2011 Fulbright Litigation Trends Survey: A Little Less Litigation; More Regulation

Businesses in the United States and United Kingdom initiated and faced slightly less litigation in 2011 than in 2010. But regulatory actions and internal investigations are climbing, according to the 2011 Fulbright Litigation Trends Survey.

More than one-third of corporate counsel report there has been an increase in external regulatory inquiries directed at their companies, and more than one-quarter of respondents expect the year ahead will bring more litigation and regulation as companies attempt to grow in an economy that remains volatile.

The vast majority of corporate counsel polled in the U.S. and the U.K. predict litigation will either rise or remain the same in the next 12 months: 92% of U.S. companies and 85% of U.K. companies. Of those, one-third of U.S. respondents predict an increase while 20% of U.K. respondents expect a rise in legal disputes in the coming 12 months. That compares with 31% and 16%, respectively, last year.

By size, nearly twice as many large-caps ($1 billion or more in gross revenues) as mid-caps ($100 million to $999 million in revenues) expect litigation to rise during the next 12 months. Sector-wise, more than one-third of respondents in the technology, engineering and health care industries are bracing for a jump in disputes.

Stricter regulation and company growth topped the reasons cited for the anticipated increase in litigation. Meanwhile, worries over the poor economy, the No. 1 reason cited last year for an expected rise in disputes, declined significantly to 21% from 41%.

Survey respondents have reported an upward trending of regulatory proceedings commenced against their companies each year since 2009, when 34% of all respondents said at least one regulatory proceeding had been filed against their company in the previous 12 months. In 2010, 37% reported at least one regulatory proceeding. In this year's survey, 40% reported one or more regulatory proceeding.

"Our survey respondents have a front-row seat to the increased scrutiny brought on by stricter regulatory enforcement," said Stephen C. Dillard, the head of Fulbright's global disputes practice. "This year, our survey confirmed a heightened level of governmental investigations focused on the energy and insurance industries, with the health care, manufacturing and engineering sectors not far behind."

This is the eighth year that Fulbright has polled corporate law departments in the U.S. and U.K. on the state of disputes. The 2011 survey gathered input from 405 in-house counsel, including 275 U.S. respondents. Launched by Fulbright in 2004, the survey canvasses corporate counsel on litigation issues and trends.

•1.                   A Look Back 

After reporting declining litigation filings in 2007, respondents to Fulbright's annual survey said suits began to rise again in 2008, went higher in 2009, reached a new high in 2010, and fell slightly the past year. 

The number of respondents (U.S. and U.K.) reporting one or more lawsuits commenced against them in the past 12 months dropped slightly to 73% from 75% last year, and to 83% from 87% in the U.S. 

By industry, the results were a mixed bag: suits commenced against the technology, retail and insurance sectors increased; energy and manufacturing reported a decrease; and financial services remained flat. Public companies reported a drop in suits filed against them (to 75% from 82% last year), but private businesses noted a slight rise (to 71% from 70%). 

U.S. corporations also reported that they were less willing to become plaintiffs. The number of U.S. respondents who reported filing at least one suit in the past 12 months fell to 52% from 60% last year. In the U.K., however, the number increased to 42% from 36% last year. 

Despite the slight drop in litigation, corporate law departments report that their annual litigation spend (excluding cost of settlement and judgments) is increasing. U.S. companies report a median spend of $1.4 million compared to $1 million last year. Moreover, nearly one-quarter of American businesses polled report that their annual spend on disputes is $5 million or higher. 

"While the overall volume of disputes eased slightly from last year, the litigation spend actually increased and remains significant for many companies," Dillard said. 

Thirty-nine percent of billion-dollar businesses in the U.S. were hit with at least one or more suits with more than $20 million at issue in the past year; while one-fifth of U.S. respondents report 50 or more suits commenced against their companies in the past 12 months. 

When asked to identify the most numerous types of litigation pending against their company in the previous 12 months, corporate counsel ranked labor and employment and contracts at the top of the list, with significant portions of respondents also citing pending regulatory, personal injury, intellectual property-patents and product liability cases. 

Contract litigation remains a significant concern for both U.S. (39%) and U.K. (53%) companies. However, for U.S. companies at least, labor litigation replaced contracts as the top worry, with a 42% rate of concern creeping back toward the 2008 level of 50%. Only 14% of U.K. companies rank labor cases as a top concern. What U.K. companies lack in labor worries, however, they make up for in securities litigation, which concerns them at twice the rate it concerns U.S. companies. 

