U.S. companies experiencing new litigation wave, anticipate more to come
by AccountingWEB on
Companies are seeing a litigation wave that corporate counsel expect to swell in the coming year, according to respondents of the 2009 Fulbright & Jaworski L.L.P. Litigation Trends Survey.
Corporate counsel say they are steeling themselves for a big year of litigation with 42% of U.S. respondents anticipating an increase in legal disputes their companies will face in the next 12 months. That is up from 34% of last year’s respondents. The expectation comes during a year when 83% of U.S. respondents reported that new litigation has been commenced against their companies in the past year, up from 79% last year.
In the year to come, respondents from large-cap companies reported the highest expectation of litigation, with 52% forecasting an increase in legal disputes, while 47% of public company respondents foresee a jump in disputes. The economy was cited as the primary reason for these expectations by 38% of U.S. respondents and 34% of U.K. respondents.
More than one-third of companies say the economic downturn has resulted not only in an increase in their litigation caseloads, but also their use of alternative fees. Tighter cost control, more than anything else, is the most important way in which the economic crisis has affected litigation management, respondents say.
“Generally, litigation rises in an economic downturn as regulators tend to step up enforcement, laid-off workers head to court and companies need to file more suits in order to collect on money owed,” said Stephen C. Dillard, head of Fulbright’s global litigation practice. “Perhaps most telling about this year’s results is that companies across the spectrum expect no substantial decreases in any area of litigation.”
This is the sixth year that Fulbright has polled corporate law departments in the U.S. and U.K. on the state of global litigation. The survey, initially launched by Fulbright in 2004, is the largest canvas of corporate counsel on litigation issues and trends.
Litigation: Where Has it Gone? Where is it Going?
Companies agree on what is bothering them most. From small-cap to large-cap, from private to public, from the U.S. to the U.K., the main problems are the same: In light of the downturn, companies face big increases in bankruptcy, contracts and labor/employment litigation. More modest increases have been cited in intellectual property, insurance and regulatory actions.
Yet, while contracts and labor/employment actions affect companies across industries, the bankruptcy ground swell has left one industry – healthcare – relatively untouched, with only 6% of healthcare respondents reporting a rise in bankruptcy and reorganization litigation.
What may lie ahead? Regulatory investigations and whistleblower allegations are expected to eat up litigation resources in the year ahead. Looking to 2010, 16% of all respondents (and 23% of large-caps) say they expect the number of internal investigations involving their company to increase. Industry-wise, approximately 20% each of financial services, insurance and technology companies expect internal investigations to rise in the coming year. This tracks expected increases in whistleblower cases: 24% of all respondents and 31% of large-cap companies expect the number of claims brought by whistleblowers in their industries to go up.
A Brief Look Back
In both Fulbright’s 2006 and 2007 surveys respondents reported declines in actual litigation filings. Then, in last year’s survey, corporate counsel anticipated an uptick in new actions and government probes.
Last year’s predictions were right. Large-cap companies took the brunt of big cases during the past 12 months, with 39% reporting having faced one or more $20 million-plus suit last year, and a striking 54% of large-caps reporting having a case go to trial in the past 12 months. (In fact, large portions of companies across industries faced trial last year, with the exception being real estate companies, of which 13% went to trial.)
With bigger size sometimes comes bigger payouts: Of the 97 large-cap companies that had a case go to trial last year, 15% report higher damage awards than prior periods versus 2% of large-caps reporting lower awards.
On the regulatory front, one-third of respondents report increases in external regulatory inquiries in the past three years. However, nearly half of U.S. companies (47%), report having retained outside counsel for assistance in government and regulatory investigations. When broken down by size and industry, 50% of large-cap companies and a notable 62% of healthcare companies report retaining outside counsel for assistance in government and regulatory investigations. The rate of regulatory actions and investigations was far lower on the other side of the Atlantic.
“Given the overall climate, and the down market’s uncovering of fraud cases, it is no wonder in-house counsel report seeing more active regulators and an expectation that the number of investigations will increase,” Dillard said.
