NEW YORK--(BUSINESS WIRE)--Following a year of doing business in a more litigious and cost-conscious environment, companies of all sizes expect those patterns to continue during the coming year, with roughly one-quarter saying legal disputes will increase again, according to the 2010 Fulbright & Jaworski L.L.P. Litigation Trends Survey.
Corporate counsel in the United States and the United Kingdom foresee the continuation of an upward trend in litigation that began with the economic downturn, with 93% of U.S. and 97% of U.K. respondents expecting legal disputes to increase or remain the same this coming year. This expectation comes during a year when 87% of U.S. respondents faced new litigation in the past year (up from 83% last year) and 53% of all respondents initiated a suit in the past year (up from 48% overall last year).
Looking ahead, more large-caps than mid- and small-caps expect litigation increases over the next 12 months. Sector-wise, a sizeable 42% of energy companies are bracing for a jump in disputes.
The reason? Across geography, company-size and industry, respondents point to a lagging economy. But this year’s other story is regulation: as the country digs out of the recession, nearly one-third each of U.S. and U.K. respondents cite stricter regulation as a major concern. More regulators have been investigating a greater variety of companies, from small to large and across sectors – particularly banking, health care and energy. Contributing to the upward trend in litigation are rising bribery and corruption matters and whistleblower allegations.
“With reform in two major industries – financial services and health care – and the possibility of greater regulation of offshore petroleum production, regulatory concerns are front-and-center in the minds of in-house legal counsel,” said Stephen C. Dillard, the head of Fulbright’s global disputes practice. “Even at small-cap companies, regulatory investigations have nearly doubled.”
This is the seventh year that Fulbright has polled corporate law departments in the U.S. and U.K. on the state of global litigation. The 2010 survey gathered input from 403 in-house counsel, including 275 U.S. respondents. Initially launched by Fulbright in 2004, the survey is the largest canvas of corporate counsel on litigation issues and trends.
Litigation: What Does the Future Hold?
After reporting declining litigation filings in 2006 and 2007, respondents say suits began to rise again in 2008 and 2009. The upward trend continued in 2010.
U.S. respondents were split 50/50 on whether the changing economy will permanently alter the way business is conducted in the legal industry while a quarter of U.K. respondents expect a permanent change. Overall, 58% of respondents said they do not think the changing economy will permanently change the way business is conducted, with the balance expecting it to force the use of more alternative fees, tighter cost controls and higher service efficiency.
Respondents expect that contracts and labor/employment actions will continue to consume litigation resources. Regulatory concerns have replaced bankruptcy concerns: 42% of energy respondents, 48% of financial services respondents and 39% of health care respondents list regulatory as the type of action that most concerns their company. Looking ahead, one-quarter of all respondents – and one-third of respondents from energy, healthcare and insurance – expect the number of regulatory proceedings their companies face to increase in the coming year.
In the U.S. – and for large-caps in particular – intellectual property and patent litigation are also high on respondents’ radars.
In 2009, companies agreed that litigation related to bankruptcy, contracts and labor/employment were the main concerns. This year, when asked to identify the most numerous type of litigation pending against their company, 46% of respondents cited contracts and 40% cited labor and employment.
Notably, 40% of energy respondents cite environmental litigation as one of their top three types of pending matters.
A Look Back
In last year’s survey, 42% of U.S. respondents expected legal disputes to increase. That prediction came true: 87% of U.S. respondents and 50% of U.K. respondents faced at least one lawsuit, arbitration, or regulatory proceeding last year, compared with the prior year's 83% and 45%, respectively.
“Over the history of our survey, respondents have accurately predicted the rise and fall of litigation with the economy,” Dillard said. “Since the global economy began languishing in 2007, litigation has climbed steadily for three years. It is telling that, even as in-house legal departments continue to carefully manage costs, more than one-quarter of this year’s respondents say they have increased their litigation budget and one-third say they have increased how much they spend on litigation.”
Not surprisingly, bigger companies draw a greater number of lawsuits: 82% of large-caps and mid-caps faced at least one suit in the past 12 months, compared with only 51% of small-caps. Meanwhile, big-dollar suits were down for all but large-caps: 41% of large-caps faced one or more $20 million-plus suit in the past 12 months, compared with 39% last year.
Sector-wise, real estate (88%), manufacturing (86%), energy (86%) and health care (83%) took on the most new lawsuits, while manufacturing was hammered with the most big dollar lawsuits. A hefty 43% of manufacturing respondents saw at least one $20 million-plus suit over the past year.
