Litigation: Where Has It Gone? Where Is It Going?

A Brief Look Back

Gearing Up for Litigation

Managing Litigation in an Economic Crisis

• How Much? Litigation costs are on the rise: 53% of all respondents said their annual litigation cost (excluding cost of settlement) exceeds $1 million, a marked increase from 2008, 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.
• Budgeting. Given that 28% of respondents said 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 and only 8% reporting a decrease. For large-caps, the numbers go both ways: 21% are increasing budgets and 23% are decreasing. Because public companies are more likely to face litigation than private companies, about twice as many public as private companies are increasing their budgets. Meanwhile, nearly one-third of all retail companies reported budget increases.
• 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 4% of respondents report decreases in the areas of personal injury, e-discovery, contracts, regulatory and intellectual property.
• Spending. Fulbright’s findings on litigation spending tell a similar story. More U.K. respondents (34%) than U.S. respondents (17%) report increases. This comes after three straight years of steady spending decreases. While retail companies led the pack for litigation budget - perhaps because that industry has more litigation pending - they also led in the category of litigation spending, with 39% of those companies reporting increases.

• Why? Sixty-three percent of U.S. respondents and 74% of U.K. respondents cited the primary reason for choosing alternative fee arrangements to be lower costs. But, in addition to cost efficiency, alternative fee arrangements can incentivize outside counsel and promote better interaction between outside and inside lawyers. Forty-five percent of respondents reported 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 by way of alternative fee arrangements. The survey results also show that the engineering, construction and technology industries have used alternative fees more often than industries such as manufacturing.
• The Billable Hour Still Rules. Reports suggesting the death of the billable hour may be exaggerated. Despite the rise of alternative fee arrangements in 2008, 52% of U.S. respondents and 61% of U.K. respondents said 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 by way of alternative fee arrangements.

• Where Are the Cases? Which areas of litigation are growing? Corporate counsel reported 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 2008). Other types of litigation, such as intellectual property, regulatory, class action and malpractice cases, have seen more modest rises.
• Healthcare Relatively Unscathed. Healthcare has remained unscathed, with only 12% of healthcare respondents reporting a rise in litigation. In addition, while nearly every sector polled is seeing a bump in bankruptcy cases, only 6% of healthcare companies said they have seen increases in bankruptcy. Similarly, only 12% of healthcare companies surveyed said they have seen a rise in contracts cases, compared with an overall rate of 28% of companies that reported experiencing more contracts litigation.

• 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 accounted for much of the regulatory action in the U.S. More than 31% of respondents reported an increase in inquiries and investigations since 2007, 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. In addition, 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 said they have initiated investigations in the past year, compared with an average of about 20% for other sectors.
• Cooperation Among Regulators. Perhaps due to the rise in corruption investigations among multi-national companies (see below), 12% of respondents reported seeing an increase in the level of cooperation between regulatory agencies in different countries since 2007; only 3% said they have seen a decrease in cooperation. In the context of FCPA violations, some said the current level of international governmental cooperation is unprecedented.
• Government, Corporations and the Privilege Waiver. Sen. Arlen Specter, former ranking member of the Senate Judiciary Committee, famously took a stance against attempts by the U.S. Department of Justice to measure cooperation by waiver of the attorney-client privilege. In the 2008 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 that their companies occasionally waived in hopes of avoiding government action. In 2009, with a bill winding its way through Congress, Fulbright asked in-house lawyers whether they favored a prohibition that prevented government lawyers from asking corporations to waive the privilege. There was nearly a 50/50 split across the board - by company size and by industry - suggesting that perhaps many in-house counsel believe that the privilege waiver does not always gain much of an advantage for the government.

• More Employees, More Whistle-blowers? A surprisingly large portion  of respondents - 21% - said their companies have been subjected to whistleblower allegations since 2007. The percentage goes up to 30% for large-caps (compared to 8% for small-caps) and 28% for public companies (vs. 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 reported 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 in 2008.
• Anticipated Rise. Twenty-four percent of all respondents expected the number of claims brought by whistleblowers in their respective industries to rise this year.

• Corruption. While the FCPA statute has been on the books for over 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 the 2008 survey, 7% of all respondents reported having engaged outside counsel for such investigations, compared with 12% in the current survey. Billion-dollar companies had a higher incidence of bribery investigations in 2008, with 17% engaging outside counsel to assist with an investigation, compared to 11% of mid-cap companies and 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 over 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 the current 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.

• 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 year, survey respondents reported 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 reported increases over 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; securities litigation is third highest, after consumer litigation. 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 most wage and hour cases; minimum wage cases account 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. Since 2009, 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. When asked which labor and employment areas have 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 said that nearly half of all suits were filed in California because of that state’s more-protective laws. While some other states have laws that are more restrictive than the federal Fair Labor Standards Act, none seem to be as generous as the Golden State.

• 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 in the financial services, insurance, manufacturing and retail sectors in particular.
• Rate of International Arbitration Higher in the U.K. and Among Retail/Wholesale. Twenty-two percent of U.K respondents said their company has been part of at least one international arbitration in the last 12 months, compared to 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. Fifteen percent of respondents reported that their company requires arbitration of disputes in non-union settings, down from 22% in 2008. 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. Arbitration, however, is not the best 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. Fifty-five percent 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 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) has increased compared to 2008’s median cost of $35,000. Litigation, some respondents said, offers greater discovery opportunities, greater availability of dispositive motions and more established rules.

• Still Lower in the U.S. Fulbright’s 2008 survey discovered that the number of class actions brought against companies had dropped compared to 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 remains at 23%, though that number rose 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 the 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. Only 2% of companies say class actions (or the U.K. equivalent) were brought against their company in the past year in the U.K.

• 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 they a lower priority for in-house counsel? In the 2008 survey, 21% of respondents reported having been involved with at least one patent infringement proceeding as a plaintiff in the preceding 12 months. This past year, that number is down to 17%. In patent-heavy industries like technology and manufacturing, however, the numbers are nearly doubled.
• Patent Defense. With patent claims going down, there was a corresponding drop in companies that defended against patent infringement claims in 2009.
• What’s Ahead. Corporate counsel do not seem to expect much of a jump in 2010: 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 did not expect to see a rise in the patent suits they file, though 15% of them expected an increase in the number of patent suits they will be involved with as a defendant.

• 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. E-discovery, while growing more costly, has become a less litigious subject. In 2008, 67% of companies said they never had an e-discovery issue in the prior 12 months become the subject of a motion, hearing or ruling from a tribunal - up from 44% in 2007.
• Where are Companies Cutting Costs in Specialized E-Discovery Practices? About a quarter of all companies and 39% of energy companies reported 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) reported keeping at least some e-discovery activities in-house, including preservation, collection, processing, and review.
  - Outsourcing. Twenty-two percent 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 media Web sites such as Facebook, MySpace and Twitter, Fulbright asked how companies are restricting use of these sites among their employees.
  - Rate of Restriction. The 2009 survey indicates that 46% of U.S. respondents restrict some mix of Facebook, MySpace, Bebo, LinkedIn, Plaxo, Twitter and YouTube; 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 were 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? Eight percent of companies that participated in the Fulbright survey reported 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 in the preceding 12 months. 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 year, compared with only 4% of U.S. companies.

Links

• Fulbright & Jaworski LLP