Updated Supplemental Budget

Following the news that Minnesota’s projected budget surplus grew substantially in recent months, Governor Tim Walz released an updated supplemental budget proposal on Thursday. Notably, his proposal to issue one-time “Walz checks” grew by more than $1.3 billion, with checks in the amount of $500 per adult. Republicans continue to oppose this proposal, instead advocating for ongoing tax relief.

Unemployment Insurance NOT Replenished (Yet)

March 15 was the much-publicized deadline for legislative leaders and Governor Walz to find agreement on replenishment of the unemployment insurance trust fund. March 15 has come and gone, and there is still no agreement. That deadline was announced because it was the date that employers were set to be notified of the amount of their first quarter unemployment insurance bill. However, those bills aren’t required to be paid until April 30, which is the date that Minnesota House leadership is now stating is the real deadline. We’ll have to wait and see if an agreement can be reached by then.

More Deadlines Approaching

One week from today, on March 25, legislative committees have their first policy bill deadline. In order to meet the deadline, legislative proposals are to have passed out of all policy committees of jurisdiction in either the House or the Senate by the end of next week. Second and third deadlines follow in close succession, on April 1 and April 8.

Becoming More Open

Monday, March 21, will be a day of change for legislators, staff and lobbyists in Minnesota: the Minnesota House of Representatives will be open to the public after being closed for more than two years. The Senate DFL Caucus announced they would unlock the doors to their office suites on the same day and, in anticipation of more people being in the Capitol complex, the Capitol’s cafeteria, the Rathskellar, is opening as well.

CD 1 Special Election Candidates Set

Twenty candidates have filed for office to complete the remaining term of Congressman Jim Hagedorn, following his death last month. Two of those candidates will head straight to the general election ballot, while the other 18 will face off in a primary election on May 24. Among the ten Republican candidates who filed to run, there are two current members of the Minnesota House (Jeremy Munson and Nels Pierson), a former member (Brad Finstad), and Congressman Hagedorn’s widow (Jennifer Carnahan). DFL candidates include a former CEO of Hormel (Jeff Ettinger) and a former associate counsel for then-President George W. Bush (Richard Painter).

Welcome to the 2022 Minnesota Legislative Session!

Minnesota legislators returned to St. Paul, either in-person or virtually, on Monday, January 31. House committees immediately dove into work, with most committees meeting for informational updates throughout the week, while the Senate only held one or two committee hearings each day. See below for brief updates on the Top 5 most important things to know as session starts.

Musical (Leadership) Chairs

Senate Majority Leader Paul Gazelka stepped down from his top post during the interim due to the fact that he is challenging Governor Tim Walz in November’s election. This began a chain of leadership changes, as then-Senate President Jeremy Miller was selected by his caucus as the new leader, and Sen. David Osmek was selected to fill the vacant Senate President position. Sen. Michelle Benson, chair of the important Health and Human Services Policy and Finance committee, is also running for governor, and announced that she was relinquishing her chair position in order to devote more time to her campaign. Sen. Paul Utke was selected to be the new chair of that committee.

Not to be left out, Senate Minority Leader Susan Kent announced during the interim that she would not be seeking re-election, and that she was stepping down as her caucus’s leader. Sen. Melisa Lopez Franzen was elected by her caucus to be the new Minority Leader.

How to Spend More Than $7 billion

With a projected budget surplus of more than $7 billion, this legislative session is being viewed by many as a second budget year. The state passed a two-year budget in 2021, and with a surplus, the Legislature has no requirement to make any budget changes. In spite of this, House and Senate caucuses have discussed numerous ways of spending at least some of the surplus, and Governor Walz released a supplemental budget proposal last week.

Unemployment Insurance

Most agree that one way to use some of the surplus is to repay the unemployment insurance debt. Since March 2020, when COVID hit in force and caused businesses to lay off employees, the state unemployment insurance fund was hit hard. The federal government allowed Minnesota to borrow to replenish the fund. However, the federal government is seeking repayment of those funds. Federal American Rescue Program (“ARP”) funds may be used to repay the federal government, and virtually every other state has used ARP funds for that purpose. If the funds aren’t replaced, automatic tax increases will blink on for businesses at historically high rates. Gov. Walz has proposed to fully replenish the fund. Legislative leaders have universally pledged to pay the dollars back quickly and replenish the fund.

Frontline Worker Pay

In the 2021 session, $250 million was appropriated to be paid to workers who had to go to in-person work despite the risks of COVID. Over the summer, a working group was tasked with making the final determinations as to how the money was allocated—which workers would enjoy this benefit and how much each would receive. An agreement was never reached, as Democrats felt that additional funding was needed to cover all the deserving workers, while Republicans felt that a narrow group of workers, consisting primarily of health care workers and first responders, were all that should receive the funds. They argued that, in order for the bonus to be meaningful, the total number of workers needed to be limited. Expect continued negotiations on this issue. Gov. Walz and House Democrats are proposing to raise the amount to be appropriated to closer to $1 billion to cover more workers. To date, Republicans have resisted calls to spend more.

