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Colleges and Universities: Litigation Challenges and Risk Mitigation in the Face of COVID-19

May 21, 2020

In navigating the coronavirus (COVID-19) pandemic, higher education institutions should be aware of a recent wave of refund class actions, antitrust considerations in communication with other institutions, claims for business interruption insurance, and force majeure provisions in existing contracts.

Colleges and universities have been particularly hard-hit by the COVID-19 pandemic, from closing campuses and transitioning to online learning to cancelling events, athletic seasons, and construction projects, among many other effects. While these proactive steps were taken to protect the health and safety of students, faculty, and staff, they have not shielded higher education institutions from litigation, contractual liability, antitrust pitfalls, financial harm, and other risks.

We are actively working with our college and university clients to mitigate wide-ranging risks. This LawFlash focuses on potential liabilities that we have identified, including refund litigation, antitrust pitfalls, business interruption insurance claims, and the applicability of force majeure provisions. Subsequent publications on other challenges that colleges and universities face are forthcoming.

Refund Class Action Litigation

As colleges and universities have been forced to close their campuses due to the global COVID-19 pandemic in order to protect the health of their students, faculty, and staff, they have had to adapt rapidly to the “new normal” by shifting classes to an online format and remotely offering financial and other types of support to their students. As a result, many colleges and universities are facing significant losses in revenue on multiple fronts.

Nevertheless, as of May 15, 2020, more than 75 class action lawsuits seeking refund of tuition, student fees, and room and board have been filed against colleges and universities nationwide, mostly in federal court. And the pace of filings shows no sign of slowing down. Defendants include large research universities and small liberal arts colleges, and both public and private institutions.

While the allegations differ somewhat among the various complaints, they generally allege that students have been deprived of the benefits of in-person classes and on-campus services and activities that are no longer available, but they have not been given an appropriate refund of tuition and other fees. The complaints also allege that the solutions offered by the institutions, namely online classes and a partial refund of certain fees, are inadequate and do not compensate for the loss of the in-person education and college experience for which they paid. The complaints generally include claims for breach of contract, unjust enrichment, and, in some cases, conversion, and seek refunds for some combination of tuition, room and board, meals, and fees for campus services.

The putative classes also differ by complaint, but they generally include (1) all students enrolled during the spring quarter or semester who paid tuition and fees; (2) all persons who paid fees for or on behalf of themselves or others who enrolled in classes; or (3) various discrete classes including tuition classes, on-campus housing classes, meals classes, and fees classes.

Plaintiffs are represented by a variety of law firms nationwide, including more established plaintiffs’ law firms and smaller and local firms that are relatively new to class action litigation. 

Our recent LawFlash provides more detailed information about these cases, potential defenses, and risk mitigation strategies.

Potential Antitrust Pitfalls

As colleges and universities respond to the challenges posed by the COVID-19 pandemic, administrators, faculty, staff, and university counsel should be mindful of avoiding conduct that may violate the antitrust laws. In the context of the pandemic, colleges and universities are often approached—either formally or informally—to work with other institutions to share “best practices” and exchange ideas to meet common challenges. While faculty and administrators often view their counterparts at other institutions as de facto colleagues and see collaboration as the norm, it is important to understand that under the antitrust laws, colleges and universities are viewed as competitors in a number of ways, including for the recruitment and retention of students, faculty, and staff.

Although sharing “best practices” on dealing with the pandemic—e.g., planning for remote learning; protecting the health and safety of students, faculty, and staff; or discussing how to safely reopen a campus—may be acceptable, any agreement between competing colleges and universities on tuition rates, tuition reimbursements, faculty salaries or benefits, housing stipends, or the like will be scrutinized as a potential violation of the antitrust laws. Even sharing nonpublic information on these topics increases the antitrust risk.

In the course of any communications between colleges and universities regarding the response to COVID-19, whether they be informal calls between administrators or formal discussions as part of a larger task force or committee, faculty, administrators, and staff should remain vigilant to ensure acceptable conversations do not “tip” into discussions about off-limit subjects. Nonpublic, competitively sensitive information on topics such as salaries, benefits, hiring plans, costs, admissions, or tuition should not be shared, and institutions should not reach any sort of agreement or understanding with other institutions to adopt a common practice related to these issues.

Examples of potentially problematic behavior would include sharing an institution’s plans for changing tuition rates, reimbursing tuition, reducing salaries, or furloughing or terminating employees as a result of the pandemic. Because this conduct has the potential to affect tuition rates for students or the compensation of faculty and staff, it increases antitrust risk for the institution and may draw the attention of antitrust regulators. For example, the US Department of Justice (DOJ) recently issued COVID-19-specific guidance, in which it warned that the DOJ is “on alert for employers . . . who might engage in collusion or other anticompetitive conduct that harms workers,” including entering into no-poach and no-hire agreements.

Outside antitrust counsel can help mitigate these risks by drafting or reviewing antitrust polices, training administrators or university counsel on how to identify and manage antitrust risk, answering questions about specific practices or actions the institution may want to adopt, and ensuring that appropriate safeguards are in place for any collaborative activity.

Business Interruption Insurance Coverage

As business interruption insurance coverage is a mechanism by which colleges and universities may mitigate certain economic harm, colleges and universities should analyze whether such coverage is available to respond to the loss of revenue or extra expenses brought on by the COVID-19 pandemic. Typically, this type of insurance is found in property insurance policies and, like other insurance coverage, will depend on the exact wording of the policy, any potential exclusions, and applicable state law.

In general, business interruption coverage provides a policyholder with protection against lost profits when a policyholder suffers physical loss or damage to property from an insured peril that interrupts the operation of the business. Many of these policies also extend business interruption coverage to situations not involving physical loss or damage to the insured’s property itself. For example, a typical property policy provides coverage for losses and expenses resulting from civil authority orders. This coverage is usually triggered by a governmental order limiting access to an insured location where the physical loss or damage is not to property at the insured location itself, but rather close to it.