Those industries that faced a lot of lawsuits also confronted a lot of arbitrations and regulatory actions – particularly the energy sector, where 57% encountered at least one arbitration last year and 51% dealt with at least one regulatory proceeding. Meanwhile, insurance (45%), health care (44%), manufacturing (43%) and financial services (38%) tended to end up in the regulatory crosshairs in greater numbers than other industries.
Who was doing all the suing? Those industries that report a higher exposure to suits also tend to initiate litigation in bigger numbers. For instance, 68% of large-caps initiated at least one litigation compared to 20% of small-caps. Similarly, while the energy sector reported dealing with a full plate of litigation, it is also initiating it: 68% filed at least one suit in the previous year. The engineering, insurance and manufacturing industries were also litigious groups, with two-thirds of each filing one or more lawsuits.
The Work Flow: In-House Lawyers And Outside Law Firms
Last year, respondents surmised the market for in-house jobs would cool following an in-house hiring uptick in 2008 – and it did.
Companies, however, continued to hire law firms, with 21% increasing their outside counsel roster. “Specific expertise,” and “broader jurisdiction” topped the list of reasons in-house counsel gave for hiring more law firms. “More litigation” was the third reason U.S. respondents gave. (Meanwhile, the 51 respondents who say they eliminated law firms from their rosters primarily said it was because of law firm consolidation, while one-third of that small group said they simply disliked a firm.)
What lies ahead for hiring? Companies might bring work back in-house: 11% of all respondents and 17% of large-caps, say they expect to add in-house lawyers in the year ahead. Seven of the nine industries polled – energy, financial services, health care, insurance, manufacturing, tech/communications and retail – say they plan to increase in-house staff in the coming year.
The 2010 Fulbright & Jaworski Litigation Trends Survey asked companies to consider, among other things, what types of cases they fear most, where they spend their budgets and how they are adjusting the management of litigation as the economic downturn continues.
What follows is a bulleted summary from the 2010 Fulbright & Jaworski Litigation Trends Survey. For a link to the descriptive “white paper” go to: http://www.fulbright.com/litigationtrends20.
The 2010 Fulbright & Jaworski Litigation Trends Survey was conducted from May through July by Greenwood Associates, a business research firm in Houston that has produced previous editions of the report. The survey, launched by Fulbright in 2004, is the largest polling of corporate counsel on litigation issues and concerns.
Fulbright’s 2010 survey asks companies to consider, among other things, what types of litigation most concerns them, where they’re spending limited budgets and how they are adjusting approaches to litigation management as the economy struggles to emerge from the downturn. This year’s survey also delves into special topics, such as how companies are dealing with the issue of data preservation and what social technology sites are being used to advance business interests.
The 2010 survey reflects information collected from 403 lawyers. Of the respondents, 83% identify themselves as either general counsel or head of litigation. Companies polled are public and private – roughly, there was a 50/50 split – and span industry groups; while respondent-companies are concentrated in financial services, energy, manufacturing, retail/wholesale, technology and health care, a substantial number of responses were also received from the insurance, real estate and engineering sectors. There is also a wide geographic spread. While 275 respondents are based in the U.S. and 128 in the U.K., 36% of all respondents do business in at least six countries, with 16% doing business in 21 or more countries.
Companies in the survey are well-represented by size as well: 25% report gross revenues of under $100 million; 28% have revenues between $100 and $999 million; and another 47% have revenues of $1 billion or more.
Managing Litigation in an Economic Downturn
1. The Money Situation: Budgets & Spending: Nearly one-third of all respondents say cost control is the most important way in which the economic downturn is affecting litigation management. Yet budgets are still on the rise: 28% of all respondents increased their budget, compared with only 16% reporting a decrease. The spending story was similar: 31% report an increase, while only 21% report a decrease. Sector-wise, budget and spending increases were seen in high proportions in energy, financial services, health care and pharmaceuticals, insurance and retail. On average, one-third of all real estate respondents reported either budget or spending decreases.
2. The Money Situation: Where? Given the importance of cost control, Fulbright asked where respondents plan to tighten their belts. Cost-control appears to mean “reallocation” more often than it means “budget decreases.” This is underscored by respondents who said they plan to decrease their budgeted spend in the same area where the most respondents also indicated they plan to increase it: e-discovery. Of the 5% of all respondents planning to decrease spending in the coming year related to e-discovery were 9% of public companies and 7% of large-caps. Meanwhile, one-fourth of all respondents plan budget increases for e-discovery and contracts, while one-fifth plan to increase budgets for labor/employment and regulatory work.