Notably, while environmental litigation remains a low-level concern for most sectors, 52% of energy companies cited it as a primary concern. This, in part, could be due to the continued debate and legal battles centered around hydraulic fracturing within U.S. shale plays. 

•2.                  What's to Come 

Looking ahead, 91% of all respondents expect the number of internal investigations involving their companies to increase or stay the same, while 90% of those surveyed expect the number of regulatory proceedings their companies face will increase or remain the same. 

Respondents in the health care industry (21%) were most likely to expect internal investigations to increase, while the energy and insurance sectors (both at 35%) led the way in anticipating a rise in regulatory proceedings. 

For more than one-quarter of all respondents, regulatory concerns are high on the radar when it comes to legal disputes. That is especially the case for large-caps, one-third of which cite them as a main concern versus only one-fifth of small-caps. 

Whistleblowers remain a concern going into 2012, with one-quarter of respondents anticipating an increase in the number of claims or lawsuits brought by whistleblowers within their industries in the coming year. That percentage exceeds 19% in the 2010 survey, and when broken down, it includes 31% of U.S. respondents and 12% of U.K. respondents. 

More respondents this year answered yes when asked whether their organizations have been more likely to be the subject of a whistleblower allegation in the past three years. Overall, 22% of respondents compared to 19% last year said their organizations were subjected to a whistleblower allegation-including 21% in the U.K. this year compared to 12% a year ago. The percentage stayed the same in the U.S., with 22% of respondents this year and last reporting that they have been subjected to a whistleblower allegation. 

The 2011 survey asked companies to consider, among other things, where they are spending their budgets, what types of alternative fee arrangements they are using most frequently, and how social media arises in the context of litigation. 

What follows is a bulleted summary from the 2011 Fulbright Litigation Trends Survey. For a link to the descriptive "white paper" go to: www.fulbright.com/litigationtrends.

•3.                  Survey Note

Fulbright's 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, polls corporate counsel on litigation issues and concerns. 

The Fulbright survey reflects information collected from 405 lawyers. Of the respondents, 74% identify themselves as either general counsels or heads of litigation. Companies polled are public and private-roughly, there was a 50/50 split-and span industry groups, including energy, financial services, manufacturing, technology/communications, retail/wholesale, engineering/construction, health care, insurance and real estate. There is also a wide geographic spread, 31% of all respondent-companies maintain offices and/or facilities in at least six countries. 

Companies of all sizes participate in the survey: 50% of respondents are large-cap companies (with gross revenues of $1 billion or more), 27% are mid-caps (gross revenues of $100 million to $999 million), and 22% are small-caps (gross revenues of less than $100 million). 