2022 Calendar

Here are key dates to know for the upcoming session:

• February 15: Last day for Legislature and Governor to agree to redistricting maps, otherwise court panel decides
• February 28: February state budget forecast expected to be released (final forecast that Legislature will use for this session)
• March 25: First deadline (bills through policy committees in one body)
• April 1: Second deadline (bills that met first deadline to pass committees in other body)
• April 8: Third deadline (all major appropriation and finance bills to pass out of committees)
• April 9-18: Legislative break
• April 19: Legislature resumes
• May 23: Last possible day of session

Last week the Occupational Safety and Health Administration (OSHA) withdrew its Emergency Temporary Standard (ETS) that would have required businesses with 100 or more employees to put a policy in place that mandated either vaccinations or the option for employees to be vaccinated or test weekly and mask. Previously, on January 13, 2022, the United States Supreme Court halted OSHA’s ability to enforce the ETS while it was pending further review on the merits from the U.S. Court of Appeals for the Sixth Circuit. OSHA chose to withdraw the ETS, effective Wednesday, January 26, instead of waiting for a possibly unfavorable decision from the U.S. Court of Appeals for the Sixth Circuit.

Now What?

OSHA is still exploring moving forward with a permanent rule and will continue to treat the withdrawn ETS as a proposed rule, subject to the usual rulemaking process, which can take several months. Employers are encouraged to submit comments on how these restrictions would impact their organizations. In the meantime, OSHA has vowed to enforce the general duty clause in the Occupational Safety and Health Act, which requires employers to provide a place of employment “free from recognized hazards that are causing or are likely to cause death or serious physical harm.”

Employers are still free to implement their own COVID-19 policies and incentives, and/or mandates, provided they comply with applicable state laws on the topic and provide for accommodations when required by law. A common myth is that HIPAA prevents employers from asking about the vaccination status of their employees. Employers may inquire as to whether an employee has been vaccinated if the question is limited to allow for a yes-or-no answer.

Relevant state and local government rules are not impacted by OSHA’s withdrawal of the ETS. Employers must continue to comply with any state and local rules that apply to their businesses. In addition, it is possible that some (likely narrower) version of the ETS could become a permanent rule in the future. While it is impossible to predict what a future permanent rule could look like, employers who have collected vaccination information from their employees should retain this information in case it becomes necessary for compliance.

If you have any questions, please contact Laura Pfeiffer at 612.604.6685, [email protected] or Mark Pihart at 612.604.6623, [email protected].

What Happened?

On January 13, 2022, the United States Supreme Court (the “Court”) granted the stay of the Occupational Safety and Health Administration’s (OSHA) Emergency Temporary Standard (ETS) requiring businesses with 100 or more employees to put a policy in place that mandated either vaccinations or the option for employees to vaccinate or test weekly and mask. The separate mandate for health care workers, however, was upheld. In a 6-3 decision, the Court held that it is probable that the ETS’s challengers will win – OSHA likely lacks the authority given to it under the Occupational Safety and Health Act to promulgate the ETS. The Court stated that COVID-19, while a risk in many workplaces, is not necessarily an occupational hazard in most workplaces. The Court held that the rule is likely more of a general public health measure, which Congress did not give OSHA the power to put in place, as opposed to an occupational safety or health standard.

What Does This Mean?

This ruling presses pause on enforcement of the ETS while the rule is pending further review from the U.S. Court of Appeals for the Sixth Circuit. The Court did not block the ETS for good, and the rule could work its way to the Court again for a final review after the Sixth Circuit further reviews the legality of the ETS. Enforcement of the ETS is currently put on hold, but the rule in its current form, or, more likely, a different, less restrictive form, could still ultimately be upheld. In the meantime, OSHA could choose to issue a narrower rule that would be more likely to be upheld.

For now, employers with 100+ employees no longer need to implement policies requiring either vaccination and safety measures or the choice to vaccinate or test weekly and mask. Employers are free to put in place their own policies, so long as such policies comply with the applicable state laws on the topic. States and local governments are also free to implement COVID-19 protocols, including vaccination.

What about State OSHA Rules?

Many states have their own workplace safety agencies that directly regulate employers in their respective states. Such states are known as “state plan” states. The Court’s ruling does not necessarily impact rules put forth by the state plan states, but those states may choose to mirror the federal government and pause their rules. For example, Minnesota adopted the federal OSHA standard on January 3, 2022. However, MNOSHA announced last week that it will suspend enforcement of the MNOSHA rule in light of the Court’s ruling, but encourages employers to continue implementing the standard due to the surge of the Omicron variant.

What about the Federal Contractor Mandate?

The Court did not address the federal contractor mandate, Executive Order 14042, in its January 13, 2022 decision. However, that mandate is currently halted under a preliminary injunction covering all 50 states, DC, and US territories. The injunction prevents the federal government from enforcing the vaccine mandate, and the federal government has advised that it will not enforce the requirements of the order as a whole. However, workers still need to follow any workplace safety requirements and protocols that apply in federal offices and facilities when working on-site. The preliminary injunction does not mean that a final decision has been made about the order – the litigation is still playing out, and the Biden Administration is likely to appeal any decision ultimately blocking the order.

If you have any questions, please contact Laura Pfeiffer at 612.604.6685, [email protected] or Mark Pihart at 612.604.6623, [email protected].

