Looking Forward: Advance Preparation in a Dynamic Legal & Business Landscape

The Michigan Association of Corporate Counsel (ACC) and Foley & Lardner LLP recently presented a virtual webinar, “Looking Forward: Advance Preparation in a Dynamic Legal & Business Landscape.” Designed to share insights and best practices with in-house counsel, the webinar featured ten cross-functional experts from Foley who discussed how leading companies can plan, predict, and prepare for rapidly shifting legal and business challenges in the face of the persistent COVID-19 pandemic, global supply chain shocks, and evolving regulatory landscape.

Supply Chain Issues & Shortages

Vanessa Miller and Nicholas Ellis, litigation partners and supply chain counselors based in Foley & Lardner’s Detroit office, opened the webinar with a warning: expect the unexpected.

Miller outlined the current predicament that many companies face. The pandemic-related lockdowns of 2020, combined with unforeseen and unrelated disasters, gave way to unprecedented operational and logistical hurdles. Throughout 2020 and 2021, companies confronted formidable supply chain disruptions, labor shortages, port delays, and rapidly increasing costs. Additionally, Original Equipment Manufacturers (“OEMs”) exacerbated the challenges for suppliers by fluctuating between inflating, reducing, and canceling product releases, thereby increasing the difficulty for suppliers to plan appropriately. These labor and supply shocks lead to increased threats and litigation among companies attempting to divert the attendant costs to other parties.

Ellis provided three key strategies to help suppliers thrive in this turbulent environment. First, suppliers should try to move away from entrenched industry practices of long-term contracts and instead consider flexible pricing provisions tied to specific criteria, like indexes and periodic price reviews. Second, suppliers should look for opportunities to mitigate supply shock risks by maintaining larger inventory banks and must be prepared to respond to requests from their customers for such arrangements.  Of course, suppliers will want to negotiate with OEMs about sharing the costs of their more extensive inventories. Third, and relatedly, suppliers should seek more defined and predictable ways to share shipping and freight costs for situations that are truly outside of the parties’ control, as opposed to maintaining the current all-or-nothing approach where the parties dispute responsibility and one party often foots the entire bill. The key to survival, Miller and Ellis explained, is to remain vigilant, alert, and flexible as market dynamics continue to shift throughout 2022.

Distressed Companies & Acquisition Opportunities

The unfortunate reality is that many companies will not stay flush with cash in the immediate future as the pandemic stimulus pools run dry and lenders become increasingly aggressive in asserting their rights against defaulting borrowers. For those distressed companies, Ann Marie Uetz, Vice-Chair of Foley’s National Litigation Department whose practice focuses on financially distressed companies, discussed opportunities for growth by acquisition. Uetz explained that companies in a financial pinch can consider buying or selling assets via chapter 11 bankruptcy proceedings or through non-judicial transactions. Each option has its pros and cons. By avoiding court and the competitive bidding process, traditional asset sales can be relatively quicker and cheaper than proceeding through bankruptcy. Non-judicial sales also provide added opportunities to negotiate control and purchase protections. On the other hand, chapter 11 bankruptcy allows buyers to pick and choose assets to purchase, permits debtors to assume, assign, or reject specific contracts and leases notwithstanding contractual restrictions on assignments, and enables debtors to sell assets free of all liens, claims, and encumbrances.

Antitrust Outlook

Not only is the market still reeling from supply chain and labor woes, but businesses also face uncertain legal landscapes. Gregory Neppl, a partner and antitrust specialist in Foley & Lardner’s Washington, D.C. office, addressed significant policy and regulatory changes under the Biden Administration. Neppl explained that the Administration, now staffed with more progressives than the Trump Administration, has called for vigorous antitrust enforcement by the DOJ and FTC. This heightened interest in antitrust enforcement may even result in a transition from the traditional “consumer welfare” focus of the Chicago School to the more progressive New Brandeis School, which emphasizes the importance of public welfare and environmental, social, and governance issues. Neppl expects the next three years to be full of surprises as the government’s interest in vigorous antitrust enforcement is pursued.

Employment Law in the New Normal

Next, labor and employment specialists from Foley & Lardner’s Detroit office discussed how the government and employers react to current market conditions. Jeffrey Kopp, a partner and the chair of the office’s Litigation Department, detailed the various challenges employers face. These include labor shortages, vaccine mandates winding through the courts, concerns about fairness and equity, remote work policies, local leave requirements, and expiring state-level COVID liability protections. Kopp advised that companies maintain clear and robust vaccination, remote work, and fairness policies to avoid claims of disparate treatment based on decisions to work remotely or refuse vaccinations.