•4.                  Managing Litigation: Budgets, Fees and In-House Hiring

  1. The Money Situation: Spending: As the financial crisis began to reach its fever pitch in 2008, litigation spending climbed with it: respondents reported a median spend the following year that reached $1.6 million at U.S. companies and $1 million at U.K. companies. In 2010, spending fell to a median of $1 million in the U.S. and $500,000 in the U.K. However, spending has risen this year, with U.S. companies reporting a median spend of $1.4 million and U.K. companies a median of $881,000. 
  2. The Money Situation:Expected Budget Increases: E-discovery tops the budget list, with nearly one-fifth of all respondents-and one-quarter of large-caps-expecting budget increases in that area. While respondents, as they have in years past, are planning for budget increases in labor and employment, contracts, and regulatory litigation, a new area of budget increases surfaced in this year's report: intellectual property, specifically patents. While 16% of U.S. respondents are increasing intellectual property budgets, the retail and technology sectors are particularly prone to do so-38% of retail and 30% of tech respondents expect to budget more for intellectual property in the year ahead.
    1. Alternative Fee Arrangements Catching Up to Billable Hour: Corporate counsel want to keep costs low, but they also want to keep them predictable. Last year, the percentage of respondents who reported using alternative fee arrangements for at least some of their work reached a majority-51%. This year, the number jumped again, to 62%. The trend is expected to continue: 44% of respondents this year predict a rise in alternative fee arrangements during the next 12 months compared to 37% of respondents last year who predicted an increase. 
    2. Billable Hour Still Dominant: Despite increased usage, alternative fee arrangements account for a minority of all billings-a clear indication the billable hour still reigns. Nearly 70% of respondents say they use alternative fee arrangements for less than 30% of their outside counsel billings.
    3. Who Uses Alternative Fee Arrangements?: Large, public companies are leading the way on alternative fee use. Sector-wise, 70% of insurance and health care respondents report using alternative fee arrangements, while more than two-thirds of energy, manufacturing, technology and retail respondents state they use some form of them.
    4. What Kind?: Respondents reported heavy usage of contingent fees and reward-based fees in 2009. The past two years have seen those types of fee arrangements languish, giving way to rises in fixed-fee arrangements (62% of all respondents); blended rate (59%); and capped fee (51%).
  3. Working Better in the U.K.?: Among U.K. respondents, there is a higher rate of satisfaction with all kinds of alternative fee arrangements. When it comes to blended rate, for instance, 89% of U.K. respondents report that they have been "very effective" or "effective" versus 45% of U.S. respondents.
  4. The In-House Hiring Spree: With companies looking to trim costs, in-house legal departments are recruiting more attorneys to manage or conduct litigation. Following the in-house hiring spree of 2008 and 2009, Fulbright found that the trend cooled off slightly in 2010, even while 11% of last year's respondents, 17% of large-caps, and seven of the nine industries polled said they expected to add in-house lawyers in the coming year. And they did.
    1. More In-House Lawyers: In both the U.S. and U.K., respondents report increases in their in-house staff employed to manage or conduct litigation: 53% of U.S. companies employ three or more in-house lawyers, compared to 40% last year; while 72% of U.K. companies employ three or more in-house lawyers versus 62% last year. The hiring trend could increase in the coming year, with 16% of all respondents predicting the number of in-house lawyers who manage litigation will grow.
    2. More Law Firms: As for the work that remains with outside counsel, companies are hiring more firms-seeking to spread work around-particularly in the U.S., where 26% of respondents report that the number of firms on their outside counsel litigation roster has increased in the past 12 months, compared to only 12% who report a decrease. 

•5.                  Internal Investigations

  1. Internal Scrutiny Continues: In 2008, internal investigations reached a high both in the U.S. and the U.K., with 49% of U.S. companies and 41% of U.K. companies commencing at least one investigation that required the assistance of outside counsel. Then 2009 saw dips on both sides of the Atlantic. During the past two years, however, the rate of internal investigations has increased. The number of respondents (U.S. and U.K.) who reported commencing one or more internal investigations in the past 12 months increased to 46% from 43% last year (and to 46% from 43% in the U.S. as well). If predictions prove correct, 2012 will see more of the same: 91% of all respondents expect the number of internal investigations involving their companies to increase or stay the same in the coming year. 
  2. Who's Investigating Itself?: The rise in internal investigations is most dramatic when viewed in the context of certain industries: there are three sectors-health care, energy and engineering/construction-for which one-half or more of the respondents have commenced an internal investigation requiring the assistance of outside counsel in the past year. Similar to last year, about one-quarter of all internal investigations resulted in a company reporting the matter to a regulatory agency.

•6.                  Regulatory Investigations

  1. Investigations Demanding Attention: In addition to disputes caused by a lagging economy, the big litigation story of the past two years has been regulation. Last year's survey found that nearly one-third of both U.S. and U.K. respondents believed that stricter regulation was a major factor in increased litigation. They were right. In both the U.S. and U.K., the rate of regulatory investigations is at a four-year high: 55% of U.S. companies (versus 43% last year) and 27% of U.K. companies (compared to 26% last year) retained outside counsel for an investigation in the past year. More than one-third of respondents report they have spent more time addressing regulatory investigative requests or regulatory enforcement proceedings during the previous three years, while only 8% report spending less time. 
  2. Prime Targets: Large-cap, public companies are prime targets for investigations. But 37% of all companies cite an increase in external regulatory inquiries directed at their companies during the past three years - up from 29% in last year's survey. Industry-wise, one-third or more each of the insurance, manufacturing, health care, financial services and energy sectors cited an increase in investigations. 
  3. Who's Investigating Whom?: The landscape of active investigators in the U.S. is broad, with the DOJ, the state attorneys general, OSHA and the EPA leading the way. Whereas last year's survey indicated that the DOJ had focused on manufacturing, health care, and, to a lesser extent, energy, this year's survey reports attention focusing on engineering, health care and technology. Fulbright's engineering respondents note investigations coming from many sides: not only the DOJ, but also state attorneys general, OSHA, the U.S. Attorney and the EPA. In the U.K., where regulatory investigations occur at roughly half the rate they do in the U.S., the FSA and the U.K. Competition Commission are leading the way, honing in on engineering, financial services and manufacturing. 

