denied coverage based on relatively solid pandemic exclusions. Some, however, have less robust language and face more substantial litigation risk.
But the aggregate amounts at stake are enormous and clever lawyers have proffered creative arguments to secure coverage.
For example, insurance recovery lawyers are arguing that even if a business interrupted by the pandemic is excluded from coverage, the claim is nevertheless insured because the virus amounted to property damage that caused a business to cease operation.
Of course, these claims are not limited to one state or region, but will arise across the country in virtually every venue. There will be numerous decisions, no doubt with different results and reasons, and there will be no clarity until the nation’s higher courts weigh in long from now.
Moreover, even where coverage is established, proving damages will be complicated. What damages does a business suffer if its property was “damaged” but no one could have or would have come anyway because of government shutdowns or changed behavior due to risks.
The pandemic will also generate an increase in various other types of insurance disputes, including, for example, environmental and health related claims.
Although the magnitude of these claims should not come close to those for business interruption, they nevertheless will be a material increase in the claim load and risk carriers must resolve that were not present in the prior crisis.
CLASS ACTIONS ACROSS VIRTUALLY EVERY INDUSTRY WILL BE UBIQUITOUS
Class actions will also play a bigger, broader, and more numerous role in this crisis. The sheer breadth of the pandemic’s impact on the economy means that far more smaller stakeholders in the economy have been directly affected by its fallout.
This is a big distinction between this crisis and the 2008 crisis, which generated more of a “trickle down” harm. This more diffuse harm will result in class actions in a wide array of industries for a wide variety of harms.
Already numerous consumer class actions seeking refunds or other relief have been brought on behalf of students, ticket event holders, and customers in the hospitality, travel, and fitness industries.
There have also been numerous class actions alleging price gouging among grocery and retail chains and internet platforms.
Still other class actions have been brought against suppliers of products with purported medicinal qualities related to COVID-19 and employers for dangerous work environments due to COVID-19 exposure.
And, of course, economic downturns typically increase securities class actions. In that respect this crisis will be no different, but it will be different than the last crisis in certain material respects. Most important, because this is not a financial market generated crisis, class actions will not be disproportionately concentrated in that sector.
Instead, the bump in securities class actions will be spread across the entire economy. Second, this crisis comes in the midst of previously underway growth in securities class action filings over the last several years, especially with respect to “event-driven” actions. And a global economic shutdown caused by a pandemic is the mother of all such events.
This disruption will certainly expose some public companies’ pre-existing vulnerabilities such as unreliable supply chains, soft demand, liquidity constraints, and tenuous investment portfolios, and class action attorneys will allege these risks were not properly disclosed. Similarly, for some companies the difficult economic times will unmask previously concealed financial conditions. And, of course, now that public companies are aware of the pandemic, the failure to adequately disclose the risks going forward implicates an even more significant risk of securities litigation as class action attorneys will attempt to connect economic setbacks to COVID-19 risks that were not adequately disclosed.
LITIGATION FINANCE WILL PLAY A MUCH BIGGER ROLE
When the 2008 crisis emerged, litigation finance was still in its infancy. In the past twelve years, that has changed dramatically.
The availability of litigation finance changes the dynamic in various ways. First, it will allow companies that are short on cash to monetize claims they might not have otherwise been able to monetize.
Second, it will assist companies that might otherwise not had the resources to litigate a pandemic-related dispute effectively to do so.
Third, it will allow companies with pending or potential cases to unload risk they are no longer comfortable or capable of carrying.
Fourth, it will make it easier for law firms that would not otherwise be comfortable taking contingency cases to pursue those cases. These factors are particularly important given that the economic fallout is distributed widely and includes many potential plaintiffs with limited capital to pursue or defend claims.
THE JUDICIAL SYSTEM IS A WILD CARD
From a practitioner’s perspective, perhaps the biggest difference between litigation in 2008 and today is the impact the crisis itself has had on the courts. In 2008, the courts were fully functional when the spike of litigation arrived and they continued to operate at full steam throughout that pipeline of litigation.
In this crisis, the courts are closed or suffering under the same impediments that every business is struggling under. Many of these courts were backlogged before the crisis, are now much more backlogged, are unlikely to be fully open for some time, and may never return to the same level of functionality.
How will already busy courts handle basic case management processes in the post-pandemic world? When will they begin trying cases? How will jury trials resume, especially in courthouses where jury pools, courtrooms, and deliberation rooms make it impossible to adequately social distance? Will people be willing to serve, especially older retired citizens who often have time do so? What will happen when one juror, lawyer, judge or employee in a trial gets sick?
It is going to take longer to litigate cases for the foreseeable future, and those cases will have much more uncertainty. Some courts may scrutinize plaintiffs’ pleadings more closely to determine if they merit taking up the court’s limited bandwidth. Others may elect not to consider dispositive motions as seriously for the same reason.
Plaintiffs will face a much longer time to trial, diminishing their leverage. Alternative dispute resolution will be pushed, and there will be hard choices to be made. A plaintiff who wants to try a case to a jury may need to consider arbitrating the case simply to get to a trial in a timely manner. A defendant who would prefer delay may elect an earlier arbitration to avoid a jury or limit discovery.
Of course, courts could react by revolutionizing the ways they administer cases in a way that might make litigation far more efficient going forward. Instituting widespread video conferences would streamline litigation, cut lawyer time and expenses, and go a long way to making up ground lost to the pandemic.
Courts could be given greater authority to appoint quasijudicial hearing officers, perhaps funded by the parties to expedite proceedings as a middle ground to arbitration. But ultimately, the most effective tool to resolve a case one way, or another, is a trial date, and it is difficult to see how courts will be able to do that quickly and at previous scale in the COVID-19 environment.
Read the full Thomson Reuters Westlaw Journal article here.