3. Tracking Alternative Fee Arrangements: Corporate counsel want to keep costs low, but they also want to keep them predictable. These priorities are driving a shift toward alternative fee arrangements. Last year, Fulbright found that 45% of all respondents used some kind of alternative fee arrangement. This year, that number reached a majority: 51%, but 60% predict the use of alternative fees will not increase in the coming year.
a. Why and What Kind? The majority of both U.S. and U.K. respondents say lower cost is the primary reason behind alternative fee arrangements. Predictability is the second most popular reason followed by risk sharing. There is not a favored form of alternative fee arrangement, with respondents saying they use a mix of fixed fees, conditional or contingent fees, blended rates, capped fees and performance/reward-based fees.
b. Who Uses Them? Alternative fee arrangements are used in both the U.S. and U.K. Public companies and large-caps are most likely to use them. By industry, approximately one-half of respondents from each sector – with the exception of engineering – say they have used some form of alternative fee arrangement. At least 75% of respondents from the energy, engineering, manufacturing and real estate sectors report that less than 30% of their work is done via alternative fee arrangements.
c. But the Billable Hour Still Rules: Alternative fee arrangements account for a minority of total billings: only one-quarter of respondents who use alternative fee arrangements estimate those arrangements exceed 30% of their total litigation spend. More than half of small-cap (63%) and mid-cap (54%) companies said they do not use any form of alternative fee arrangement.
Investigations: No One Spared
4. Internal Scrutiny Takes Hold: Internal investigations requiring outside counsel are dramatically up across the board this year. This year, 43% of respondents said they initiated an internal investigation requiring the assistance of outside counsel, compared to just 28% of respondents who reported the same last year. Large-caps said they are only twice as likely as small caps to initiate investigations. In last year’s survey, large-caps were four times more likely than their smaller counterparts to commence an internal review.
a. Internal investigations are up across every sector, with the biggest increases reported by financial services (to 46% this year from 24% last year), real estate (to 28% from 6% last year) and technology/communications respondents (to 43% from 21% last year).
b. About one-quarter of all internal investigations result in a company reporting a matter to a regulatory agency.
5. Investigations Continue to Demand Attention: In this year’s survey, the number of respondents retaining outside counsel for a government or regulatory investigation held steady at 37% – only a percentage point lower than last year. U.S. respondents saw a slight decrease (43% this year compared to 47% last year) while U.K. respondents saw a jump (26% this year compared to 17% last year) in those who hired outside counsel for an investigation.
6. Increases On the Horizon: One-quarter of respondents in this year’s survey said they expect the number of regulatory proceedings their companies face to increase compared to 12% of respondents who expected an increase last year. The jump is solely attributable to U.S. respondents – a third of which expect an increase, compared to just 9% last year. One-third of respondents from energy, healthcare and insurance expect regulatory proceedings to increase in the coming year.
7. Who’s Investigating Whom? As always, companies that are both large-cap and public are prime targets. But if your company also falls in the energy, healthcare, or insurance sectors, there’s a 50/50 chance you retained outside counsel last year to handle an investigation. The landscape of active investigators is broad. In the U.S., the DOJ has been active in investigating manufacturing and healthcare, and, to a lesser extent, energy; the SEC has been investigating healthcare, financial services and energy; the EPA is the energy industry’s most likely investigator and has also been looking into manufacturers; the FDA has been most active in the healthcare and manufacturing space; OSHA has been active in energy and manufacturing; and the IRS has homed in on engineering companies – 18% of which report being investigated in the past year. [T40] In the U.K., the FSA (Financial Services Authority) has been investigating not only the financial services industry, but insurance and real estate as well. U.K. respondents from the insurance industry also report investigations coming from the Bank of England, the OFT and HMRC.
8. Whistleblower Allegations Remain High: One-fifth of all respondents have been subjected to whistleblower allegations in the past three years, but numbers vary significantly depending on company size: large-caps are nearly three times as likely as small-caps and about twice as likely as mid-caps, to face whistleblower allegations. The industries reporting the most whistleblowers include engineering, healthcare, manufacturing and retail/wholesale.