•7.                  Corruption Takes a Breather

  1. Bribery Investigations Down: After three straight years of rising rates of bribery investigations -  particularly at large-cap, public companies -  the past 12 months saw a drop, with 8% of all respondents having engaged outside counsel to assist with a bribery or corruption investigation, compared with last year's rate of 16%. Among U.K. respondents, who accounted for most of last year's spike in bribery cases, 6% report engaging outside counsel to assist with an investigation. 
  2. Checking in on the U.K. Bribery Act: Still, the threat of a bribery investigation looms. Fulbright asked respondents whether they foresee changes in the way their companies do business due to the implementation of the U.K. Bribery Act. More than 20% of U.K. companies (and 12% of U.S. companies) answered yes. Fulbright also inquired as to whether companies undertook a review of existing procedures in light of the Act. While the rate of "yes" responses was significantly higher among U.K. companies, one-quarter of all respondents said a review of existing procedures had been undertaken. 

•8.                  Labor & Employment Litigation: Up, Up, Up

  1. Leading The Way: With unemployment remaining high, and continued talk of a "double-dip" recession, employment litigation accounts for a sizable portion of disputes. Wage and hour disputes led the way, with 20% of all respondents reporting an increase in multi-plaintiff cases, a little higher than last year's rate of 18%. By industry, retail/wholesale is getting hit hardest, with 37% reporting a jump in wage and hour cases. 
  2. Labor Landscape Shifting: About 40% of all respondents say that when it comes to the entire spectrum of labor and employment litigation - both multi-plaintiff cases and otherwise - discrimination suits have increased the most in the past 12 months, with particularly high rates reported by health care, manufacturing, financial services and insurance respondents. 
  3. A Closer Look at Wage and Hour: The upward trend in wage and hour cases started several years ago, when plaintiffs lawyers increased their pursuit of these cases, recognizing that although state and federal law provided recovery of small amounts per employee for events or practices, these laws covered hundreds of workers - in addition to providing for an award of attorney's fees and double-damages in some cases. This year, the trend continues: more than 40% of respondents say the greatest increase in multi-plaintiff cases are wage and hour disputes. 
  4. Monetary Exposure: Not surprisingly, 43% of U.S. respondents say wage and hour claims create the most monetary exposure. Interestingly, even though only 12% of all respondents reported an increase in retaliation lawsuits in the past 12 months, 32% note that retaliation suits are among the three types of claims (along with wage and hour, and age discrimination) that create the most monetary exposure. 

•9.                  Litigation versus Arbitration

  1. How Should We Resolve This?: Litigation is still the preferred mode of resolution for disputes that are not international in nature: 50% of all respondents prefer litigation versus 39% who prefer arbitration (the other 11% say "it depends"). However, the popularity of litigation decreased from last year, while the preference for arbitration increased in both the U.S. (to 40% from 34%) and in the U.K. (to 37% from 28%). Notably, there is a correlation between dispute-resolution mode and company-size: arbitration is more popular among mid-caps than it is among large-caps. 
  2. Better or Cheaper?: U.K. respondents are more likely to choose litigation because of its cost-saving potential, whereas U.S. respondents are more likely to go with litigation because it provides better results. When U.S. companies choose arbitration, nearly one-third of them do so because it's faster. 
  3. International Arbitrations Stay Flat: Last year 52% of U.K. respondents had been a party to an international arbitration in the prior year versus 55% in this year's survey, while fewer U.S. respondents (18%) report having been party to an international arbitration in the previous 12 months than last year (19%). Sector-wise, more than 40% each of energy, manufacturing, engineering and technology respondents were a party to at least one international arbitration in the past year. 
  4. Which Seat?: Seventy percent of U.S. respondents - including 46% of all large-caps - report they choose their home jurisdiction as the seat of arbitration; whereas 69% of U.K. respondents - and 69% of all small-caps - accepted the jurisdiction requested by the counterparty. Why? Among U.S. respondents, "impartiality" is the primary influence on choice of seat, while "logistical convenience" is the primary concern for U.K. respondents. 

