Fulbright Finds that Third of Companies Expect Litigation to Go Up over Next Year - U.K. Release
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Litigation Survey Findings
- Nearly one-third of businesses expect an increase in the number of disputes they will face in the coming year.
- One in two (50%) financial services businesses said they expect to see an increase in the number of disputes.
- U.K. businesses seeing more regulatory activity from overseas regulators (SEC, DOJ and EU Commission) than OFT or FSA.
- Average annual litigation spend for U.K. companies now stands at $2.8 million.
- Despite dominating media headlines, subprime matters barely on the radar with 3% engaging outside counsel to assist in these matters.
Nearly one in three (31%) of businesses anticipate an increase in the number of legal disputes compared to 8% who say the total number of disputes is likely to decrease, according to a report1 published today by global law firm and litigation heavyweight Fulbright & Jaworski International L.L.P.
The larger the company, the more concerned it is about the prospects of facing more litigation. Forty-three percent of large organisations surveyed expect an increase in disputes this year, compared to just 3% who said they expected disputes to fall. The financial services sector tops the list of industries expecting increased litigation (50% of financial services respondents said they expected to see an increase). This was followed by healthcare (40%), retail/wholesale (39%) and insurance (36%).
Fulbright’s Fifth Annual Litigation Survey Findings would suggest that litigation exposure is back to 2005 levels, with a quarter of businesses not seeing any lawsuits commenced against them in the past 12 months. There also is a slight decline in the larger (more than $20 million) court actions witnessed by companies. This is likely to reflect the good economic conditions that have been enjoyed by U.K. and U.S. companies over the previous three years.
“This year’s survey marks an interesting tipping point, reflecting a snapshot of what may be the calm before the storm,” said Chris Warren-Smith, head of International Financial Services Disputes at Fulbright. “The downward indicators reported last year reflect the more stable economic conditions and mindset that existed for many businesses for much of 2007. However, the warning signs were already out there that the economy was about to shift into bear mode. This concern is reflected by in-house lawyers who are bracing themselves for an increase in legal disputes involving their companies during the coming year. Indeed, the number of companies that believe an increase is on the horizon outnumber four-to-one those forecasting a decrease.”
Although two in five (41%) of U.K. companies had no lawsuits commenced against them in the past year, one in six (16%) respondents had at least one lawsuit commenced against them claiming more than $20 million. The number of U.K. respondents with more than 20 cases commenced against them increased to 10% from 4% in 2007.
There also was a decline in the number of lawsuits filed by respondents during the past three years, with almost one-half (46%) of respondents saying they had not filed any court actions. This figure also is back to 2005 levels. The number of larger court actions where $20 million is the threshold have also apparently declined, with just 10% of the suits initiated having $20 million at issue, compared with 23% in 2007.
The financial services, retail/wholesale and technology/communications industries are the most aggressive sectors in terms of filing court actions.
Contracts remain at the top of the list of litigation concerns for both U.K. and U.S. companies (cited by 66% of U.K. respondents); this is followed by labour/employment (40% of U.K. businesses) and patents/IP (22%). Regulatory matters (13%) drop down to number eight from being the third biggest concern in 2006 and 2007.
Credit Crunch Matters
Despite dominating the media headlines for the past 12 months, the survey’s findings would indicate subprime matters are just beginning to penetrate the list of top litigation concerns for businesses. The analysis reveals that 3% of respondents have engaged outside counsel to assist with a subprime-related matter. In the financial services arena, that figure increased to 11%.
Five percent of respondents anticipate their organisations will be involved in litigation, investigations or other matters related to the subprime crisis within the next 12 months, although this number increases to 22% for financial services companies.
“The widely anticipated tidal wave of subprime litigation has yet to materialise in the U.K. according to the results of our survey,” Warren-Smith said. “Institutions have been involved in a lot of work out activity and negotiations behind the scenes. This is a sensitive area, and those involved currently prefer not to wash their dirty linen in public. It remains to be seen how sustainable this approach will prove to be.”
Regulatory Inquiries and Investigations
Thirty-seven percent of the total respondents have had a regulatory proceeding commenced against them, with U.S. companies twice as likely as U.K. businesses to face a regulatory proceeding.
Interestingly, nearly half (48%) of publicly held companies have had a regulatory proceeding initiated against them, compared with just 27% of private businesses [Table 18]. More publicly held companies (54%) retain outside counsel to deal with regulatory proceedings compared with 31% of privately held companies.
During the past three years, about 41% of respondents have spent more time on regulatory investigation requests or regulatory enforcement proceedings, either as a party or non-party. On the whole, there has been a slight increase in the number of respondents reporting no regulatory proceedings. However, certain sectors, such as energy respondents (49%), report spending more time on regulatory matters. The percentage of U.K. respondents spending more time on regulatory matters has almost doubled since 2007, reflecting a possible increase in the complexities involved in dealing with regulatory matters.
Most Active Regulators
The findings reveal that U.K. companies see as much, if not more, regulatory activity from non-U.K. regulators. Forty percent report having retained outside counsel for regulatory investigations in the past year for matters involving the DOJ, followed by the SEC (33%) and the EU Commission (33%). Just one in four (27%) of U.K. businesses said they had been approached by U.K.-based regulators, FSA and OFT. Meanwhile, just 8% of U.S. companies surveyed said they have used outside counsel to assist with an FSA regulatory matter and just 5% said they have hired counsel to deal with an EU Commission matter.