The Occupational Safety and Health Administration (OSHA) released a widely anticipated Emergency Temporary Standard (ETS) requiring employers with at least 100 employees to ensure its employees are either vaccinated against COVID-19 or be tested weekly. Employees must be fully vaccinated or commence weekly testing by January 4, 2022. Covered employers must begin complying with the other requirements, like masking for unvaccinated employees and implementing a policy, by December 5, 2021. The ETS also preempts any inconsistent state or local laws, including bans on employers’ authority to require masking, vaccination, or testing. The 5^th Circuit Court of Appeals has temporarily stayed the ETS, however the Biden Administration believes the ETS will withstand this and any other legal challenges. Winthrop & Weinstine, P.A. will continue to monitor the legal challenges to the ETS and provide updates, as available.

Does My Organization Have 100 Employees?

The ETS will apply to an estimated 84 million workers, roughly two-thirds of the nation’s private sector workforce. The ETS covers all employers in workplaces subject to OSHA’s authority, including, among others, manufacturing, retail, construction, and agriculture. A question on the minds of many employers nationwide is – who is included in the 100-employee threshold? This question is key to determining which employers have to comply with the new ETS. Employers must comply with the rule if they have 100 or more employees at any time while the ETS is in effect. The following guidance from OSHA explains how employers must count employees in determining the 100-employee threshold:

1. Employers must aggregate the number of employees across all of their US locations.
   • In a traditional franchisor-franchisee relationship, in which each franchise location is independently owned and operated, the franchisor only counts corporate employees, and each franchisee would count employees of its respective franchise.
   • If two or more related entities handle safety matters as one company, the entities may be regarded as a single integrated employer for purposes of counting employees of both related entities.
2. Independent contractors are not counted.
3. Part-time employees are counted.
4. Seasonal and temporary workers are counted.
5. Employees under age 18 are counted.
6. Staffing agencies that place employees at host employer locations count those employees, but the host employer does not.
7. Federal workers and contractors and healthcare workers are subject to separate rules.

The ETS does not apply to employees who never work in an office and never meet with co-workers or customers, or employees who work exclusively outdoors, but they still must be included to determine if the 100 employee threshold is met.

What to Do if My Organization Meets the 100-Employee Threshold?

Under the ETS, if the legal challenges are resolved, employers must implement a mandatory vaccination policy by December 5, 2021. The policy must include a process for medical and religious accommodations and provide for paid time off for employees who get vaccinated during work hours. Employees must receive up to four hours of paid time to receive their vaccine, excluding boosters. They must also receive reasonable time off, to be determined by the employer, for side effects related to the vaccination. Any additional time relating to the vaccination does not need to be paid, but if it is reasonable, an employee cannot be terminated for taking it. An employer may require an employee to use paid sick leave or paid time off when recovering from side effects from a primary vaccination dose, but employees cannot be forced to use vacation (if vacation is separate from sick leave). According to the ETS, employers are not required to pay for any of the “costs associated with testing” or incidentals incurred during the vaccination process unless otherwise required by applicable state laws, regulations or a collective bargaining agreement (CBA). The Department of Labor’s Wage and Hour Division intends to clarify in its guidance whether an employer is required to pay for an employee’s time getting tested.

Employees need to provide proof of vaccination to their employer, which can be accomplished by providing copies of records from their healthcare provider or pharmacy, vaccination record cards, medical records documenting the vaccination, immunization records from a public health, state, or tribal immunization informational system, or any other official documents. Employers need to maintain these records as long as the ETS is in place, and this information should be maintained separately from an employee’s personnel file.

If an employee is not fully vaccinated, the employee must provide proof of a negative test at least once every seven days. Employers are not required to offer testing as an option to its employees.  If employers choose to allow testing as an option, eligible tests include those that are cleared, approved or authorized (including under an EUA), to detect current infection with SARS-CoV-2 (e.g., a viral test) as long as the test is administered in accordance with the authorized instructions; antibody tests are not acceptable. Over-the-counter antigen tests may be used, but may not be both self-administered and self-read unless observed by the employer or an authorized telehealth proctor. Any employees who test positive must be removed from the workplace immediately, and may return only when they receive a negative test result on a nucleic acid amplification test, meet criteria put forth by the CDC Isolation Guidance, or have a recommendation from a licensed healthcare provider. Employers are not required under the ETS to provide paid leave during this time, but state and local laws may require paid leave. Unvaccinated employees must wear a mask or other face covering while indoors or occupying the same vehicle as another person for work purposes. If the employee is unable to wear a mask for medical or religious reasons, they may request a reasonable accommodation.

Employers must report COVID-19 related fatalities within eight hours of receiving the information, and must report hospitalizations within twenty-four hours.

What if an Employee Asks for a Religious or Medical Exemption?

Employees with medical or religious objections to the vaccine or masking requirements may submit a request for a reasonable accommodation. Once an employer is on notice that an employee has a medical condition or sincerely-held religious belief which they claim conflicts with the job requirements, the employer must engage in an interactive process to determine if, without undue hardship to the employer, a reasonable accommodation may be granted. If the employer has an objective reason to doubt the sincerity of the religious belief, the employer can ask for additional information and perform a fact inquiry. Employers may not reject requests based on the fact that a belief is unfamiliar. Winthrop & Weinstine is ready to assist employers needing assistance on how to evaluate medical or religious accommodation requests.

How will this be Enforced?

Covered employers could face fines of up to approximately $14,000 for serious violations of the ETS, and roughly ten times that amount for willful or repeated violations. Compliance with this rule may be added to inspection lists when OSHA inspectors are on-site at an employer’s workplace.