•10.             IP Litigation

  1. Patently Less Popular: After reaching 20% of overall respondents in last year's survey, respondents reporting their companies filed at least one patent suit in the prior year declined to 12%. Outliers were manufacturing (28% of which filed one or more suits last year), engineering (26%) and health care (20%). Large-caps are twice as likely as small-caps to file a patent suit and five times as likely to face one. 
  2. A Spike to Come?: After last year's lull, 2012 could see a jump in patent suits. As mentioned previously, 13% of all respondents are bracing for budget increases in IP, with the retail and technology sectors particularly concerned; 38% of retail and 30% of tech are expecting to spend more on IP in the coming year. 
  3. Retail - A Special Case: Notably, while only 6% of respondents from the retail industry filed a patent suit last year, 42% defended a suit. A similar, though less pronounced, discrepancy exists in the tech sector: 13% of respondents say they filed a patent suit, while 38% defended one. In engineering, the phenomenon runs the other way: 26% filed a suit, while 4% defended one. 

•11.             Class Actions

  1. Remaining Flat: In further evidence that class-action reform is working, the Fulbright survey indicates that class actions have held steady for the fourth year in a row, with one-quarter of all respondents noting they faced one or more class actions in U.S. courts during the previous year. Class-action cases occur more frequently in the retail and insurance industries with about 50% of respondents in each sector having faced one or more. Among those brought, labor and employment class actions are the most common with consumer cases ranking second.

•12.             Managing the Data Flow: Discovery, Cloud Computing, Privacy and Social Media

  1. Cooperation - Mixed Results: When asked whether they have made a concerted effort to be more cooperative over the past year in discovery, respondents split almost evenly between: yes (34%), no (36%), and no opportunity (29%). The biggest benefit for those who increased their efforts to cooperate was lower discovery costs (57%), particularly in the U.K. (80%). When asked why their companies had not made a concerted effort to be more cooperative, U.S. respondents reported: it was their litigation strategy to defend cases on all fronts (34%); they were already transparent (32%); and attempts were not reciprocated (25%). In the U.K., the answers were primarily split between a strategy to defend cases on all fronts (47%) and their attempts were not reciprocated (44%). 
  2. Cloud Computing - Up, Up & Away: More than one-quarter of all respondents say their companies are using cloud computing (48% of the tech sector uses it). Nearly one-quarter of U.S. respondents and 13% of U.K. respondents say they expect to move software to the cloud. Of those using cloud computing, 31% of U.S. respondents and 50% of U.K. respondents had to preserve and/or collect data from the cloud in connection with actual or threatened litigation. Meanwhile, more than one-quarter of respondents who use cloud computing report they have encountered security breaches.
  3. Privacy & Data Protection - Getting Personal: The landscape on privacy and data protection continues to evolve as these issues seem to be generating daily headlines describing more, and more serious, data breaches. This year respondents reported that privacy and data protection issues arose most frequently in the context of collecting data from company equipment used by employees (57% of all respondents encountered an issue) and employees' personal equipment (50% of all respondents encountered an issue). 
  4. Social Media and Mobile Devices: In this age of branding through social media, when individuals and companies alike are cultivating presences through online social-networks - uploading reams of information in the process - Fulbright asked a series of questions about how corporations and their employees are adapting and how social media arises in the context of litigation. 
  5. Litigating Around Social Media: Nearly one-fifth of all respondents report that in the previous year their companies had to preserve or collect data from an employee's personal social media account. Meanwhile, 13% of all respondents - including 27% of U.K. respondents - have had to produce, as part of discovery, electronic information stored on a social media site in the past 12 months. Some companies are choosing to block internal network users from accessing social media sites, such as Facebook, MySpace and Bebo (41% block); Twitter and YouTube (33% block); and LinkedIn, Plaxo, Tumblr, StumbleUpon, and Digg (23% block).
  6. Mobile Devices: Ninety-one percent of U.S. respondents reported that they allowed their employees to conduct business on mobile devices, while 55% of U.K. companies reported that they did so. Given the prevalence of mobile devices in the U.S., it is interesting to see that only 30% of respondents had to preserve or collect data from them for a litigation or investigation. The biggest challenge in conducting discovery from mobile devices was that they were widely distributed and disconnected (53% of respondents). Of those concerned about litigation arising from their employees' use of mobile devices (34%), the majority are worried about the loss of customer or proprietary data.