Disputes ahead as global businesses await increased regulatory proceedings, and raise concerns about related litigation. So says the findings of a litigation survey carried out by Fulbright & Jaworski.
The key survey results
More than one third (36 percent) of U.K. companies faced regulatory proceedings in the last 12 months. More than one in five (22 percent) of all respondents have dealt with allegations brought by a whistleblower in the past three years, up from 13 percent in 2010. One in five (19 percent) U.K. respondents expect enhanced regulation to lead to a rise in legal disputes. Eighty-five percent of U.K. companies and 92 percent of U.S. companies expect the volume of legal disputes to increase or remain the same over the next year. Two-thirds (66 percent) of U.K. respondents reported that they have used alternative fee arrangements, up from 50 percent in 2010 and 39 percent in 2009. One in four (25 percent) of all respondents have encountered privacy/data protection issues in litigation, disputes or investigations.
Regulatory matters have been dominating the agenda for businesses involved in legal disputes over the last year, according to this year’s Litigation Trends Survey, published today by global law firm and litigation heavyweight Fulbright & Jaworski International LLP.
The number of U.K. businesses facing regulatory investigations continues to rise, with more than one third (36 percent) of U.K. companies stating that they faced a regulatory proceeding in the last year. In 2010, 32 percent reported having dealt with a regulatory investigation, up from Nine percent in 2009. Globally, the number of regulatory proceedings instigated has also continued to increase with 40 percent of all respondents reporting involvement in at least one over the last year, up from 37 percent in 2010. Nearly half (49 percent) of all public companies faced at least one regulatory proceeding in the past 12 months.
Dealing with these matters is increasingly disruptive to businesses; one quarter (27 percent) of U.K. respondents to this year’s survey reported an increase in regulatory inquiries or investigations against their company, compared to 18 percent in 2010 and 19 percent in 2009. As a result, businesses are continuing to turn to outside counsel for assistance in handling government and regulatory investigations. In 2011, almost half (46 percent) of all respondents reported that they had retained outside counsel in connection with regulatory proceedings, up from 37 percent in 2010.
In terms of the most active regulatory bodies in the U.K., businesses most often faced regulatory proceedings involving the Financial Services Authority (15 percent), the Competition Commission (15 percent), Her Majesty’s Revenue and Customs (8 percent) and the Serious Fraud Office (8 percent). The conduct of internal investigations by U.K. businesses remains a common feature – in the last year, almost half (43 percent) of U.K. respondents embarked on an internal investigation with the assistance of outside counsel.
Businesses have also been required to follow up internal investigations by reporting issues to regulators, with one in five (19 percent) of U.K. companies and a quarter (24 percent) of U.S. respondents going on to report the matter to a regulatory agency. One quarter (26 percent) of the largest companies, with gross revenues in excess of US$1bn, reported issues arising out of internal investigations to a regulator.
“Businesses are operating in a global climate of enhanced supervision, intense scrutiny, and significant enforcement including increasing penalties. As a result, companies and their advisers in the U.S., U.K. and internationally are handling increasing numbers of internal investigations and regulatory proceedings often as a result of whistleblowing allegations, at substantial cost to the business.” said Lista M Cannon, partner and co-chair of the firm’s International Investigations practice group. “Co-operation between regulators on an international basis is now a reality. As a result, businesses and their advisers are increasingly subject to multi-jurisdictional challenges. A co-operative approach to dealing with the regulators, often commenced by self-reporting issues to one or more regulators, is becoming the norm, particularly among larger businesses.”
The growth of whistleblowing
Whistleblowing allegations have continued to have a significant impact on businesses. One fifth (21 percent) of U.K. respondents have been subject to such claims in the last three years, up from 13 percent in 2010 and a threefold increase since the 2009 survey when 6 percent of U.K. respondents reported having been on the receiving end of whistleblowing allegations in the previous three years. The consequences of these allegations are serious; 40 percent of U.K. respondents stated that whistleblower allegations led to an internal investigation, 20 percent reported a regulatory investigation and 33 percent reported that third party proceedings followed. Over half of all respondents (55 percent) were subjected to third party proceedings as a result of whistleblower allegations – an increase from 46 percent in 2010.
A quarter (25 percent) of all respondents, and one in eight (12 percent) U.K. respondents, anticipate an increase in claims or lawsuits brought by whistleblowers over the coming year. The largest companies (those with gross revenues in excess of US$1billion) are those most likely to expect an increase in such claims or lawsuits, with nearly a third (30 percent) expecting an increase. In contrast, 12 percent of the smallest companies (those with gross revenues of less than US$100million) expect an increase in claims or lawsuits brought by whistleblowers.
Bribery and corruption: a declining concern?
In 2011, the number of U.K. and U.S. respondents instructing outside counsel to assist with a bribery or corruption investigation declined towards 2008 levels, following a sharp spike in 2010. Over the past year, six percent of U.K. respondents instructed outside counsel to assist with a bribery or corruption investigation, compared to 26 percent in 2010 (12 percent in 2009, five percent in 2008). One in five (20 percent) U.K. respondents and one in ten (11 percent) U.S. respondents conducted bribery and corruption-related M&A due diligence in the last year before entering into a transaction involving another country – a notable decline since last year’s survey (28 percent of U.K. respondents; 17 percent of U.S. respondents).
