Fulbright & Jaworski has just published its 2010 Litigation Trends Survey with one of the headline findings being that one third of UK businesses reported facing a regulatory proceeding in past year…

• 32% of UK companies report facing a regulatory proceeding in the past year
• Twice as many UK respondents indicated their company had been subject to a whistleblower allegation as did last year
• One in four (26%) businesses expect an increase in legal disputes in the next 12 months
• Energy sector foresees biggest jump with 42% expecting an increase in disputes
• Three in four businesses (75%) have faced at least one new lawsuit in the past 12 months
• The number of UK respondents reporting they initiated a new lawsuit in the past year is up to 36% from 25% in 2009
• “Poor economy” cited as the main reason for expected rise in legal disputes
• 37% of organisations who say they use alternative fees expect their use of such arrangements to increase in the next 12 months

Regulatory investigations are on the rise, with almost one-third (32%) of UK businesses stating they faced a regulatory proceeding in the past year, according to respondents of this year’s Litigation Trends Survey, published today by global law firm and litigation heavyweight Fulbright & Jaworski International LLP.  This represents a substantial increase on last year’s findings when only 9% said they had dealt with a regulatory investigation.

Regulatory matters also were cited as one of the three most numerous types of matter pending against UK respondents.  This figure has risen starkly to 20% from five years ago when only 5% of UK organisations claimed regulatory matters to be an issue. Unsurprisingly, given this increased exposure, regulatory matters were cited by 31% of UK respondents as the type of matter that most concerns them, double the number who cited regulatory matters in 2008.  The risk of financial exposure is behind many UK respondents’ concerns, with almost half (48%) citing this risk, compared with just 18% last year. Some 26% of respondents expect the number of regulatory proceedings they face to increase during the next year, up from 12% last year.

“Regulatory activity is being played out on a global stage, with regulators cooperating closely with their international counterparts in the supervision of and enforcement against regulated businesses”, said Lista Cannon, Managing Partner of Fulbright & Jaworski’s London office and head of the firm’s International Regulatory Investigations practice.  “As a result, companies are increasingly finding themselves subject to regulatory investigations, often on a multi-jurisdictional basis.”

Cannon added: “The potential ramifications of a regulatory investigation can be extremely severe on both sides of the Atlantic.  Recently, businesses have been subject to increasingly large fines. Senior management are under close scrutiny and face significant criminal penalties. Regulatory proceedings can also adversely affect a company’s share price and increasingly are a precursor to litigation against the company.  Settlement with a regulator is by no means an easy option: the imposition by regulators of compliance monitors into businesses can have a significant and detrimental impact, not least on account of the high financial cost to the company.”

One-third of respondents (33%) who have dealt with regulatory requests say they have spent more time addressing such inquiries during the past three years.  About one-quarter (26%) of UK respondents have employed outside counsel for assistance in government or regulatory investigations in the past year.  This figure has increased from 17% in 2009.  This increase is seen across all companies, regardless of size.

In addition to regulatory investigations, 16% of UK companies anticipate the number of internal investigations they will face in the coming year will increase. In the previous year, 44% of UK respondents said they commenced at least one internal investigation that required the assistance of outside counsel, and one in four of those investigations resulted in a report to a regulatory agency.

“Whistleblower” allegations also appear to be on the rise with nearly one in five (19%) of all respondents saying they have dealt with allegations by a whistleblower in the past three years, and 19% saying they anticipate these claims to increase.  Respondents said 86% of whistleblower allegations led to an internal investigation, 42% led to a regulatory investigation and 46% resulted in a third-party proceeding.

Another topic that is causing waves across both sides of the Atlantic is the new UK Bribery Act, which 35% of UK respondents and 11% of US respondents expect to change the way their companies operate.

Antony Corsi, Fulbright partner, comments: “It is interesting to note the practical impact of the new Bribery Act, before it has even come into force.  Already a quarter of UK respondents say they have engaged outside law firms to assist with a corruption or bribery investigation.  Such investigations may become even more frequent, particularly taking into account the growing impact of whistleblower allegations, and as the new Act will make it easier for bodies such as the SFO or the proposed new Economic Crime Agency to take action.”

In terms of the most active regulatory bodies, there is an even spread of US agencies who are conducting regulatory investigations amongst both US and UK companies. The US’s DOJ and the EPA are the most active US regulatory agencies.  Amongst UK agencies, the FSA is most frequently cited by UK companies (8% of all those who have been involved in a regulatory investigation).  The survey shows that the next most active regulators are the competition regulators, the OFT (4% of UK companies involved in a regulatory investigation) and EU Commission (4%). Tied at 3% each were the UK Competition Commission and HMRC.

Rod Lambert, Fulbright partner and Co-Chair of Anti-Trust and Competition, commented: “There is ever increasing interaction between European antitrust regulators and US businesses.  It is imperative that global antitrust compliance programmes properly address the differences between US and EU regimes.  There are areas where EU antitrust law is more prescriptive and can lead to different enforcement priorities for EU regulators.  Simply rolling out US antitrust compliance programme for EU operations may well not limit significant EU antitrust exposure.”

Litigation trends

• Businesses expect more litigation in the year ahead, with one in four (26%) anticipating an increase in the number of legal disputes in the next 12 months.

• The figures make for stark reading when 50% of UK companies claim to have had at least one court action commenced against them in the previous year, and 16% of UK companies say the action involved more than US$20 million.

• More than 40% of respondents say the poor economy is the primary reason they expect more litigation.

• The energy sector topped the list of industries expecting an increase in litigation (42%) followed by manufacturing (30%) and retail (29%).  These sectors also saw the highest number of court actions commenced against them, with manufacturing topping the list (43%), followed by property (35%) and energy (32%).