“The increasing cooperation amongst international regulatory bodies means that U.K. businesses are just as exposed, if not more so, to regulatory matters that originate outside the U.K.,” said Lista Cannon, the partner-in-charge of Fulbright’s London location. “The transnational nature of the regulatory environment means that U.K. businesses require increasingly sophisticated advice and strategies to deal with them.”
The survey also revealed a trend in the number of respondents who agreed to waive lawyer/client privilege when dealing with enforcement authorities—79% would “never” do so in 2007, compared with 90% in 2008. The number of in-house lawyers willing to forego confidentiality may drop even lower in light of the U.S. Justice Department’s edict in late August prohibiting federal prosecutors from pressuring companies and individuals facing investigation to waive their right of privilege.
Some comfort to U.K. businesses is obtained from the very low number of respondents experiencing dawn raids (3% overall and just 2% in the U.K.).
Two in five respondents (both U.K. and U.S.) undertook at least one internal investigation significant enough to require assistance from outside counsel in the past year. The split between public and private companies is notable. One-third of privately held companies have conducted at least one internal investigation requiring outside counsel in the past year compared with 60% of public companies.
“Our findings confirm that internal investigations are a part of routine life for many companies,” said Antony Corsi, a litigation partner at Fulbright. “We anticipate such investigations will increase in line with the current downturn in the economy, as more in-depth scrutiny results in irregularities coming to light.”
Litigation and Litigation Spend
The survey highlights that there has been a decreasing spend on litigation, excluding costs of settlement and judgment. There also is a slight declining trend in the total yearly expenditure for costs and expenses of outside counsel, with a decrease from $964,000 in 2007 to $895,000 this year.
However, companies spending $1million or more on litigation increased amongst both U.S. and U.K. businesses, and amongst smaller companies, the percentage spending $1million or more tripled from last year and increased by half amongst mid-sized companies.
The amount spent on outside counsel by U.K. companies has increased by 18%, with one in 10 U.K. companies (10%) spending $10 million; no U.K. companies reported spending that much last year.
Overall, the number of in-house lawyers employed to manage litigation has remained broadly stable. In line with the expectation for increased litigation exposure, 17% of businesses expect the number of in-house lawyers who manage litigation to increase, compared with 3% that believe the number will decrease.
Facilitating Payments/Dealing with Corruption or Bribery Investigations
Three in five (61%) of public companies prohibit facilitating payments in foreign countries compared with 37% of private companies. Interestingly, although most U.S. companies expressly prohibit such payments, 20% of U.S. respondents still allow them in some foreign countries as a means of expediting business and government functions. This practice is even more common in the U.K., where 39% of companies still permit some type of payments to facilitate deals in some foreign countries.
Two in five (40%) of U.K. companies have decided not to do business in a country based on a perceived degree of local corruption, compared with one in four (23%) in the U.S.
The number of respondents with no class or group actions increased from 48% last year to 77% in 2008. Five percent of U.K. respondents have class actions pending against them in the U.K. Melanie Ryan, a Fulbright litigation partner, commented: “The low absolute number of U.K. businesses facing class/group actions is reflected in the Civil Justice Council’s recent proposal to reform the class actions system in England and Wales. If the proposals of the Civil Justice Council are accepted in their entirety, there will be a fundamental change in the class action landscape.”
Data Protection Laws and e-Discovery
A relatively low number (4%) of companies have requested electronically stored information (ESI) data that could be subject to U.K. or EU data protection laws during U.S. litigation. Some of the largest companies responding to the survey reported having received U.S. court orders requiring production of data in violation of data protection laws or having been subject to a sanction for not providing data.
Four out of five (78%) of U.K. respondents have never had an issue related to e-discovery that has become the subject of a court ruling, whereas the equivalent figure in the U.S. is 63%. The results suggest e-discovery is still not an issue in the U.K. and that parties are resolving their problems amicably rather than in the courtroom.
Surprisingly, 11% of all respondents stated they had appeared before a litigation tribunal without the ability to deal with complex electronic data disclosures issues.
A high number of respondents thought the use of full pre-trial disclosure in the U.S. should be reconsidered (64%). Two in three of all respondents feel overburdened by the use of full disclosure, and interestingly, the figure was even higher for U.K. respondents than for those in the U.S. When the same question was put to the respondents concerning the U.K. procedures, much lower levels of dissatisfaction were indicated (45%).
About the Report
1Fulbright & Jaworski Fifth Annual Litigation Trends Survey Findings is an independent survey of senior corporate counsel. Now in its fifth year, the report surveyed 358 companies (from a wide range of industry sectors). For further information or to request additional analysis on specific topics, please contact Partner in Charge Lista Cannon (+ 44 (0) 20 7832 3601), Partner Chris Warren-Smith (+ 44 (0) 20 7832 3604), Partner Melanie Ryan (+ 44 (0) 20 7832 3650) or Partner Antony Corsi (+ 44 (0) 20 7832 3659) at Fulbright & Jaworski International LLP, 85 Fleet Street, London EC4Y 1AE.