Insurers will likely contest coverage under property insurance policies by arguing that COVID-19 does not result in “physical loss or damage” to property and that so-called virus or pollutant/contaminant exclusions apply to bar coverage. Policyholders take a different view. For example, in the context of the COVID-19 pandemic, the “propensity” of the virus to spread and the tendency, ability, or proclivity of it to attach to property itself (i.e., without any specific “contamination” of the virus on property) constitutes “property loss or damage” that, in turn, has resulted in governmental orders limiting, restricting, or prohibiting access to properties.

Since the precise terms contained in any particular insurance policy can vary, each business interruption claim presents its own unique set of challenges. In light of this, various regulatory and legislative actions are being taken that may weigh in favor of policyholders, providing additional support for coverage. (For more information, please see our LawFlash, COVID-19 Business Interruption Losses: The Potential Keys to Unlocking Insurance Recovery.)

Colleges and universities with substantial COVID-19-related business interruption losses should take immediate, concrete steps now to preserve their ability to pursue proceeds from their insurance carriers and/or financial relief from potential future governmental programs. Insurance policies generally require the policyholder to provide “prompt” notice to the insurer and to follow up with a signed and sworn proof or statement of loss. Therefore, documenting financial losses and expenses and describing claims in a legally accurate manner is key. (For more information, please see our LawFlash, COVID-19 Business Interruption Losses: Preserving and Pursuing Claims.)

And, notices of loss and other communications with insurers should be as legally precise as possible and drafted in a manner that will not inadvertently and incorrectly obstruct the policyholder’s ability to maximize its access to potentially responsive coverage. Coverage counsel, as opposed to solely relying on brokers, should be consulted in connection with all such communications.

Force Majeure and Related Principles

In light of the many suspensions and cancellations that have resulted from COVID-19, colleges and universities should review their commercial and enrollment-related contracts for force majeure provisions. However, even if those provisions are not included, there may be applicable common law principles that excuse colleges and universities from certain contractual obligations.

Many commercial contracts contain a force majeure clause that may allow a party to avoid or defer performing some or all of its obligations under the contract when an unanticipated event beyond the control of either party (such as a global pandemic) makes it impossible for the party to fulfill its contractual obligations. Many force majeure provisions contain limitations on their applicability, including in particular as to payment obligations. As a rule, force majeure provisions are strictly construed, and the force majeure event must objectively affect the invoking party’s ability to perform.

However, as noted above, even without a force majeure clause, performance of a contract may be excused under common law principles. For example, the principle of “impossibility” could apply where it is truly impossible for the party to perform its obligations due to circumstances beyond that party’s control (e.g., where a university cannot provide use of a performance or meeting space required under a rental agreement because an unforeseeable, lawful government order prohibits gatherings of large numbers of people).

Some jurisdictions also excuse performance where it becomes “impracticable” for unforeseeable reasons. Under the doctrine of “frustration of purpose,” performance can be excused where the essential purpose of the contract has been completely defeated by unforeseeable circumstances that arose after formation of the agreement (e.g., an agreement to purchase season football tickets could be excused as a result of the cancellation of the football season due to an unforeseeable public health emergency).

In the event that one party seeks to invoke force majeure for the impact of COVID-19 or a lawful order of a governmental authority issued in response to the pandemic, both parties should take into account, among many other considerations, the following:

  • Does the contract in issue have a force majeure clause and, if so, what are the specific events and circumstances falling within the scope of the clause? Does the clause contain a catch-all provision (e.g., “other events beyond the parties’ control” or “acts of God”)? Some jurisdictions interpret such clauses very broadly and others quite narrowly.
  • The party seeking to invoke force majeure will generally bear the burden of establishing that its performance is effectively impossible, and that the event giving rise to the claim of force majeure was unforeseeable, could not have been avoided, and is the proximate cause of the party’s inability to perform under the contract.
  • Force majeure clauses are generally construed strictly according to their terms. Does the clause contain any limitations or exclusions (e.g., prohibiting claims of force majeure to excuse performance of payment obligations), or require any notice to the counterparty?
  • Does the contract contain a governing law provision? The interpretation and application of force majeure clauses vary from state to state and are highly dependent on the facts and circumstances presented.
  • Note that wrongful invocation of force majeure could constitute anticipatory repudiation of the contract and subject the party claiming it to liability for breach of contract.

We will continue to monitor and help our clients respond to the wide-ranging challenges the higher education community faces as a result of the COVID-19 pandemic.

Coronavirus COVID-19 Task Force

For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. Find resources on how to cope with the post-pandemic reality on our NOW. NORMAL. NEXT. page and our COVID-19 page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts, and download our biweekly COVID-19 Legal Issue Compendium.

Contacts

If you have any questions about the topics covered here or any other issues that colleges and universities are encountering, please feel free to reach out to the authors, your usual Morgan Lewis contacts, or any of the following:

Boston
Noah Kaufman

Chicago
Deborah Davidson
Scott Schutte

Houston
Susan Feigin Harris
Scott McBride

Miami
Robert Brochin

New York
Christopher Dlutowski
Peter Neger
Louis Singer
Martha Stolley

Philadelphia
Lily Becker
Klair Fitzpatrick
Kathleen A. Keyser
Ali Kliment
Kenneth Polite, Jr.
Eric L. Stern

San Francisco
Molly Moriarty Lane
Sujal Shah

Washington, DC
Lewis Csedrik
Gerald Konkel
Gregory L. Needles
Brad Nes
Alexander Reid
Celia Roady
Robert Smyth