• UK companies are initiating more lawsuits with 36% of respondents saying they filed a lawsuit compared to 25% in last year’s survey. When broken down by industry, energy (68%) and engineering (67%) were the most litigious sectors with two in three commencing a proceeding.

Arbitration

• Almost one-third of UK companies (31%) have had an arbitration commenced against them with one-quarter saying they had filed an arbitration proceeding. Across all respondents, the energy (36%) and insurance (35%) sectors were the industries most likely to have initiated an arbitration.

• David Howell, partner in Fulbright’s London office and co-head of Fulbright’s global International Arbitration Practice, added: “More than half (52%) of UK respondents – more than double the number in 2009 – were involved in an international arbitration last year and nearly one-third of U.K. respondents expect an increase in the number of arbitrations in 2011. This certainly reflects our own experience over the past year in the energy, technology and communications sectors.  The majority of international contracts now provide for dispute resolution by arbitration, and all of the major arbitration institutions (including the ICC and LCIA) have seen a significant rise in the number of cases they are handling.”

• When looking at domestic disputes, in general US and UK businesses choose litigation (58%) over arbitration (32%). The larger the company, the bigger the preference for litigation over arbitration, with 64% of US$1 billion revenue businesses choosing litigation over arbitration 29%.  In the UK the predominant reason for choosing the litigation route for non-international disputes is lower costs (78%) and better results (27%).

• The preferred choice for seat of arbitration for UK respondents was London (42%), the UK (29%) and New York (17%). The preferred choice of arbitration rules by UK respondents are the ICC rules (44%).

Litigation cost and practice management

• Two-thirds (69%) of respondents say that the economic crisis has affected their organisations’ litigation management.  Those who participated in the survey say they are seeking competitive rates, and ways to control their litigation costs.  As a result, there continues to be a move toward alternative fee arrangements with one in two (51%) of all respondents saying they use some form of alternative fee arrangement.

• Of those using alternative fees, the move toward them is most pronounced among large corporates (US$1 billion or more), with 61% saying they use them.  The overriding reason for using a different fee structure was to lower costs (78%), followed by a wish to have greater costs predictability (18%).

• More than a third (37%) of those participating in the survey say they expect the use of alternative fee arrangements to increase in the coming year.  Two in five (42%) believe the economic downturn will permanently change the way business is done in the legal industry, and over half of them (52%) expect the changing economy will result in more alternative fee arrangements.

Chris Warren-Smith, Partner and Co-Chair of Fulbright’s Global Litigation Practice Group, commented: “The survey indicates a significant structural change is occurring in the legal sector.  The economic crisis has accelerated real change – clients want more control over their legal costs and are forcing a move away from hourly billing to alternative fee arrangements.  Fee arrangements are increasingly becoming solution or outcome driven with outside Counsel having “skin in the game.”  Clients are indicating that this is not just a temporary austerity measure but a permanent change, although how this plays out as markets develop, remains to be seen.”

Differences exist in the type of alternative fee arrangements favoured by US and UK businesses, with fee structures contingent on success being most favoured by UK businesses (74%), compared with fixed fees being preferred in the US (58%).

Privacy and e-discovery

• More than half of UK respondents (51%) have encountered issues involving privacy/data protection in the past year.  This figure is higher than in the US (39%) and almost certainly is explained by the tighter data protection laws in the UK and EU.  The industry sectors most commonly affected are health care (64%) and insurance (60%).

• In terms of the type of privacy or data protection issues encountered in threatened or actual disputes, the biggest concern for UK respondents was the processing and transfer of data from the EU to the US (56%).  This was followed by the use of third-party vendors to collect and process data (47%) and the search/collection of data from IT equipment used by employees (44%).

• A majority of respondents in the UK (67%) and US (69%) believe further clarification is needed of their duty to preserve electronic material in preparation for an investigation or litigation. This may explain the wide-ranging methods employed by companies who preserve electronic data for litigation or an investigation.  In the UK, the most popular methods are to preserve everything in a searchable database (71%), followed by the suspension of automatic deletion (66%).

• E-discovery tops the litigation areas where respondents expect to increase their budgeted spend in the next 12 months.

• Social networking sites may start to add another dimension to the preservation of e-discovery material, with a number using such sites as part of their everyday business. Websites cited include LinkedIn (26%), Twitter (22%), company blogs (23%) and Facebook (17%).

“Businesses are continuing to grapple with the practical difficulties of identifying and processing potentially enormous volumes of electronic data for litigation and regulatory investigations,” said Melanie Ryan, a partner in Fulbright’s London office. “These difficulties are exacerbated when there is an international aspect, for example, when the data is located in multiple jurisdictions and different data privacy laws are engaged.  The use of social networking sites as legitimate channels for business will make matters even more complex.  In these circumstances, we are not surprised that e-discovery is the area in which our survey respondents most anticipate increases in their budgeted spend.”

About the Report
The Fulbright & Jaworski 2010 Litigation Trends Survey is an independent survey of senior corporate counsel. Now in its seventh year, the report surveyed 403 in-house lawyers (from a wide range of industry sectors) and is the largest canvas of corporate counsel on litigation issues and trends. For further information or to request additional analysis on specific topics, please contact Lista Cannon, the Managing Partner of Fulbright’s London office (lcannon@fulbright.com or + 44 (0) 20 7832 3601), Partner Chris Warren-Smith (cwarren-smith@fulbright.com or + 44 (0) 20 7832 3604) or Partner Antony Corsi (acorsi@fulbright.com or + 44 (0) 20 7832 3659).