Companies in the United States and United Kingdom dealt with more litigation while regulatory investigations reached a five-year high, according to Fulbright's 9th Annual Litigation Trends Survey.
After a one-year decline, litigation rose to 2010 levels as businesses on both sides of the Atlantic initiated and faced more lawsuits in 2012 than they did in 2011. In the U.S., labor and employment disputes and contract litigation led the way.
Meanwhile, Fulbright's respondents adapted to a stricter regulatory environment, both at home and abroad, following the toughest Wall Street reform since the 1930s and the U.K.'s 2010 anti-bribery legislation.
Indeed, the Fulbright survey found that the rate of companies retaining outside counsel for assistance in a regulatory investigation jumped in the U.S. (from 55% in 2011 to 60% in 2012) and skyrocketed in the U.K. (from 27% to 72%).
"Ever since the financial crisis, our litigation trends survey has found respondents confronting increased regulatory scrutiny," said Otway B. Denny, the head of Fulbright's global disputes practice. "As litigation rebounded in 2012, more companies, particularly in energy, health care, and manufacturing, experienced an increase in government and regulatory investigations. All three of these industries, along with technology, were involved in investigations that concerned at least six different U.S. regulators."
Most companies predict that an easing in litigation during 2013 is unlikely. The majority of all respondents—92% (compared with 89% in last year's survey)—expect the number of legal disputes their companies will face to rise or stay the same in the next 12 months. One-quarter of U.S. respondents and 32% of U.K. respondents expect litigation to rise in 2013. Companies from the retail, energy, and health care industries have the highest expectations for a rise in the number of disputes.
This marks the ninth year that Fulbright has polled corporate law departments in the U.S. and U.K. on the state of disputes. The survey gathered input from 392 in-house attorneys, including 275 U.S. respondents, on litigation issues and trends.
Following a slight decline in 2011, the number of lawsuits rose again in 2012. While last year's survey found 48% of all companies had initiated lawsuits, this year's survey showed 60% of respondents becoming plaintiffs in the last 12 months.
More offense meant more defense. In the 12 months leading up to last year's survey, 27% of U.S. companies—and just 8% of U.K. companies—had faced more than 20 suits. In the 12 months leading up to this year's survey, 32% of U.S. companies and 35% of U.K. companies had faced more than 20 suits.
Engineering and construction companies led in litigation, with 80% of them filing at least one suit last year. The engineering sector faced suits at an even greater rate than it initiated them and almost half of all Fulbright's engineering respondents faced at least one high-dollar suit during the last year. Not surprisingly, 57% of engineering respondents reported an annual litigation spend of $5 million or more – the highest for all respondents to Fulbright's survey.
Arbitration trends told a similar story. On the one hand, overall rates of arbitration remained flat from 2011 levels, with a little less than half of all companies having been involved in at least one arbitration proceeding in the last 12 months and far fewer having commenced one. On the other hand, big-dollar arbitrations grew, particularly in the U.S., where 10% of the companies responding faced at least one arbitration with more than $20 million at stake (compared to 4% in 2011).
Consistent with past surveys, labor and employment disputes and contract litigation continued to occupy legal departments in the U.S. and U.K., a trend that is true regardless of company size. Last year's survey showed a quarter of U.S. companies reporting an increase in wage and hour disputes. This year's survey finds that rate cut, drastically, to 12%.
What The Future Holds
Looking ahead, 16% of U.K. respondents (compared with 12% of U.S. respondents) expect the number of internal investigations involving their company to increase in the coming year.
Worries over whistleblower allegations continue, and for good reason: the number of allegations made remained high during the past 12 months—particularly among larger companies—and only 3% of respondents expect a decline in the coming year.
Litigation concerns are shifting. Personal injury disputes are on the rise, particularly in the U.S., and especially for mid-size and larger companies in real estate, retail, manufacturing, and energy. The U.K. has new worries, too—namely, regulatory investigations: more than one-third of U.K. respondents ranked those types of disputes among their top five concerns, marking a significant increase from the previous survey.
This year's survey asked companies to consider, among other things, where they spend their budgets, how they handle international arbitrations, and what issues they encounter relating to privacy and data protection during disputes and investigations. What follows is a bulleted summary from Fulbright's 9th Annual Litigation Trends Survey.
Fulbright's 9th Annual Litigation Trends Survey was conducted in 2012 by Greenwood Associates, a business research firm in Houston that has produced previous editions of the report. The survey, launched by Fulbright in 2004, polls corporate counsel on litigation issues and concerns.