9. Continuing the Upward Trend: About a fifth of respondents expect whistleblower allegations to increase in the coming year. Notably, 26% of mid-caps anticipate a rise, compared with 19% of large-caps, which is down compared to last year’s survey when 30% expected an increase. Nearly one-third of each of energy, engineering and health care respondents expect whistleblower claims to rise in the year ahead.
10. What Becomes of Whistleblower Allegations? Respondents who experienced a whistleblower allegation last year said they most often end in internal investigations (86% of this year’s respondents compared to 73% of last year’s.) Meanwhile, 46% of respondents said they were subjected to third-party proceedings and 42% faced a regulatory investigation as a result of a whistleblower allegation. U.S. respondents report that these outcomes are more likely than they were last year: 86% report an internal investigation resulted from a whistleblower claim in the previous three years compared to 67% in last year’s survey; 51% report the claim ended in a third-party proceeding, up from 35% last year; and 43% report a regulatory investigation resulted from the allegation, up from 23% last year.
Bribery Matters Continue to Grow
11. Another Big Year for Bribery: Recent interest by the SEC and DOJ in cracking down on foreign corruption has led to a jump in FCPA matters. One-quarter of both large-cap respondents and public company respondents have engaged outside counsel in the past 12 months to assist with a bribery or corruption investigation – up from 17% in last year’s survey. The rate of investigations has been rising across the board: in the past three surveys, Fulbright has asked respondents whether their companies engaged outside counsel to assist with a corruption or bribery investigation in the prior year. In 2008, 7% of all respondents engaged outside counsel for an investigation; in 2009, the rate jumped to 12%; and this year, the rate went up again, to 16%. (Notably, this year’s jump is due entirely to U.K. companies – see below.)
12. A Corruption-Conscious U.K.: Due in part to the new U.K. Bribery Act, corruption has become a major focus for U.K. companies. More than one-third of U.K. respondents (and 11% of U.S. respondents) said they foresee changes in the way their companies operate due to the new law. More than a quarter of U.K. respondents – more than twice the U.S. average – retained outside counsel for a corruption or bribery investigation. And when it comes to cross-border business transactions, such as mergers, 28% of U.K. respondents engaged in due diligence for bribery or corruption in the past 12 months, versus last year’s U.K. rate of 16%.
Labor & Employment Litigation
13. Across the Board, Employment Litigation Up: Much of the litigation swell was due to spikes in labor and employment suits. As the economic recovery lags, payrolls shrink and wages are cut. There is much talk of doing more with less. In this climate, companies continue to be sued by their employees in ever greater numbers. For the third straight year, sizeable portions of survey respondents report increases in multi-plaintiff cases: 18% report increases in wage and hour disputes (FLSA); 11% report a rise in traditional labor union related matters; 10% report an increase in age discrimination cases; 7% report rises in race discrimination suits and ERISA suits; and 6% report rises in sex discrimination suits and disability discrimination suits.
14. A Bubble in Wage & Hour Disputes? The upward trend in wage and hour suits started several years ago, when plaintiffs’ lawyers discovered that state and federal law provided the basis for recovery of small amounts per employee for events or practices covering hundreds of workers – in addition to attorney’s fees and, in some cases, double damages. Wage and hour disputes remain the primary concern when it comes to multi-plaintiff cases: nearly half of all respondents say the greatest increase in multi-plaintiff cases came in the area of wage and hour cases. Among those wage and hour claims, the majority were premised on misclassification and overtime, with a drop-off seen in claims related to meals and breaks.
15. Discrimination: Cases alleging sex, race, age and religious discrimination do not account for much of multi-plaintiff cases. Of those respondents who faced employment litigation cases, when looking at both single and multi-plaintiff cases together, 51% they saw the greatest increase in the area of discrimination during the past year. It is an area 44% of respondents expect to continue growing in the coming year. Approximately one-third of all respondents indicate race, age and wage and hour cases are the three types of claims that create the most monetary exposure.
How Should We Resolve This? Litigation versus Arbitration
16. International Arbitration Expected to Rise: Fulbright’s latest survey found an expectation among corporate counsel that international commercial arbitration will rise in the coming year. Nearly one-fifth of all respondents (and nearly a third of U.K. respondents) expect an increase in 2011. Sector-wise, a quarter of respondents from each of the financial services, manufacturing and healthcare industries expect a rise in the use of international arbitration.