Begin Preparing Now

The December 5, 2021 and January 4, 2022 deadlines (which will remain if the legal challenges are resolved) will be here before you know it. Your business should begin preparing now so that you do not face compliance issues or have to scramble on the eve of either deadline.

If the legal challenges are resolved, effective December 5, 2021, employers must:

1. Require masking indoors for employees who have not been fully vaccinated;
2. Provide up to four hours of paid time off for employees to receive the vaccine; and
3. Develop, implement, and enforce a policy requiring full vaccination or mandatory weekly testing and face coverings.

If the legal challenges are resolved, effective January 4, 2022, employers must:

1. Obtain proof of the vaccination status of all employees to be kept while the ETS is in place, and maintain a roster of each employee’s status; and
2. Require weekly testing of all unvaccinated employees if the employer intends to allow for testing or for those employees who requested and received an accommodation to vaccination.

Employers must also make available to employees in a language and literacy level the employees will understand:

1. Information about the requirements of the ETS;
2. Workplace policies and procedures established pursuant to the ETS;
3. The CDC’s “Key Things to Know About COVID-19 Vaccines”;
4. Information about protections against discrimination and retaliation; and
5. Information about criminal penalties for knowingly providing false documentation or statements.

If you have any questions regarding the new rules, please contact Laura Pfeiffer at 612.604.6685, [email protected] or Mark Pihart at 612.604.6623, [email protected].

Companies that are subject to federal securities laws and regulations, and those involved in markets for futures, options, and swaps should take note: On October 21, 2021, the Commodity Futures Trading Commission (CFTC) announced that it awarded nearly $200 million to a whistleblower. The whistleblower, who sources identified as a former Deutsche Bank employee, had provided information in 2012 that contributed to an open investigation of Deutsche Bank, and ultimately led to a successful enforcement action. The information related to then-ongoing manipulation of the London Interbank Offer Rate (LIBOR), a benchmark interest rate at which major banks lend to one another.

American and British financial authorities fined Deutsche Bank $2.5 billion in 2015 in response to the rate-rigging scandal, but the CFTC initially denied the whistleblower’s application for an award. Section 748 of the Dodd-Frank Act allows successful whistleblowers to receive 10-30% of monetary sanctions collected from violators when they provide information that significantly contributes to the success of an enforcement action, and can show that there is a meaningful nexus between that information and the CFTC’s successful investigation. An internal review by the CFTC reversed its initial denial, and granted the award to the whistleblower. The record-breaking award is the largest ever received under the Dodd-Frank Act, which was enacted in 2010 in the wake of the Great Recession to restructure financial regulations in the United States.

Proponents of whistleblowing schemes point to the size of the award as evidence that such programs are effective and provide substantial incentives to bring potential whistleblowers to contact enforcement officials, while opponents have criticized what they view as excessive windfalls to whistleblowers. If your company is subject to federal securities law, now is a good time to review your company’s compliance protocols to make sure you’re not potentially in violation of any such laws or regulations, and to consider how to limit exposure to investigations by minimizing the risk of becoming the subject of a whistleblowing complaint.

A redacted version of the CFTC’s October 21, 2021 Order can be found here.

The struggles of commercial tenants due to the COVID-19 pandemic are as widespread as they will be long-lasting.  From closures to strict regulations that have greatly disrupted normal operations, businesses are facing continuing pressures to keep their operations running smoothly, if at all.  A recent study by the Federal Reserve estimated that COVID-19 may have shuttered as many as 200,000 businesses between March 2020 and February 2021.[1]  Those that have survived are not out of the woods yet, with normal obligations like rent causing mounting troubles as revenues fail to increase.  Thanks to a recent decision by the Minnesota Court of Appeals, business evictions may soon be on the rise.

While the federal government and many states enacted various forms of eviction moratoriums and allocated COVID-19 recovery funds towards rent relief for residential tenants, the same assistance has not necessarily been provided to their commercial counterparts.  And on September 27, the Minnesota Court of Appeals issued an opinion in SVAP III Riverdale Commons LLC v. Coon Rapids Gym, LLC, A20-1593, No. 02-CV-20-3652 (Minn. Ct. App. Sep. 27, 2021) that clarifies which defenses commercial tenants can and can’t use when faced with eviction as a result of ongoing COVID-19 related business interruptions.  The Court of Appeals held that a business who cannot pay rent may not rely on the defenses of impossibility and frustration of purpose to avoid a commercial eviction action based on non-payment of rent during the COVID-19 pandemic.  The result is that while commercial tenants may potentially invoke COVID-19 related disruptions to avoid paying past-due rent, commercial landlords will not be prevented from evicting non-paying tenants.

A party may normally use an impossibility defense when an intervening factor causes unreasonable difficulty – i.e. makes it impossible – for a party to perform its obligations under a contract.  Similarly, frustration of purpose occurs when an intervening factor prevents the existence of a fact that the parties relied on when entering into the contract in the first place.  Both these defenses were at issue in the Coon Rapids Gym case.