The Fulbright survey reflects information collected from 392 in-house attorneys. Of the respondents, 82% identify themselves as general counsel and 14% as head of litigation. Seventy percent of all respondents are located in the U.S., 26% in the U.K. and 4% in other countries. Forty-seven percent of respondents maintain offices in at least three countries, while 16% have offices in 21 or more countries.
The companies represented in the survey are public and private—roughly a 50/50 split—and span the following industry groups: energy, engineering and construction, financial services, health care, insurance, manufacturing, real estate, retail and wholesale, and technology and communication. Sub-industries are also well represented. For instance, U.S. energy respondents are split among oil and gas, drilling, power, and alternative energy; while U.S. health care sub-industries include pharmaceuticals, hospitals, and medical devices.
Companies of all sizes participated in the survey: 49% of respondents were larger companies (with gross revenues of $1 billion or more), 31% were mid-size (gross revenues of $100 million to $999 million), and 20% were smaller (gross revenues of less than $100 million). Thirty-two percent of all energy respondents and 31% of manufacturing respondents had gross revenues of $10 billion or more in the previous fiscal year. Respondents from the financial services, real estate, and retail sectors dominated the smaller-company category.
Managing Litigation: Budgets, Fees and In-House Hiring
- Spending is Trending: Litigation spending rose in 2011, with 53% of U.S. companies reporting an annual litigation spend of $1 million or more. The 2012 U.S. spend stayed level with 53% of companies again reporting an annual spend of $1 million or more. However, there was a slight bump in the high dollar range, with 27% of U.S. companies reporting an annual spend of $5 million or more compared to 23% in 2011.
- Engineering – Special Case: Engineering and construction respondents reported an enormous annual spend with 57% spending $5 million or more, the highest annual litigation spend among all industries represented in Fulbright's survey.
- Budgeting for IP: E-discovery, contracts, and labor and employment litigation have been perennial cost centers for survey participants. Year after year, companies expect their budgets in those areas to see double-digit percentage increases. In 2011, IP litigation—particularly at larger tech and retail companies—was added to that list. This year's survey shows that IP remains a top concern: 13% of all companies expect budget increases in IP and only 5% forecast a decrease.
- Alternative Fees Take New Direction: For many years, alternative fee usage had been on the rise among survey participants, a reflection of the wish to keep costs not only low but also predictable. This year's survey showed a shift in direction for both U.S. and U.K. respondents. In 2010, 52% of U.S. respondents used alternative fees for at least some of their work, and that figure increased to 61%. in 2011. This year's survey revealed a scaling back—to 51%. In the U.K., the story was similar, with the number of respondents using alternative fees increasing in 2011 (66% up from 50% in 2010) but decreasing in 2012 to 63%. Larger companies from health care, manufacturing and tech stood as the leaders in usage. And where alternative fees remained in use in the U.S., they accounted for a decreasing portion of overall work: 87% of U.S. respondents claimed that less than 30% of the money spent on outside counsel was billed via alternative fees.
In-House Hiring Slows: During the lean years of 2008 and 2009, in-house legal departments bulked up to cut costs, hiring more attorneys to conduct or manage litigation. In-house hiring stayed flat in 2010, but then came back strong again in 2011 before flattening once more in 2012.
- Going In-House: Fifty-eight percent of U.S. companies employed three or more in-house lawyers in 2012, compared to 53% in 2011 (and 40% in 2010); while 72% of U.K. companies employed three or more in-house lawyers in 2012, matching 2011 (and following 62% in 2010). Industry-wise, energy and insurance companies led, as 73% of respondents from each of these industries employed three or more in-house lawyers.
- More to come: Thirteen percent of all respondents expect the number of in-house lawyers who manage or conduct litigation to increase in the coming year, while only 3% expect a decrease. Among industry sectors, prospects for increases in in-house litigation management teams stood highest among tech, health care, energy, retail/wholesale, insurance, and manufacturing companies. Correspondingly, when it comes to hiring outside counsel, respondents from insurance, real estate, retail, and tech experienced a greater decrease than increase during the last 12 months.
- Firm Hiring Up in U.S.: Twenty percent of U.S. respondents have increased the number of law firms on their outside counsel litigation roster over the past 12 months, and only 14% have decreased the number. In contrast, the numbers for U.K. companies were reversed: 22% decreased outside firm hiring while only 9% reported an increase.
