Jason A. Levine, Giles Judd, and J. Stephen Tagert, Alston & Bird LLP
This past week’s top COVID-19 litigation developments were: a decision upholding Indiana University’s vaccination mandate for returning students; a new shareholder derivative action claiming that a pharmaceutical company improperly interfered with a COVID-19 treatment’s clinical trial; and the dismissal of a suit for business interruption insurance coverage based on a “virus” exclusion in the policy.
1. Federal Court Upholds Indiana University’s Vaccination Mandate
Overview: An Indiana federal court held, in the preliminary injunction posture, that Indiana University may require students to receive COVID-19 vaccinations before returning to campus for the fall 2021 semester, given the presence of various exemptions for medical reasons and for students with bona fide religious objections to vaccination.
Complaint: Eight students sued Indiana University, alleging that its vaccination mandate—along with requirements of masking, testing, and social distancing for those who receive religious or medical exemptions from the vaccination requirement—violates their due process rights. The students sought a preliminary injunction against enforcement of the mandate.
Decision: In a 100-page opinion, the court denied the students’ motion and held that, even though students have a significant liberty interest in refusing unwanted medical treatment, the university may require vaccinations to advance its legitimate interest in the health of its students, faculty, and staff. The court relied on the Supreme Court’s 1905 decision in Jacobson v. Commonwealth of Massachusetts—which held that a State may require vaccination for smallpox—to hold that state entities may require vaccinations when rationally related to a legitimate state interest. The court also rejected the students’ argument that the university was placing an unconstitutional condition on their exercise of a state benefit (i.e., attendance at the public university). Finally, the court clarified that it was not holding that the university could require vaccinations without exemptions, or could do whatever it wished to address COVID-19.
Our Take:Colleges and universities continue to implement policies to prepare for students to arrive on campus, and this decision is consistent with rulings in a workplace setting. Meanwhile, some colleges still face lawsuits over closing their campuses last year amid the pandemic. For example, on July 20, a federal court partially denied the Manhattan School of Music’s motion for judgment on the pleadings, allowing a claim of implied contract for in-person music education to proceed.
2. Investor Suit Alleges Improper Interference With COVID-19 Clinical Drug Trial
Overview: An investor filed a derivative suit in Delaware Chancery Court against controlling stockholders of FSD Biosciences and its parent company, FSD Pharma, Inc., alleging breach of fiduciary duty and corporate waste through purported interference with a Phase 2 clinical trial of an inflammatory drug used to treat COVID-19. The interference allegedly was intended to advance the acquisition of another company in which the stockholders had an interest.
Complaint: According to the complaint, FSD Pharma raised nearly $75 million dollars in the last 18 months for its wholly-owned subsidiary, FSD Biosciences, to bring an anti-inflammatory drug used to treat COVID-19 to market. The investor alleges that the controlling stockholders “needlessly, recklessly, and prematurely terminated a critical Phase 2 clinical trial” of the drug to pursue the acquisition of a start-up involved in the development of psychedelic compounds for the treatment of mental illness. The complaint asserts that the controlling stockholders had personal interests in the start-up and stood to gain financially from the acquisition. When the acquisition proposal met with resistance from the board, these controlling stockholders purportedly attempted to undermine the clinical study and replace the board. As a consequence of these actions, the investor alleges that “patients lying in hospital beds being treated for COVID-19 who had agreed to participate in this clinical trial have been abandoned.”
Our Take: Allegations of corporate waste are typically difficult to prove, and it will be interesting to see what weight, if any, the court gives to the COVID-19 context in assessing those allegations.
3. Virus Exclusion Bars Coverage for Ice Cream Company’s Losses During the Pandemic
Overview: A New Jersey federal court granted a motion for judgment on the pleadings in a proposed class action brought by Sweetberry Holdings, LLC, a New Jersey company that owns and operates ice cream stores in several states, against its insurer, Twin City Fire Insurance Company, holding that a virus exclusion in plaintiff’s policy bars relief for losses due to the pandemic.
Decision: In an order granting Twin City’s motion for judgment on the pleadings, the court noted that the plain language of the policy excludes coverage for losses stemming from the coronavirus. Specifically, the policy excludes coverage for loss or damage caused by “‘fungi,’ wet rot, dry rot, bacteria, or virus,” but provides limited coverage when such fungi, rot, bacteria, or virus was caused by “specified causes of loss,” including explosion, hail, smoke, riot, or water damage. Plaintiff argued that, not only was the provision ambiguous, but also that the limited coverage carveout was “unattainable” because viruses are not caused by any of the “specified causes of loss.” The court noted, however, that the provision was clear and unambiguous, and that “[t]he presence of a conditional exception to an exclusion in an insurance policy does not render the exclusion ambiguous.” Further, the court rejected plaintiff’s claim that the limited coverage carveout was illusory, since it would not result in a “complete lack of any coverage”; scenarios existed where limited coverage could be triggered.
Our Take: We have repeatedly seen in the COVID-19 context that courts will uphold virus exclusion provisions in insurance policies provided the language is clear is unambiguous. This case confirms that limited coverage exceptions to those exclusions will likewise be upheld and deemed not illusory so long as scenarios exist that would trigger coverage, even if the particular scenario at issue does not.