In that case, Coon Rapids Gym operated a fitness gym location within the Riverdale Commons shopping mall in Coon Rapids, Minnesota.  Shortly after the COVID-19 pandemic began, however, Minnesota Governor Tim Walz issued a peacetime emergency order which forced all gyms throughout the State of Minnesota to shut down their operations and close their doors.  The Coon Rapids Gym location was closed to customers for two months before being allowed to re-open with mandatory limited capacity.  With zero revenue for two months and hamstrung operations since, Coon Rapids Gym began to fall behind on their rent payments under their lease.  After four months of non-payment, Riverdale Commons informed Coon Rapids Gym that they were in default and that the lease would be terminated if the overdue rent wasn’t tendered within 30 days.  Coon Rapids Gym failed to tender the overdue rent, and Riverdale Commons brought an eviction action to regain control of the premises.

In the trial court, Coon Rapids Gym argued the defenses of impossibility and frustration of purpose based on the theory that the COVID-19 pandemic and the emergency orders by Governor Walz, which closed gyms and prevented the business from having customers, prevented the purpose of the lease at Riverdale Commons and precluded Coon Rapids Gym from being able to pay rent.  The trial court excluded the Gym’s defenses and the Gym appealed.

The Court of Appeals agreed with the trial court in rejecting Coon Rapids Gym’s impossibility and frustration of purpose defenses.  The Court of Appeals stressed that Minnesota eviction statutes only provide one affirmative defense to an eviction action based on non-payment of rent: that the eviction was retaliatory in response to the tenant enforcing their rights under the lease.  The Court of Appeals further reasons that if parties in eviction actions were allowed to use impossibility and frustration of purpose as affirmative defenses, judicial economy would be threatened and eviction proceedings would greatly expand in scope and time.[2]  However, in making its ruling the court did posit that the defenses of impossibility and frustration of purpose, and breach of contract may be more well-suited to the types of proceedings that follow evictions, such as an action to recover unpaid rent.  Thus, while the defenses of impossibility and frustration of purpose may not be able to prevent eviction, they may help business-owners avoid further negative consequences following the eviction itself.

The Coon Rapids Gym decision changes the litigation landscape for commercial landlords and tenants.  Any commercial tenant who has been falling behind on rental payments and was hoping for solace based on hardships from COVID-19 business disruptions will not find refuge in the defenses of impossibility and frustration of purpose, but commercial landlords will enjoy some flexibility in choosing whether to maintain non-paying businesses as tenants.  As a result, it is important for commercial landlords and commercial tenants alike to take proactive actions, such as renegotiating payment provisions or talking to a lawyer about the potential for eviction when tenants are unable to make their rental payments.

[1] https://www.businessinsider.com/small-business-closures-pandemic-less-expected-past-year-fed-survey-2021-4

Report: https://www.federalreserve.gov/econres/feds/files/2020089r1pap.pdf

[2] Coon Rapids Gym also asserted a defense based on Breach of Contract, which was similarly rejected for the same reason.

THIS UPDATE WAS PREPARED WITH THE ASSISTANCE OF CO-AUTHOR CHRIS CERNY, SUMMER ASSOCIATE

This month, the Eighth Circuit Court of Appeals issued what appears to be the first appellate opinion applying the “manifested defect” rule to the Class Action Fairness Act’s (“CAFA”) $5 million amount-in-controversy requirement. The manifested defect rule generally states that consumers who do not experience a defective condition cannot bring product defect claims. While the rule is not new, its application to class actions in federal court is. The Eighth Circuit’s new decision thus directly implicates class action product defect cases in federal court. In addition, it could affect how federal courts review class action complaints based on state law generally, increasing the importance of statistical evidence.

The Background Facts

On September 15, 2021, the Eighth Circuit issued its decision in Penrod v. K&N Engineering, Inc.,[1] affirming a federal district court’s dismissal of a proposed class action alleging the defendant was responsible for defective oil filters. Three named plaintiffs asserted state law claims to recover damages caused by leaky oil filters. In each of the named plaintiffs’ situations, the oil filters were installed in motorcycles and allegedly failed, causing oil to leak onto the back wheels. But only one of the three plaintiffs needed to replace his engine, at a cost of approximately $10,000. The other two plaintiffs alleged that they experienced some leaking and merely replaced the filters at cost.

The plaintiffs sought to bring a class action on behalf of 2.5 million consumers who also purchased the oil filters. But the plaintiffs calculated that only 0.03% of oil filters had failed. The Eighth Circuit affirmed the district court’s determination that the consumers who did not experience a failure had no cognizable damages and could not be part of the class. Thus, there were only approximately 750 class members throughout the United States.

Notable Holdings

While affirmance of the district court’s damages holding may not be particularly notable—indeed, the Eighth Circuit has made similar determinations in recent cases—the effect on the case was dispositive because the plaintiffs had sued in federal court, arguing that court had subject-matter jurisdiction under CAFA.

Enacted in 2005, CAFA establishes jurisdiction in federal court over class action state law claims if, among other things, the potential class damages in the aggregate exceed $5 million. Most disputes regarding the threshold damages requirement involve attempts by plaintiffs to demonstrate their claims do not exceed $5 million, so as to keep the class action in a state court that may be more hospitable or favorable to plaintiffs who are residents of the same state. But in Penrod, the plaintiffs sought to aggregate their various claims under multiple state laws that otherwise might be too small to justify individual litigation in separate state courts throughout the United States. Their thinking was likely that one federal venue for all of the state law claims could lead to a higher settlement or damages award in a more efficient manner.