- Secondment – U.K. vs. U.S.: Sixty-nine percent of U.K. respondents – versus only 31% of U.S. respondents—participated in a secondment in the last two years. Companies that are larger and/or public, including those from engineering and financial services, were the most involved.
- Investigations Reach 5-Year High: In 2011, the percentage of companies retaining outside counsel for assistance in a regulatory investigation jumped considerably in the U.S. (from 43% to 55%). In 2012, the number rose again, hitting 60% in the U.S. About one-third of all respondents in last year's survey reported having spent more time addressing regulatory investigative requests in the past three years. This year's survey found that overall rate continuing to increase, to 42%, with nearly 30% of all respondents predicting an increase in the coming year and only 10% expecting a decrease.
- The Targets: Nearly three-quarters of respondents from the energy, health care, and manufacturing sectors have been the target of a regulatory investigation. The energy, health care, manufacturing, and tech sectors were each involved in investigations concerning six or more U.S. regulators over the past year.
- Who's Investigating Whom?: As in 2011, the DOJ and the state attorneys general have been active in investigations. While the DOJ's focus has been on tech, health care, engineering, and energy companies, the state attorneys general tended to focus more on insurance companies. In addition, the SEC has stepped up its efforts with investigations targeted at financial services and insurance companies.
- Regulatory Investigation in U.K.: Seventy-two percent of Fulbright's U.K. respondents retained counsel for a regulatory investigation in the last year, up from 27% in 2011 and 26% in 2010. U.K. respondents are mostly concerned with investigations by the Financial Services Authority (38%).
- Internal Scrutiny Steadies: Since 2008, the percentage of companies reporting internal investigations that required outside counsel has fluctuated between approximately 30% and 50%. The high in 2008 was followed by a dip in 2009. Last year's survey found that rates of internal investigations had risen. This year's survey revealed 42% of U.S. and 46% of U.K. companies retained counsel for one or more internal investigations in the past 12 months.
- Prevalence at Smaller Companies: Whereas outside regulatory scrutiny tends to focus on companies that are larger and/or public, rates of internal scrutiny are highest at companies that are smaller and/or private. Ninety-six percent of smaller companies and 93% of private companies expect the number of internal investigations involving their company to increase or stay the same in the coming year (compared to 85% of larger companies and 83% of public companies).
- A Sector Shift: In last year's survey, health care, energy, and engineering sectors led the industry pack in internal investigations. This year's survey showed the financial services, manufacturing and retail sectors experiencing higher rates, with at least 50% of each industry reporting one or more internal investigations in the last 12 months. Retail led the pack as 55% of companies in that sector underwent at least one internal investigation, and 19% underwent six or more.
- Whistleblower Allegations Remain High: And could climb higher. More than one-fifth of all respondents (26% in the U.S.—up from 22% in the previous survey; and 37% in the U.K.—up from just 21% in the previous survey) reported being subject to allegations by a whistleblower. As always, larger companies—as well as those from engineering, health care, and manufacturing—were more likely to see whistleblowers emerge. Expect the trend to continue in 2013: Only 3% of all respondents predict a decline in whistleblowers over the next 12 months.
- What Becomes of Allegations?: Consistent with past surveys, the most common outcome of a whistleblower allegation was an internal investigation (78% of respondents subject to whistleblower allegations), particularly for financial services and insurance companies (with both sectors reporting that 100% of allegations led to internal investigations). The second-most common outcome was a regulatory investigation (44% of respondents against whom allegations were made). Least common was a proceeding brought by a whistleblower or a third party (40% of respondents against whom allegations were made).
Bribery Investigations As Expected
- Enter the U.K. Bribery Act: Last year's survey respondents showed signs of gearing up for the implementation of the U.K. Bribery Act of 2010. Twenty-five percent of all respondents undertook reviews of existing procedures, compared to 38% in the U.K. Their concerns, it turns out, were justified. In this year's survey, 25% of all respondents and 37% of U.K. respondents said they've changed the way they operate due to anti-bribery legislation. While the rate of U.S. companies engaging outside counsel for a corruption or bribery investigation remained steady at 9%, the rate of U.K. companies that dealt with such an investigation in the past 12 months tripled—from 6% in 2011 to 18% in 2012.