The Department of Justice, the Environmental Protection Agency and states attorneys general have been particularly active. Over the past year, 19% of respondents retained counsel for investigations by the Securities and Exchange Commission.
Gearing Up for Litigation
What have in-house counsel done to gird their companies for legal battle? Hire and budget.
This year, 48% of large-cap respondents indicate they now employ six or more in-house lawyers to manage or conduct litigation, up from 26% last year. It appears, however, that in-house hiring will cool. Only 11% of respondents forecast an increase in the number of in-house litigators over the next 12 months.
With litigation on the rise and resources on the wane, Fulbright asked in-house counsel about their planned budgets for the coming year. Budget increases largely track anticipated areas of concern: 18% of respondents say they plan to increase their budget for labor/employment litigation; 15% will spend more on bankruptcy; and 14% will up the amount spent on contract disputes. Meanwhile, 11% say they will spend more on regulatory and investigations work, while 16% are planning to spend more on e-discovery.
Where will all this money come from? Not necessarily from other areas of litigation. Only 6% of large-cap companies plan to decrease their budgets in other areas, such as antitrust and trade, personal injury and environmental litigation. Slightly more public companies than private companies expect to decrease their litigation budgets. However, when taken by industry, planned decreases are most prominent in healthcare, with 12% of respondents planning to lower their spend on personal injury cases and 15% planning decreases in the area of professional malpractice.
“While companies aren’t necessarily spending less on litigation, in-house counsel are finding other ways to cut costs,” Dillard said.
Cost-cutting measures include in-sourcing e-discovery, using law firms with specialized e-discovery practices and outsourcing certain e-discovery functions through preferred provider relationships. Stricter document retention policies, such as systematic destruction, also help keep discovery costs down.
The 2009 survey asked companies to consider, among other things, what types of cases they fear most, where they are spending their budgets and how they are adjusting their approaches to litigation management in light of the downturn.
What follows is a bulleted summary from the 2009 Fulbright & Jaworski Litigation Trends Survey. For a link to a descriptive “white paper” go to: http://www.fulbright.com/litigationtrends05.
The 2009 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.
The 2009 survey asks companies to consider, among other things, what types of litigation most concerns them, where they’re spending limited budgets and how they’re adjusting approaches to litigation management in light of the downturn. This year's survey also delves into special topics, such as how companies are dealing with rising e-discovery costs and employee use of social media Web sites, such as Facebook and Twitter.
The survey reflects information collected from 408 company lawyers – 13% more respondents than last year - most of whom identify themselves as either general counsel or head of litigation. Companies polled are both public and private, and span industry groups, from education to energy, engineering, financial services, healthcare, insurance, manufacturing, real estate, retail and technology. A quarter of respondents do business in at least 11 countries. Companies in the survey also are well-represented by size: 16% report revenues of under $100 million, while 31% have revenues between $100 and $999 million, and another 53% are at $1 billion and above.
Managing Litigation in an Economic Crisis:
- The Money Situation: How Much? Litigation costs are on the rise this year: 53% of all respondents say their annual litigation cost (excluding cost of settlement) exceeds $1 million, a marked increase from last year, in which 43% of companies said their annual litigation cost exceeded the $1 million mark. Nearly one-third of healthcare companies in the survey broke the $10 million mark.
- The Money Situation: Budgeting: Given that 28% of respondents say tighter cost control is the most significant way in which the crisis has affected their company’s litigation management, Fulbright asked how companies are doing more with less. Overall, slightly more companies (19%) are decreasing their litigation budgets than increasing them (15%). U.K. companies appear to be budgeting more liberally, with 22% reporting that budgets are increasing, while only 8% say they are decreasing. For large-caps, the numbers go both ways: 21% are increasing budgets while 23% are decreasing. In light of the fact that public companies are more likely to face litigation than private companies, about twice as many public companies as private companies are increasing their budgets. Meanwhile, nearly one-third of all retail companies report budget increases.