The Eighth Circuit rejected the plaintiffs’ attempts to bring one large class action in federal court. It reasoned that, because only one of the three named plaintiffs faced substantial loss, it was implausible that the 750 class members suffered a loss of $6,667 or more, to meet the $5 million requirement. The average of the three named plaintiffs’ losses were about $3,333, for example. Therefore, the 750 member class could not make out a potential claim for damages totaling $5 million, and the Eighth Circuit affirmed dismissal of the class action complaint.

Key Insights

This apparent first-of-its-kind decision applying the manifested defect rule to CAFA not only directly affects prospective future product liability class actions, but also may heighten the amount of due diligence required by named plaintiffs in other class action cases to plausibly allege damages aggregated across a class of affected consumers totaling $5 million or more. Indeed, the Eighth Circuit appeared to endorse the use of statistical data to allege damages—a growing trend in other contexts throughout the county.

One key insight from Penrod is that Plaintiffs may benefit from conducting reliable sampling or surveys to extrapolate damages. Plaintiffs can then cite that information in their complaints to survive early motions to dismiss, unlike the Penrod plaintiffs. Similarly, Defendants should consider using reliable sampling or surveys to undermine plaintiffs’ allegations of $5 million or more in damages, perhaps as part of an early summary judgment motion. This may be an effective strategy to stave off large class actions in federal court early.

This article was reprinted in Westlaw Today on October 8, 2021. (login required)

To download a copy of the PDF click here.

[1] No. 20-1355, 2021 WL 4177761 (8th Cir. Sept. 15, 2021).

The COVID-19 pandemic hit commercial landlords and tenants hard. Many Minnesota businesses experienced a steep decline in revenue and, as a result, have been unable to either make their monthly rent payments or collect on the same.

Today, businesses with leased, store-front locations are still struggling to make ends meet. One of the first consequences of reduced revenues is an inability to fulfill commercial lease obligations. This in turn has a significant effect on landlords who have expenses to meet and mortgages to pay. With a loss of rental income, landlords may face foreclosure and loss of their property. As a result, commercial tenants and landlords are faced with a difficult decision. For tenants, should they (a) continue making partial rent payments, or (b) cut their losses, abandon the leased premises, and attempt to terminate their commercial lease agreement? For landlords, should they (a) accept partial payments and risk continued reductions in revenue, or (b) strictly enforce their contractual rights and remedies, including “accelerating” the lease and demanding all remaining rent payments, but ultimately obtain only a judgment, with little chance of recovery, at least in the short term? This is where acceleration clauses come into play.

An acceleration clause gives a landlord the right, after a default by the tenant (i.e., nonpayment of rent, abandonment of the premises, or any other event of default set forth in the agreement), to demand the entire balance of the unpaid rent owed under the lease for the entire remainder of the lease term. An acceleration clause allows the landlord to collect all remaining unpaid rent in one lump sum payment before the rent would otherwise be due. Under Minnesota law, if there is no acceleration clause, the landlord is typically entitled only to collect rent from the tenant as it becomes due under the lease.

Commercial tenants and landlords alike often wonder whether acceleration clauses are enforceable. In reality, the enforceability of an acceleration clause will have a direct and substantial impact on the financial health of both landlords and tenants. The short answer is that Minnesota courts will generally enforce acceleration clauses in commercial lease agreements, with some important caveats.

The Minnesota Court of Appeals holds that “Minnesota courts give effect to a lease provision that gives a lessor the right to recover rent through the end of the lease term, after a lessee has defaulted.” 1975 Robert St. Partners v. SR Shingle Creek LLLP, No. A07-0844, 2008 WL 2020480, at *5 (Minn. Ct. App. May 13, 2008) (citations omitted). Under Minnesota law commercial tenants could face substantial liability if they elect to stop making full payments and/or abandon the leased premises.

Many tenants incorrectly assume that the landlord is required to mitigate its damages by, for example, finding a replacement tenant to take over the premises. Much to the contrary, Minnesota law is clear that where the tenant abandons the premises but the lease agreement is not terminated, the landlord has no duty to mitigate its damages after abandonment. Control Data Corp. v. Metro Office Parks Co., 296 Minn. 302, 306 (1973). However, if the lease agreement is terminated, then the landlord generally has a duty to “use reasonable efforts” to mitigate its damages after the lease is breached. Lariat Companies, Inc. v. Baja Sol Cantina EP, LLC, No. A12-2202, 2013 WL 4404589, at *4 (Minn. Ct. App. Aug. 19, 2013) (citing Gruman v. Invs. Diversified Servs. Inc., 78 N.W.2d 377, 381 (1956)). In this scenario, the party who breaches the lease agreement (i.e., the non-paying tenant) has the burden of proving that the landlord could have mitigated its damages. Lanesboro Produce & Hatchery Co. v. Forthun, 16 N.W.2d 326, 328 (1944).

It is important to note that the above-described common law principles are general rules, and may be altered by the express terms of the applicable lease agreement. For example, the contracting parties may include provisions which provide that accelerated rents are not recoverable until the lease agreement is terminated, or that the landlord does have a duty to mitigate its damages even where the lease is not terminated. Minnesota courts usually enforce lease agreements as written, even if they contravene other common law principles. See RAM Mut. Ins. Co. v. Rohde, 820 N.W.2d 1, 14 (Minn. 2012) (citation omitted).