- Foreign Transactions: Companies in both the U.S. and U.K. are conducting heightened levels of due diligence for corruption in the context of mergers, acquisitions, and other transactions with a foreign country, perhaps in an effort to stem a surge in bribery investigations. Sector-wise, engineering and manufacturing companies reported the highest rate of investigations, conducting due diligence for bribery and corruption at around twice the rate of other industries.
Labor & Employment Litigation: Two Countries, Two Stories
- Slowing in the U.S.: As the U.S. unemployment rate declines, labor and employment litigation eases. Across all areas—from race discrimination to retaliation suits—U.S. companies reported falloffs in litigation, with the most pronounced drop in wage and hour disputes.While last year's survey showed 25% of U.S. companies reporting an increase in this type of litigation over the prior 12 months, this year's survey showed that rate cut to 12%. Sector-wise, only engineering (20%) and health care (22%) reported rates of increase in wage and hour disputes that match the previous year's overall average. Notably, the vast majority of wage and hour disputes filed against U.S. companies are brought in state court.
- Accelerating in the U.K.: Meanwhile, labor and employment litigation rose in the U.K., where companies reported increases in all areas. Sex discrimination cases saw the highest rates, with 15% of companies reporting an increase in these cases during the last 12 months, up from 4% in 2011.
- Discrimination Suits Gaining: Last year's survey noted that the labor litigation landscape appeared to be shifting toward discrimination suits. Indeed, even though labor litigation was down in 2012 in the U.S., discrimination suits continued for companies on both sides of the Atlantic. About a quarter of companies in the U.S. and U.K., and across the industry sectors surveyed, listed discrimination as the area with the greatest increase in the past 12 months. When asked which area will see the greatest increase in the next 12 months, over one-third of all companies again list discrimination.
- A Spike in Costs: Across the board, costs of labor litigation are up. In the U.S., 41% of companies reported an average cost to defend a single employment arbitration suit—excluding settlement —of $100,000 or more (up from 34% in 2011). In the U.K., 75% of companies reported an average cost of $30,000 or more, with 25% reporting $100,000 or more (up from 32% and 3% respectively in 2011). The average cost to defend a single plaintiff employment suit was also up: 61% of U.S. companies (up from 59% in 2011) and 44% of U.K. companies (up from 15% in 2011) reporting a cost of $100,000 or more. The average cost to arbitrate a class action employment suit was more than $200,000 for 54% of U.S. companies (up from 45% in 2011) and $100,000 or more for 61% of U.K. companies (up from 12% in 2011). The average cost to litigate a single plaintiff employment action was $100,000 or more for 67% of U.S. companies (up from 51%) and $100,000 or more for 67% of the U.K. companies (up from 12%).
Intellectual Property & Trade Secrets
- Patently Litigious: Last year's survey found 13% of all respondents bracing for budget increases in IP. Indeed, 24% of all companies filed an IP suit in the past 12 months. Larger companies were nearly three times as likely as smaller companies to file an IP suit, and six times as likely to defend against one. While the vast majority of IP litigation was brought (and defended against) for less than $250,000, 15% of the companies who responded to the cost-related questions pegged their average cost to litigate an IP case at between $1 million and $10 million.
- Engineering – A Special Case: Whereas manufacturing, retail and tech companies tend to bring IP suits at approximately the same rate as they defend against them, this year's survey revealed an anomaly in engineering: Even though 40% brought an IP suit in the last 12 months, only 13% defended against one.
- Patents, Patents, Patents: With IP litigation up, Fulbright asked respondents to break down their IP litigation by five practice areas: patent, trade secret, trademark, counterfeiting, and copyright. In the U.S. and U.K.—and particularly for manufacturing and tech companies—patent infringement accounted for much of the typical company's overall IP litigation portfolio, and patent suits accounted for the majority of big-dollar cases, which were defined as proceedings involving an amount in controversy of more than $5 million. Nine percent of all respondents and 24% of retail respondents expect the number of patent cases in which their company becomes involved during the next 12 months to increase from last year.
Litigation versus Arbitration – The International Scene
- How Should We Resolve This?: Last year's survey found that litigation was still the preferred mode of resolution for disputes that are not international in nature. In this year's survey, Fulbright asked about disputes that are international in nature. For these cases, arbitration was favored, at least among U.S. companies: 25% chose arbitration; 15% chose litigation; and 60% said, "It depends." U.K. companies are split with 23% choosing litigation and 20% choosing arbitration, with 57% saying, "It depends." Avoidance of a jury, cost-effectiveness, and confidentiality ranked as the top reasons to choose arbitration for international disputes.