- The Money Situation: Where? Those budget increases will go primarily toward bankruptcy litigation, e-discovery, labor/employment, regulatory and contracts cases. Planned budget decreases are far less common: 5% of respondents report decreases in class action work, while a mere 4% of respondents report decreases in the areas of personal injury, e-discovery, contracts, regulatory and intellectual property.
- The Money Situation: Spending: Fulbright’s findings on litigation spending tell a similar story. More U.K. respondents (34%) report increases than U.S. respondents (17%). This comes after three straight years of steady spending decreases. While retail companies lead the pack for litigation budget – perhaps because that industry has more litigation pending – they also lead in the category of litigation spending, with 39% of those companies reporting increases.
- The Rise of Alternative Fees: With litigation spending up as the result of the crisis, company lawyers want to fetch competitive rates and get a better sense, ahead of time, of what their litigation bill will be. Fulbright found that 35% of all respondents say the economic crisis has led to an increase in the use of alternative fees, with their rate of use being higher in the U.K. and among large-cap companies.
- Why? 63% of U.S. respondents and 74% of U.K. respondents say the primary reason for choosing alternative fee arrangements is lower costs. But in addition to cost efficiency, alternative fee arrangements can incentivize outside counsel and promote better interaction between outside and inside lawyers. 45% of respondents report using some kind of alternative fee arrangement, including a balanced mix of blended rate, capped fee, conditional or contingent fee, fixed fee and performance-based arrangements.
- Who Uses Them? Public companies are more likely to use alternative fees, with 18% of public company respondents reporting that anywhere from one-fourth to one-half of litigation work is being billed via alternative fee arrangements. The survey results also show that the engineering, construction and technology industries have utilized alternative fees more often than industries such as financial services, healthcare, insurance and manufacturing.
- But the Billable Hour Still Rules: Reports suggesting that the death of the billable hour is nigh may be exaggerated. Despite the rise of alternative fee arrangements over the past year, 52% of U.S. respondents and 61% of U.K. respondents say their companies do not use alternative fees. It is also worth noting that 69% of respondents say that, of the money spent on outside counsel, only 25% or less is billed via alternative fee arrangements.
- Litigation Is Up: More than one-third of all respondents say litigation caseload is up as a result of the crisis. Nearly half of large-caps report a rise in caseload (versus 12% of small-caps), and 43% of public companies report a rise (versus 26% of private companies).
- So Where Are the Cases? Which areas of litigation are seeing the most action? Corporate counsel report big jumps in litigation related to bankruptcy (a practice area that had remained relatively dormant over the previous three years), contracts (which has been consistently prevalent since at least 2005) and labor and employment (which, though still prevalent, came down significantly from last year). Other types of litigation have seen more modest rises, such as intellectual property, regulatory, class action and malpractice cases.
- Healthcare Relatively Unscathed: Healthcare has remained unscathed, with only 12% of healthcare respondents reporting a rise in litigation (versus, for example, 42% each of financial services and insurance companies and 55% of retail companies). And while nearly every sector polled is seeing a bump up in bankruptcy cases, only 6% of healthcare companies say they have seen increases in bankruptcy. Similarly, only 12% of healthcare companies surveyed say they have seen a rise in contracts cases, compared with an overall rate of 28% of companies that say they have experienced more contracts litigation.
Regulatory Investigations: A Broad New Landscape:
- More Regulators, More Investigations: Regulatory proceedings, internal investigations and external inquiries – all of which had been steadily on the wane since 2006 – are back up. The DOJ, EPA, states attorneys general and the SEC account for much of the regulatory action in the U.S. More than 31% of respondents report an increase in inquiries and investigations over the past three years, including requests from the FDA, OSHA, the IRS, U.S. Attorneys offices and the FTC.
- More Internal Scrutiny at Large-Caps, Healthcare and Manufacturing Companies: Large-cap companies are twice as likely as mid-caps, and four times as likely as small-caps, to commence investigations on their own initiative. And large-caps also are more likely to self-report a matter to a regulatory agency following investigation. Meanwhile, 47% of healthcare companies and 41% of manufacturing companies say they have commenced investigations on their own initiative in the past year, compared with an average of about 20% for other sectors.