Even though courts are generally inclined to enforce acceleration clauses, there are potential defenses to enforcement. One potential defense is to show that the acceleration clause is really an unenforceable penalty clause in disguise, because it creates an inaccurate and unjust windfall in favor of the landlord. Minnesota courts appear to analyze acceleration clauses in a similar manner as liquidated damages provisions and penalty clauses.[1] See, e.g., In re Grodnik’s, Inc., 128 F. Supp. 941, 942 (D. Minn. 1955). A penalty clause is usually unenforceable because it is viewed as being disproportionate to the actual amount of damages suffered, whereas a liquidated damages provision is enforceable where: (a) the damages amount provided by the liquidated damages provision is “a reasonable forecast of just compensation for the harm that is caused by the [tenant’s] breach;” and (b) “the harm that is caused by the [tenant’s] breach is one that is incapable or very difficult of accurate estimation.” See Gorco Const. Co. v. Stein, 256 Minn. 476, 482, 99 N.W.2d 69, 74–75 (1959) (citation omitted). Under In re Grodnick’s, these rules appear to apply equally to acceleration clauses.

Applying these concepts, a commercial tenant may be able to avoid liability for future rents due under an acceleration clause if the clause does not include necessary limitations to ensure that the recoverable rents are adjusted on a reasonable basis so as to avoid a windfall in favor of the landlord. For instance, an acceleration clause generally must: (a) account to the breaching tenant for any rent received from a replacement tenant by deducting said amounts from the accelerated rent; and (b) discount for the present value of specific property. See, e.g., Lariat Companies, Inc. v. Baja Sol Cantina EP, LLC, No. A12-2202, 2013 WL 4404589, at *4 (Minn. Ct. App. Aug. 19, 2013); Restatement (Second) of Property, Land. & Ten. § 12.1, cmt. k (1977). If the acceleration clause does not include these limitations, it may constitute an unenforceable penalty, thereby precluding the landlord from recovering all, or some, of the accelerated rent amounts. Accordingly, it is in both landlords’ and tenants’ best interests to agree to an acceleration clause that is appropriately tailored.

Given the ongoing uncertainty surrounding the COVID-19 pandemic and its effects on businesses, it is imperative that commercial tenants and landlords alike diligently evaluate their duties and obligations before abandoning a property or terminating a lease agreement. Consulting an attorney could save your business and limit unnecessary losses. The law firm of Winthrop & Weinstine, P.A. boasts a wide array of experienced attorneys who can help your business navigate the nuances of a commercial lease dispute to ensure that you make informed, business-oriented decisions to avoid prospective liability.

[1] A liquidated damages clause is a contractual provision that specifies a predetermined amount of money that must be paid as damages for a parties’ failure to perform under a contract. The amount of the liquidated damages is supposed to be the parties’ best estimate at the time they sign the contract of the damages that would be caused by a breach. If a breach occurs and the liquidated damages clause is enforceable, the parties do not calculate the actual damages (i.e., how much money a party actually lost as a result of the breach). Instead, the breaching party pays the predetermined sum provided by the liquidated damages provision.

This update was prepared with the assistance of co-author Tess Olinger, Summer Associate

In the wake of COVID-19 and governmental closure orders, many businesses were forced to temporarily suspend their operations. Consequently, many consumer-facing businesses lost out on a significant source of income. As previously predicted, some of these business turned to their Commercial General Liability (“CGL”) insurance policies to seek coverage for these losses. After insurers denied coverage, these businesses brought suit.

Claims for coverage for COVID-related loss have faced significant hurdles in most jurisdictions, including Minnesota. Over the past year, most courts around the country have held there is no coverage under CGL policies because these policies require a showing of “direct physical loss or damage,” which is often interpreted to mean a physical alteration to the property, not merely an economic loss to the business. Additionally, some policies contain virus, law and ordinance exclusions, or both.

Recently, the Eighth Circuit Court of Appeals (applying Iowa law) became the first federal appellate court to affirm denial of coverage. In its published opinion in Oral Surgeons P.C. v. The Cincinnati Insurance Co. (discussed below), the Eighth Circuit joined the vast majority of courts around the country—including in Minnesota—that have denied coverage. Both insureds and insurers should be aware of potential language in their policies that could trigger or prevent coverage in these situations.

I. Minnesota Courts have Uniformly Denied Coverage for COVID-Related Loss

Insureds have had no success whatsoever in obtaining coverage in Minnesota courts. There have been six cases in total, and each resulted in dismissal of the insured’s claim for coverage.

The first of these cases is Seifert v IMT Insurance Co.^[1] The Minnesota federal district court held that the plaintiff was not entitled to coverage for their COVID-related losses because the insured failed to allege that it suffered direct physical loss or damage to its premises. The court held that the policy only provided coverage in the event of direct physical loss or damage, not for economic loss. This decision aligns with numerous similar decisions across the country.

In attempts to prove physical loss or damage, some insureds have argued that infections occurring at insured premises demonstrates that the premises are contaminated with COVID-19, and that is a direct physical loss. One such case is Berkseth Rojas DDS v. Aspen American Insurance Co.^[2] The insured alleged that three employees were infected with COVID-19, and, therefore, “it [was] an absolute certainty that covered property has been infiltrated and contaminated by COVID-19 by those three persons.” The insured alleged that this contamination forced her to make repairs and changes to her property, such as installing plexiglass at the reception area and limiting the number of patients in the building at one time, thus limiting the functional space of her building. The court rejected this attempt to compare the presence of coronavirus on her property to other conditions, such as asbestos and smoke contamination, noting that there is a difference between contamination by particles and damage by those particles. The insured claimed only contamination by COVID-19, not physical damage to her property.