- Energy, Engineering & Smaller Companies – A Special Case: While mid-size and larger companies preferred arbitration in international disputes, smaller companies skewed toward litigation and were the least likely to have been party to an international arbitration in the past 12 months. On the other end of the spectrum stood energy and engineering companies. Nearly half of respondents from each of these industries—about twice the average—chose arbitration in international disputes; and nearly half from each had been party to an international arbitration in the past 12 months.
- Law Beats Seat: Across geography, company size, and sector, respondents generally preferred the following seats for international arbitration: Singapore in Asia (versus Hong Kong or Kuala Lumpur) , Dubai in the Middle East (versus Bahrain or Qatar), and London in Europe (versus Geneva, Paris, Stockholm, or Zurich). "Logistical convenience" and "Location of the company" were the primary influences on respondents' choice of seat. Even at home, U.S. respondents show a strong bias toward their own regions: Texas companies preferred Houston; East Coast companies preferred New York; California companies preferred Los Angeles; and so forth. But even while companies would prefer to arbitrate at home, the vast majority of U.S. respondents would rather concede choice of seat than choice of law.
- Lessons of Experience: Among 10 arbitration institutions, including the Stockholm Chamber of Commerce and the Singapore International Arbitration Centre, survey participants reported that a bulk of their arbitration experience in the past five years has been with the American Arbitration Association, JAMS, the London Court of International Arbitration and the International Chamber of Commerce Court of Arbitration. The energy, engineering, financial services, and retail sectors encounter UNCITRAL at higher rates than other industries.
- Right to Appoint: Nearly two-thirds of the companies with the most experience in international arbitrations—companies that are larger and/or public in the energy and engineering industries—regarded the right to appoint at least one member of the tribunal as a key right they wish to retain.
- Still Flat: For the fifth year in a row, class actions remained flat, with only a quarter of all respondents—and about 40% of larger companies—having faced one or more class or group action in the past 12 months in U.S. courts. Sector-wise, retail, financial services, and engineering face slightly higher levels of class actions than peer industries. Labor and employment actions and consumer cases still lead.
- Successful Reform?: As for the class actions brought against them, both U.S. and U.K. companies reported major decreases in the number that were settled or dismissed through litigation—indication, perhaps, that class action reform is working in the U.S.
Corralling Data: Protecting Privacy in an Age of Social Media and Mobile Devices
- Privacy & Data Protection: Nearly one-third of all respondents—with particularly high rates among larger companies, as well as among the engineering, financial services, health care, insurance, and tech sectors—encountered issues involving privacy and/or data protection in disputes or investigations in the past 12 months. Issues arose most frequently in the context of collecting data from company equipment and from employees' personal equipment. Companies were also concerned about the use of third-party vendors to collect and process data.
- Clouds Overhead: It's no secret that cloud computing is "the big thing" in data storage technology. In 2011, more than a quarter of all companies reported using cloud computing. In 2012, the rate jumped to a third. Of those companies that use it, a third have had to preserve or collect data from the cloud in connection with actual or threatened disputes or investigations.
Social Media and Mobile Devices: With Facebook exceeding 1 billion members and Twitter having more than 500 million registered users, social media is no longer a niche area of life online. Given its ubiquity, companies must adapt policies to address how information on social media impacts litigation.
- Employees & Social Media: About one-fifth of all companies—slightly up from last year's survey—have had to preserve or collect data from an employee's personal social media account in connection with a dispute or investigation. Notably, respondents from the tech and communication sector report a rate below the survey's average. But only 9% of U.S. companies reported having to actually produce, as part of discovery, information stored on social media.
- When Data Goes Mobile: Last year's survey found that while 91% of U.S. companies permitted employees to conduct business on mobile devices, only 30% had to preserve or collect data from those devices for a litigation or investigation. This year's survey revealed that gap has narrowed: 41% of U.S. companies have had to preserve or collect data from an employee's mobile device for a dispute.
- To Self-Preserve or Not?: While 69% of all companies rely on self-preservation to fulfill their document preservation obligations in disputes or investigations, that rate increased beyond 75% for companies in engineering, manufacturing, and retail. What's the alternative? Instead of self-preservation, the most popular ways to preserve potentially relevant documents were to ask IT to collect all data sources from the pertinent custodians and to maintain data sources that prevent deletion or modification. Those who don't rely on self-preservation cited, as reasons, cost-effectiveness and the efficiency of not having to rely on the custodian.