17. International Arbitration All the Rage in U.K.: Last year, only 22% of all respondents reported having been party to an international arbitration in the previous 12 months. This year’s survey finds that overall rate more than doubled. However, the rise was due mainly to a spike in international arbitrations at U.K. companies – 52% of whom were party to an international arbitration (versus only 19% of U.S. respondents). Sector-wise, 40% of respondents from the financial services and manufacturing industries reported being party to one or more international arbitrations in the past year, with energy and technology/communications a close second with 36% of each reporting one or more international arbitration.
18. For Domestic Disputes, Litigation Still Preferred: For disputes that are not international in nature, litigation is preferred, both in the U.S. and U.K. and across company-size and sector. But the rationale changes depending on geography: in the U.K. “lower cost” is the predominant reason for choosing litigation. Meanwhile, only 19% of U.S. respondents say lower cost leads them to choose litigation – they also point to “better results” and “reviewability” among the top reasons for choosing litigation. For the minority that prefer arbitration in domestic disputes, lower cost is the main reason.
19. Arbitrating Labor Suits – A Special Case: More than one-quarter of U.S. respondents say they now require arbitration of employment disputes in non-union settings – that’s up from last year’s 19%. Why choose arbitration in these cases? More than 70% each of small-cap, mid-cap and large-cap companies say arbitration is beneficial for employee relations.
20. Is Reform Working? For the third year in a row, the Fulbright survey indicates that class actions have held steady, with a quarter of all respondents saying they faced at least one class action in the past 12 months. That rate, however, jumps to 39% when the inquiry is confined to large-caps and to 36% when confined to public companies. The class action mechanism is used most commonly in the context of labor/employment actions and consumer cases, according to 35% of respondents.
A Look at Patent Litigation
21. Slightly More Popular: Patent claims may not be as high as they once were, but there was a slight increase in the number of respondents this year who said they have been involved in a patent infringement proceeding as a claimant or plaintiff. In the past year, 20% of all respondents filed one or more patents claims compared to 17% of respondents to the 2009 survey. Manufacturing, engineering and real estate all reported increases in the number of patent suits they filed in the previous year, with manufacturers doubling their filings from last year, to 52%. The outlier was tech/communications industry respondents, who indicated a drop from 38% to 15%. Meanwhile, public companies were three times more likely than private companies to file patent suits.
22. Protecting Patents: A majority of respondents think patent offense and defense will stay the same in the coming year. Hot sectors for patent suits in 2011 may be in health care and manufacturing companies, where 17% and 16%, respectively, say they expect to file more patent suits in the year ahead. Meanwhile, retail/wholesale and manufacturing respondents say they may be on the defensive end of that equation with 21% of retail/wholesale survey participants and 20% of manufacturing participants gearing up for an increase.
Managing the Data Flow: Preservation, Privacy, Protection & e-Discovery
23. The Question of Reform: Do the U.S. and U.K. rules of civil procedure need to be modified – either to limit the scope of e-discovery or to clarify a litigant’s duty to preserve material in anticipation of litigation? On both counts, according to survey participants, the answer is: Yes.
24. Modifying e-Discovery: 70% of all respondents say e-discovery for civil actions needs to be curtailed in the U.S., while 60% say U.K. rules also need tailoring in this area. More than two-thirds of U.S. and U.K. respondents believe guidance in this area requires “some” or “substantial” clarification.
25. How Are Companies Preserving Potentially Relevant Information? Survey respondents use a variety of techniques to preserve information, including relying on the custodian to preserve their own information (55%); suspending automatic deletion (55%); preserving everything in searchable databases (54%); and using automated search software (43%).
26. Privacy and Data Protection: More than 40% of all respondents report having encountered an actual or threatened dispute involving privacy and data protection. Of those respondents, 44% say their companies have encountered issues using third party vendors to collect and process data; 43% have encountered issues searching for data on company equipment used by employees; and 39% have encountered privacy and data protection issues when data is transferred from the European Union to the U.S.
27. Social Technology and Online Business Strategies: This is another area of potential e-discovery problems since some businesses have been early adopters of social media functionality, not for their employees’ personal use but for business uses, such as recruiting (LinkedIn) and marketing (Facebook). Fulbright asked respondents how they are using social networking for business purposes.
a. Social Technology: More than one-quarter of corporate counsel now say their company uses LinkedIn, while 22% of respondents use Twitter and 17% use Facebook.
b. Company Blogs: Nearly one-quarter of all respondents say their company uses some kind of corporate blog.
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