Another important component in determining the potential success of a COVID-related coverage claim is coverage exclusions. Even if a court agreed that “direct physical loss or damage” could apply to COVID-related contamination, virus or law and ordinance exclusions may preclude coverage. For example, in Blue Ox LLC et al. v. Midwest Mutual Family Insurance Co,^[3] a Minnesota state court held that the policy in question did not cover plaintiffs’ COVID-19 related losses both because there was a lack of direct physical loss or damage, and because there was a virus exclusion, stating that the insurer would not “pay for loss or damage caused directly or indirectly by any virus.” The court emphasized the term “indirectly” in rejecting the plaintiffs’ argument that their loss was caused by Governor Walz’s Executive Orders, not COVID-19 specifically, reasoning: “plaintiffs do not dispute that the coronavirus is part of the causal chain that prompted the governor to issue his executive orders, which resulted in their business losses.” The policy also contained an Ordinance or Law exclusion precluding coverage for losses caused directly or indirectly by “the enforcement or compliance with any ordinance or law regulating the construction, use, or repair of any property.” According to the court, the Executive Orders were issued pursuant to authority delegated to Governor Walz, and thus had the force of law. Finally, yet another exclusion barred coverage. The “Consequential Loss Exclusion” stated that the insurer “will not pay for any loss or damage caused by or resulting from delay, loss of use, or loss of market.” The court determined that plaintiffs were claiming a loss of use during the time they were unable to be open to normal capacity, which meant their business losses were not covered.

II. The Eighth Circuit Recently Issued the First Federal Appellate Decision, Joining the Vast Majority of Courts to Deny Coverage for COVID-Related Loss.

The Eighth Circuit recently became the first federal appellate court to address a COVID-related loss coverage dispute, in Oral Surgeons P.C. v. The Cincinnati Insurance Co., a case interpreting Iowa law.^[4] The Eighth Circuit agreed with the district court that the policy at issue unambiguously required physical alteration, physical contamination, or physical destruction of insured property, and that the insured’s losses were confined to an “inability to use” the property, resulting in economic loss. The insured did not, however, allege any physical alteration to its property from COVID-19. Although Oral Surgeons interpreted and applied Iowa contract law, the Eighth Circuit referred to Minnesota case law in its analysis, reasoning there is no material difference between Iowa and Minnesota law on insurance contact interpretation.

In short, insureds in Minnesota have an uphill battle to obtain coverage for their COVID-related business losses, and insurers likely have strong grounds to deny coverage.

III. COVID-19 Business Insurance Cases in Other Jurisdictions

While many Minnesota insureds have struggled to obtain coverage, some jurisdictions have interpreted “direct physical loss or damage” in a way that favors coverage.

For example, Missouri courts have accepted the COVID-19 contamination theory advanced in Berkseth Rojas. In Blue Springs Dental Care LLC., et al. v. Owners Insurance Company, the court held that the insured plausibly alleged that COVID-19 physically damaged its property by physically “attaching” to the insured’s premises.^[5] The court determined this allegation was sufficient to survive a motion to dismiss, but that Blue Springs would need to prove that COVID-19 actually contaminated the premises.

In another example, Studio 417 Inc., et al. v. The Cincinnati Insurance Co., the court reasoned that the insurer was conflating the terms “physical loss” and “physical damage,” and that in order to give effect to the policy language in its entirety, the two words must have distinct meanings.^[6] The policy at issue did not define either term. Using the dictionary definition of “loss”, the court determined that the ordinary meaning of loss reasonably could be “the act of losing possession” or “deprivation”. Under this definition, the insured pled sufficient facts that it had suffered a physical loss due to COVID-19.

As stated, however, Minnesota courts have not issued similar decisions.

IV. The Future of COVID-Related Loss Insurance Claims

The recent Eighth Circuit decision in Oral Surgeons further solidifies the interpretation that most CGL policies require direct physical loss or damage, and that COVID-19 does not cause any such harm. But even if COVID-19 could cause this harm, many policies include exclusions that likely preclude coverage, such as virus exclusions and anti-concurrent loss provisions. Whether insureds will have an uphill battle to obtain coverage for COVID-related losses in the future all depends, of course, on the exact terms of the policy at issue and the kind of loss caused by COVID-19.

[1] Seifert v IMT Insurance Co., 495 F.Supp.3d 747 (D. Minn. 2020).
[2] Berkseth-Rojas v. Aspen American Insurance Co., No. 3:20-cv-948-D (N.D. TX. July 13, 2021).
[3] Blue Ox LLC et al. v. Midwest Mutual Family Insurance Co., No. 62-CV-20-3771 (Minn. 2d Dist. Ct. Jan. 29, 2021).
[4] Oral Surgeons P.C. v. The Cincinnati Insurance Co., 2 F.4th 1141 (8^th Cir. 2021).
[5] Blue Springs Dental Care, LLC, et al. v. Owners Insurance Co., 488 F.Supp.3d 867, 873 (W.D. Mo. 2020).
[6] Studio 417, Inc., et al. v. The Cincinnati Insurance Co., 478 F.Supp.3d 794, 801 (W.D. Mo. 2020).