Felicia O’Connor, a senior counsel and litigator, then discussed the Biden Administration’s recent staff and policy changes to the National Labor Relations Board (NLRB). First, employers can expect more progressive employment policies from the NLRB as the agency now has a new chairman and general counsel, and the makeup of the Board’s appointees gradually changed such that Democrats now fill most spots. Second, the NLRB issued a new General Counsel Memo that announced several departures from Trump-era policies. For instance, the NLRB intends to increase scrutiny on employee handbook policies that restrict protected concerted activity. It also plans to broaden Weingarten rights—rights to representation at investigatory interviews that may lead to discipline—to apply to union and non-union employees. And relatedly, the agency will bolster rights to distribute pro-union materials at job sites.

DEI: a People-Centric Approach

Staying on the topic of equity, Alexis Robertson, Foley & Lardner’s Director of Diversity and Inclusion based in Chicago, discussed the importance of diversity, equity, and inclusion in corporations and the marketplace. Robertson counseled that companies should make concerted efforts to transition from merely complying with diversity initiatives to fully embracing and integrating them from the top down. These efforts must continuously evolve and expand from employee training to broader management, culture, talent systems, and overall workforce initiatives. Not only will implementing and updating such policies stymie litigation, but comprehensive studies from Deloitte show that they exert a growing influence on workforce trends and can help companies fill desperately needed jobs and stay afloat.

Ordinary Warranty and Expanding Liability

Leah Imbrogno, a senior counsel and commercial litigator in Foley & Lardner’s Detroit office, brought the conversation closer to home by discussing how automotive OEMs are expanding supplier responsibility for warranty claims. Although OEMs usually share responsibility for warranty campaigns and recalls with suppliers, Imbrogno warned that they have been increasingly passing down ordinary warranty charges—i.e., mundane dealer repairs that do not rise to the level of recalls. To be sure, many contracts permit OEMs to pass down common warranty claims, but they were often neglected. Imbrogno advised that suppliers should now expect aggressive enforcement of these contractual provisions, which could lead to litigation. She counseled that suppliers prepare by studying their contracts, conducting separate root cause analyses into warranty claims, bringing supplier representatives to investigations conducted by OEMs, and working on building fulsome records for any supply chain disputes.

The Electrification Frontier & Hurdles

Finally, Detroit-based partners Steve Hilfinger and Mark Aiello and D.C. based special counsel  Nick Englund wrapped up the event with a panel moderated by Miller on how the automotive industry can prepare for and overcome the hurdles of electrifying vehicles.  Hilfinger, a mergers and acquisitions specialist, kicked off the panel with an overview of the acquisitions market. He described a booming, record-breaking acquisitions market in 2021, totaling $4.3 trillion in transactions fueled by active public markets, abundant private capital, and low interest rates. The automotive industry gained from the booming market, with electric vehicle and technology transactions leading the way. Hilfinger expects more robust activity in the market, particularly with distressed suppliers, even as it faces turbulence from the upcoming election and increasing interest rates.

Addressing the move to electrification, Englund briefed the audience on the regulatory environment that seeks to drive the market in that direction. Englund explained that certain agencies, like the National Highway Traffic Safety Administration (NHTSA) and the Environmental Protection Agency (EPA), implemented regulations that make conventional motor vehicles increasingly less attractive to produce than their electric counterparts. These regulations address issues like greenhouse gas emissions and fuel economy.

Finally, Aiello, who focuses on automotive commercial transactions and litigation, concluded the discussion by explaining that supply chain competence and IP savviness may determine which companies succeed in electrifying their products. That is because electric vehicles generally are mechanically simpler to produce but demand more technology and complex integration. Companies seeking to electrify their products should therefore prioritize diversifying their supply chains, broadening their IP strategies, developing contingency plans, and exiting or realigning existing contracts. Lastly, Aiello discussed the increased use of specialized agreements in the supply chain, such as joint development, license, and long-term supply agreements, to address the complex issues increasingly facing customers and the supply base in connection with EV-related technology.

The specialists from Foley & Lardner discussed various topics as they reported on the rapidly evolving market and regulatory environment.  Despite the myriad issues addressed, several common themes emerged. As leading companies seek to thrive in 2022 and onward, they must stay alert and adaptive, prioritize diversity, expand their supply chains, develop larger inventories, study their contracts and explore options to renegotiate critical terms, and, as Miller aptly put it, expect the unexpected.