In a similar vein, 21 percent of U.K. respondents expect the newly implemented U.K. Bribery Act to force changes in their operations, down from 35 percent in 2010. This may be explained by the fact that 38 percent of U.K. respondents reported having already undertaken a review of existing procedures in light of the implementation of the Act in July 2011. U.S. respondents have also recognised the potential jurisdictional reach of the Bribery Act 2010 and continue to believe that it will force changes in their operations, with 12 percent of U.S. respondents expecting the Act to have an impact on their companies, compared to 11 percent last year.
“The implementation of the Bribery Act 2010 has generated much concern for both U.K. and international businesses. We are seeing the reality that businesses appreciate that they can no longer simply focus on the U.S. regulators and U.S. legislation. Many businesses across a range of sectors, and large businesses in particular, have already conducted reviews of their procedures to limit and detect corruption and to ensure compliance with the Act,” said Antony Corsi, litigation partner and a member of Fulbright’s International Investigations practice group. “The question will be whether those reviews are preventing and detecting corruption sufficiently to keep the regulators at bay and whether those who have not conducted reviews will get caught out.”
Large proportions of respondents from this year’s survey have been involved in litigation in the last year. Nearly three quarters (73 percent) of all respondents were sued in the last year, with 23 percent of all respondents reporting that they had been on the receiving end of a claim valued in excess of US$20million. Almost half (42 percent) of U.K. respondents brought claims over the last year, compared to 36 percent in 2010 and 25 percent in 2009. One in five (19 percent) of those claims were valued at more than US$20million. Businesses continue to expect more litigation in the year ahead. One in five (20 percent) of U.K. and one third (33 percent) of U.S. respondents anticipate an increase in the number of legal disputes – a slight rise in the U.K. from 16 percent in 2010.
Enhanced regulation is expected to have a significant impact on businesses over the next year. More than one quarter (28 percent) of all respondents (and 19 percent of U.K. respondents) expect their legal disputes to increase as a result of heightened regulatory scrutiny and enforcement – a sharp rise since 2010 when 7 percent of U.K. respondents raised concerns about stricter regulation leading to legal disputes. The impact of the economic climate on legal disputes is expected to decline over the next year when compared to 2010’s results; this year 19 percent of U.K. respondents considered the state of the economy as a reason for an increase in the legal disputes they may face, down from 47 percent in last year’s survey.
While identifying the most numerous types of litigation matters that were pending against their companies in the last year, 55 percent of U.K. respondents mentioned disputes arising out of contractual arrangements, a marked rise from 32 percent in 2010 and more than the 48 percent recorded in 2008. More than one in five (22 percent) identified employment cases, continuing a steady rise since 2009 and a similar proportion (21 percent) cited product liability matters. The exposure of U.K. respondents to collective action litigation (“class actions”) in the U.K. continues to rise. This year, 13 percent of U.K. respondents reported having to deal with class actions in the U.K. in the last year, up from 11 percent in 2010 and 6 percent in 2009. No U.S. respondents reported having experienced class action litigation in the UK.
The costs of litigation and methods of paying for it
The overall litigation spend of businesses is increasing with around a half (51 percent) of all respondents, and 46 percent of U.K. respondents, recording an annual litigation spend (excluding the cost of settlement and judgments) in excess of US$1million. Last year, 38 percent of U.K. respondents had spent more than US$1million on litigation, down from 50 percent in 2009. The median litigation spend of U.K. respondents was US$880,000 up from US$500,000 in 2010 but below 2009 (US$1million) and 2008 (US$980,000). The median litigation spend of U.S. respondents was higher: US$1.4million, compared to US$1million in 2010, US$1.6million in 2009 and US$900,000 in 2009.
Almost one in five (17 percent) respondents in the energy and insurance sectors recorded an annual litigation spend in excess of US$10million. The use of alternative fee arrangements (“AFA”) to pay for legal services in the context of disputes, a mechanism for charging clients for legal work other than by a traditional hourly rate, is becoming increasingly common on both sides of the Atlantic.
Two-thirds (66 percent) of U.K. respondents stated that they had used AFAs, up from 50 percent in 2010 and 39 percent in 2009. Similarly, 61 percent of U.S. respondents have used AFAs, compared to 52 percent in 2010 and 48 percent in 2009. The move toward using AFAs is most pronounced among the largest companies with 76 percent saying they use them. Nearly half of all respondents (44 percent) expect the use of alternative fee arrangements to increase during the next year. However, despite the increasing use of alternative fee arrangements, they continue to account for only a minority of all legal spending on disputes. The hourly rate remains dominant with nearly 70 percent of respondents saying they use alternative fee arrangements for less than 30 percent of their outside counsel billings.
“Businesses expect to experience sustained and increasing exposure to international and domestic legal disputes. They see increasing regulatory activity resulting in more disputes,” said Chris Warren-Smith, partner and co-chair of Fulbright’s Global Litigation Practice Group. “Every day we see clients becoming increasingly sophisticated in managing their regulatory and litigation spend, seeking ever more effective ways to ensure they obtain value for money in purchasing legal services. One interesting conclusion from the results is that the level of disputes is higher than 2009 and 2010 but the legal spend is lower. This shows the positive impact alternative fee arrangements and other risk transfer mechanisms are having for businesses and demonstrates that they and their legal service providers are working together in the current challenging environment.”