- Cooperation Among Regulators: Owing, perhaps, to the rise in corruption investigations among multi-national companies (see below), 12% of respondents say they have seen an increase in the level of cooperation between regulatory agencies in different countries over the past three years. Only 3% say they have seen a decrease in cooperation. In the context of FCPA violations, some say the current level of international governmental cooperation is unprecedented.
- Government, Corporations and the Privilege Waiver: Sen. Arlen Specter, the former ranking member of the Senate Judiciary Committee, has famously taken a stance against attempts by the U.S. Department of Justice to measure cooperation by waiver of the attorney-client privilege. In last year’s survey, 10% of respondents said their companies had actually waived privilege – at least occasionally – in hopes of avoiding government prosecution or an enforcement action. That was down from 21% of respondents in 2007 who reported their companies occasionally waived in hopes of avoiding government action. So this year, with a bill wending its way through Congress, Fulbright asked in-house lawyers whether they favor a prohibition that prevents government lawyers from asking corporations to waive the privilege. There is nearly a 50/50 split across the board – by company size and by industry – suggesting that perhaps many in-house counsel believe that privilege waiver does not always gain much of an advantage for the government.
- More Employees, More Whistleblowers? A surprisingly large portion – 21% – of respondents say their companies have been subjected to whistleblower allegations in the past three years. But the percentage goes up to 30% for large-caps (versus 8% for small-caps) and 28% for public companies (versus 14% for private companies). Whistleblower allegations result in a mix of internal investigations, regulatory investigations and third-party proceedings.
- Whistleblowers and the Healthcare Industry: Whistleblowers are particularly prominent in healthcare, which could account for the fact that healthcare companies tend to initiate more investigations on their own. Nearly 40% of in-house counsel at healthcare companies report a whistleblower allegation in the past three years. More whistleblowers, however, could also mean less litigation. The healthcare industry saw only modest rises in any given area of litigation last year.
- Anticipated Rise: 24% of all respondents expect the number of claims brought by whistleblowers in their respective industries to rise in the coming year.
Bribery Cases on the Rise:
- Corruption: While the FCPA statute has been on the books for more than 30 years, enforcement of the law has only really taken off in the last four years, with the SEC and DOJ expressing renewed interest in cracking down on foreign corruption. Overall, investigations are on the rise, according to the Fulbright survey: In last year’s survey, 7% of all respondents reported having engaged outside counsel for such investigations versus 12% in the 2009 survey. Billion-dollar companies had a higher incidence of bribery investigations last year, with 17% engaging outside counsel to assist with an investigation, versus 11% of mid-cap companies and just 2% of small-caps. Public companies are investigated about three times as often as private companies. The rate of corruption investigations in the manufacturing industry is particularly high, with 25% of manufacturing companies having faced an investigation in the past year.
- Is the FCPA Working? Bribery cases may be having an impact on how companies do business. Fulbright’s 2008 survey found 31% of respondents had made a decision not to do business in a given country based on the perceived degree of local corruption. In this year’s survey, that same statistic is reduced to 16%. However: 39% of manufacturing companies avoided doing business in certain countries last year due to the perceived level of corruption.
Closer Look at Labor & Employment Litigation:
- Employment Litigation Rises With Jobless Rate: As the economy dips and unemployment spikes, the jobless sue their former employers in greater numbers. For the second straight year, survey respondents report sizeable increases in multi-plaintiff cases in the area of wage and hour disputes (FLSA) (up 15%), age discrimination cases (up 11%) and disability discrimination (up 8%). Corporate counsel also report increases, during the past 12 months, in race discrimination cases (up 10%), sex discrimination cases (up 11%), religious discrimination cases (up 4%) and ERISA cases (up 4%).
- What Types of Labor Suits? Wage and hour disputes remain the primary concern when it comes to multi-plaintiff cases. On the class action front, labor/employment account for 40% of cases (while consumer litigation comes in second, and securities litigation third.) Which area of labor/employment litigation has seen the biggest jump? Nearly 40% of respondents point to wage and hour, with misclassification, overtime and meal and rest break claims accounting collectively for the vast majority of wage and hour cases, and with minimum wage cases accounting for the remaining 6%. The wage and hour case trend started several years ago when plaintiffs lawyers discovered that state and federal law in this area provided the basis for recovery of small amounts per employee for events or practices covering hundreds of workers, but in addition attorneys' fees, and in some cases double damages. In the past year, discrimination cases have seen the greatest jump as employees lose job security or the jobs themselves.
- Sex and Race: Sex discrimination cases came in second and race cases came in third. And when asked which labor and employment area has seen the greatest increase – when looking at both multi-plaintiff and single-plaintiff cases – 54% said discrimination, while only 25% said wage and hour, again attributable to the depressed job climate and related reductions in force.
- California Bound: For wage and hour claims, U.S. respondents say that nearly half of all suits are filed in California because of that state’s more protective laws. While some other states have state laws that are more restrictive than the federal Fair Labor Standards Act, none seem to be as generous as the Golden State.
How to Resolve? Litigation versus Arbitration:
- Commercial International Arbitrations Expected to Rise: Nearly a quarter of counsel from large-cap companies and 17% of all respondents expect an increase in the number of commercial international arbitrations they will be involved in over the coming year. Increases are expected, particularly, in the financial services, insurance, manufacturing and retail sectors.
- Rate of International Arbitration Higher in U.K. and Among Retail/Wholesale: 22% of U.K respondents say their company has been party to at least one international arbitration in the last 12 months, versus 14% of U.S. respondents. That number goes up to 29%, however, when looking only at large-cap companies. Moreover, 72% of retail and wholesale companies that participated in the survey commenced at least one international arbitration in the past 12 months.
- Arbitration in Labor Suits – A Special Case: 15% of respondents said their company requires arbitration of disputes in non-union settings – that’s down from last year’s 22%. Why choose arbitration for these suits? The process is beneficial from an employee-relations standpoint, according to 83% of those respondents. Cost also is an issue: The median cost ($50,000) to arbitrate a single-plaintiff employment case is about half the median cost ($99,038) of litigating a single-plaintiff employment case to conclusion. Though arbitration is not the better route for everyone: Large-cap companies, on the whole, spend more on arbitrating single-plaintiff cases, with 61% of large-caps paying upwards of $50,000 per case. The median cost of arbitration for public companies is also substantially higher than for private companies.
- For Domestic Disputes, Leaning Toward Litigation: 55% of U.S. respondents said that in disputes that are not international in nature, and when given a choice, they opt for litigation over arbitration – from both the defensive and offensive side. (In the U.K., however, arbitration for domestic disputes remains popular with 51% of U.K. respondents saying they opt for arbitration in domestic disputes.) The primary considerations for choosing one over another are cost, efficiency, higher comfort level and predictability of outcome.
- Why Are Some In-House Counsel Choosing Litigation for Domestic Disputes? In the U.S., some in-house lawyers believe litigation is more likely to produce decisions on the legal merits rather than an arbitrator’s unchecked sense of fair play. What’s more: arbitration can be no less expensive or time-consuming. The median cost for arbitration – $50,000 – is way up from last year’s median cost of $35,000. Litigation, some respondents say, offers greater discovery opportunities, greater availability of dispositive motions and more established rules.
- Still Lower in U.S.: Fulbright’s 2008 survey discovered that the number of class actions brought against companies had gone way down from 2007 levels. In 2007, 51% of survey respondents reported one or more class actions having been brought against their company in the prior year. In 2008, that number dipped to 23%, and this year it also is at 23%, though that number escalates to 36% when confining the inquiry to large-cap companies and to 41% when looking only at the retail and wholesale industries. The class action mechanism is being used most commonly in labor/employment actions, consumer cases and securities litigation.
- Still Non-Existent in U.K.: There is no direct U.K. equivalent of a U.S. class action. There are other mechanisms for pursuing group complaints, but they are largely unused. This year only 2% of companies say class actions (or the U.K. equivalent) were brought against their company in the past 12 months in the U.K.
What’s New in Patents
- Patent Offense: Has patent litigation gone by the wayside as in-house counsel preoccupy themselves with bankruptcy litigation, labor and employment suits and regulatory matters? Or, in the face of reduced budgets, are in-house counsel simply pushing patent disputes down on their priority lists? In the 2008 survey, 21% of respondents reported having been involved with at least one patent infringement proceeding as a plaintiff in the past 12 months. This year that number is down to 17%. In patent-heavy industries like technology and manufacturing, however, the numbers are as much as twice that.
- Patent Defense: With patent claims going down, there was a corresponding drop in companies that have defended against patent infringement claims in the past 12 months.
- What’s Ahead: Corporate counsel do not seem to expect much of a jump in the coming year: 92% of respondents said they expect the number of patent infringement suits their companies will be involved with as a claimant to remain the same in the coming year. In-house counsel at technology companies do not expect to see a rise in the patent suits they file, though 15% of them expect an increase in the number of patent suits they will be involved with as a defendant.
Reforming the Discovery Process:
- To Limit or Expand? More than 60% of all in-house counsel (77% in the U.S.; 21% in the U.K.) would like to see the use of “full” pre-trial disclosure reconsidered in the U.S. to make the process more affordable. But in England and Wales, only 26% of all survey respondents say “full” pre-trial disclosure should be reconsidered, possibly because pretrial disclosure there is less fulsome already.
- More Costly But Less Litigious: In any case, e-discovery, while growing ever more costly, has also become a less litigious subject. Last year 67% of companies said they never had an e-discovery issue in the prior 12 months become a subject of a motion, hearing or ruling from a tribunal – up from 44% in 2007.
- Where are Companies Cutting Costs in e-Discovery?
- Specialized e-discovery practices: About a quarter of all companies and 39% of energy companies are using law firms with specialized e-discovery practices. Such firms are providing companies with a mix of e-discovery services, from preservation to collection, processing and review.
- Insourcing: Nearly half of all survey respondents, 58% of large-cap companies, and 69% of retail/wholesale companies are keeping at least some e-discovery activities in-house, from preservation, collection, processing and review.
- Outsourcing: 22% of U.S. companies and 28% of U.K. companies are outsourcing main e-discovery functions through preferred provider relationships or master service agreements.
- Does FRE 502 Save Money? Federal Rule of Evidence 502, enacted last year, permits claw-back of privileged evidence and “quick peek” review. The rule was intended to strengthen litigants’ ability to protect their privilege by giving waiver protection to a party that inadvertently produces a privileged document. The rule was enacted, in part, to address the cost of pre-production privilege review. But 89% of respondents say the rule has resulted in no savings to their company. Another 9% say it has resulted in moderate or insignificant savings.
- Dealing With Social Technology in Discovery: Given the popularity of social technology Web sites, such as Facebook, MySpace and Twitter, this year Fulbright asked how companies are restricting use of these sites among their employees.
- Rate of restriction: Fulbright’s survey indicates that 46% of U.S. respondents restrict some mix of Facebook, MySpace, Bebo, LinkedIn, Plaxo, Twitter and YouTube, while 52% of U.K. respondents reported restrictions. In the U.S. and the U.K., Facebook, MySpace, Bebo and YouTube are the most commonly blocked sites.
- Fewest Restrictions at Tech Companies: Notably, tech companies are the least likely to block social networking sites, with 56% of tech companies who participated in the survey saying they have no restrictions on such sites.
- Why Restrict? In the past 12 months, 8% of companies that participated in the Fulbright survey report having been required, as part of discovery in the U.S. or disclosure in the U.K., to produce electronically stored information (ESI) from one of the above sites. But ESI production from social media sites appears to be more common in the U.K.: 18% of U.K. respondents reported having had to produce ESI from a social media site in the past 12 months versus only 4% of U.S. companies.
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