Survey: U.S. Firms Prepare for Rise in Litigation After Two Years of Declines

Following two straight years of reporting declines in the number of new lawsuits and regulatory proceedings — including a drop in large-dollar cases — U.S. companies now anticipate an uptick in new actions and government probes, as well as the need to hire more in-house litigation staff to help manage the expected rise in disputes, according to an industry study on litigation trends.

The fifth annual 2008 Litigation Trends Survey, published by international law firm Fulbright & Jaworski LLP, polled corporate law departments in the U.S. and U.K. on the state of global litigation.

“This year’s survey appears to mark an inflection point for American business, between the end of a prolonged period of prosperity and the start of a period of economic challenge that is likely to fuel litigation over who is to blame and who should pay for the consequences,” said Stephen C. Dillard, who chairs Fulbright’s global litigation practice. “Given that we were polling in-house counsel on the cusp of that transition, it’s no wonder that this year’s findings highlight both the evident calm before the storm, as well as the sense that disputes are on the rise.”

The 2008 survey drew input from 358 in-house counsel on both sides of the Atlantic, including 251 U.S. respondents. The survey, initially launched by Fulbright in 2004, is the largest canvas of corporate counsel on litigation issues and trends.

The Recent Drop in New Case Filings
By several key indices, the overall pace of fresh litigation indeed trended downward in 2007-08, with 21 percent of U.S. companies reporting no new lawsuits filed against them in the past year. That’s an improvement from 17 percent having stayed litigation-free in 2006-07 and nearly double the number from 2005-06, when 11 percent of companies reported enjoying a year without any new lawsuits to defend.

Even more pronounced was the drop-off in plaintiff filings: Fulbright found that 56 percent of U.S. companies brought at least one action against another party in the past year — no small portion, but still a 10 percent decline from the number of firms commencing new plaintiff filings in 2007 and a larger dip from 2004, when 88 percent of businesses said they had filed one or more lawsuits.

The survey also found a noticeable drop in big-dollar filings. Only 26 percent of U.S. firms paid out claims above $20 million in the year past with one or more new lawsuits with, a decline of 14 percent from 2007. While 37 percent of billion-dollar companies had to defend at least one new $20 million suit, that was a dramatic 25 percent drop from the number reporting a year ago.

Even government enforcers eased off a bit. Forty-three percent of in-house counsel said their company faced some type of regulatory proceeding the past year — a 5 percent decline from 2007 and a 10 percent drop from 2006.

Challenging Web of Litigation Exposures Remains
While overall case filings may have slowed this year, the litigation landscape is by no means shrinking. Findings show that most U.S. companies still face a challenging web of litigation exposures, with certain industries prone to particular types of actions — intellectual property/patent infringement, product liability, environmental/toxic tort — even as nearly all businesses contend with disputes involving employment, contracts and personal injury.

Insurance companies were the No. 1 target for new litigation in the past year — two-thirds of insurers faced at least six new lawsuits, including 29 percent facing more than 50 new actions. Retailers had the next largest docket with 55 percent fending off six or more new cases, followed by manufacturers (54 percent) and health care providers (52 percent). Although they ignited some of the highest profile class actions and government prosecutions, financial services companies were further down the list, with 37 percent being hit with six or more fresh lawsuits. Tech-communications firms reported the fewest, with 30 percent facing six or more new suits.

Companies also detect a spike in specific types of actions — nearly a third (32 percent) of Fulbright respondents reported a jump in multi-plaintiff suits stemming from wage-and-hour claims by employees in the past year, with 29 percent notching an increase in discrimination cases, including age claims. Companies also cited a noticeable rise in privacy lawsuits, whether class or collective actions.

Regulatory proceedings may have ebbed in absolute terms, but American companies report having to contend with investigations by more than a dozen different agencies in 2007-08, including growing scrutiny from state attorneys general and even the European Union.

By any measure, the sheer volume of U.S. litigation remains very large indeed, including the steady churn of new cases nationally. The survey found that 79 percent of U.S. companies still reported fielding at least one new lawsuit in the past year — with 27 percent fending off more than 20 new suits, including 18 percent coping with more than 50 new actions. The pace of new litigation is especially marked for larger companies and as Fulbright notes this year, among public companies, which were twice as likely as private firms to be on the receiving end of a new filing.

And despite the decline in the number of suits with claims in excess of $20 million, overall litigation costs have not slackened. Fulbright found that 45 percent of U.S. companies are currently spending at least $1 million annually on litigation — a 1 percent uptick from a year ago.

Cases tied to the collapse of the subprime mortgage market began to show up this year as well. Overall, 3 percent of U.S. companies surveyed were forced to engage outside counsel to assist with a subprime lawsuit or investigation this past year, although figures were sharply higher for several industries, particularly financial services companies and insurers.

A Bear Market Turns Bullish on Litigation
This year’s survey also signals an important perceived change as to how U.S. corporate law departments view the litigation climate. In 2007, only 22 percent of in-house counsel expected to see an increase in the number of legal disputes faced by their company in the 12 months ahead — and in fact, the rate of new actions slowed in the time since.

The mood has clearly changed one year later, amidst a struggling economy, ongoing credit squeeze and banking crisis, and the effects of the subprime market all sparking a wave of corporate bankruptcies, layoffs, and government investigations: 34 percent of in-house counsel now anticipate a run-up in litigation involving their company. For some industry groups, the foreboding was 40 percent or higher. In contrast, in the U.K. — where the economy had not been under the same distress – 21 percent of in-house counsel surveyed felt they would see a rise in the number of new suits against them.

U.S. companies appear similarly concerned about a shift on the regulatory front: 25 percent of respondents expect an increase in the number of regulatory proceedings on the horizon, with 8 percent calling for a decline. For large companies, a sober 35 percent are forecasting a bump up in government actions in the near future.

As they prepare for more lawsuits, companies likewise acknowledge the need to reinforce their legal troops — in the process suspending a recent trend line to trim litigation expenses. By a five-to-one margin, respondents said they were more likely to add to their staffs of in-house litigation attorneys than cut back in the year ahead.

Litigation-Force Winds Changing Again
The Fulbright survey demonstrates that litigation forces touch all corners of the American business map, the authors wrote.

“A look at current exposures makes clear just how broad the U.S. disputes scene is,” said Dillard, pointing to 15 general areas of litigation cited among counsel’s top concerns. “Litigation affects all industries and regions, and certainly all-sized companies, though larger firms invariably invite more cases than small and middle-market enterprises.”

With the economy having fully shifted into bear mode, Dillard observed that in-house counsel were expressing concern that all-out actions could spill onto multiple fronts — not only the perennial contract and employment matters, but also cases stemming from professional liability, real estate, insurance coverage, bankruptcy, theft of IP and trade secrets, and securities litigation.

“You have numerous actions — patent, product liability or toxic tort — that tend to strike some industries more often than others, combined with widening strains of workplace suits such as wage-and-hour and privacy that are hitting everyone, added to a growing array of enforcement agencies knocking at the door,” Dillard said. “It’s no wonder that companies are spending as much time and resources on litigation issues as ever before.”

And in the year to come, survey respondents indicate they expect to see more disputes.

“It’s telling that only eight percent of U.S. participants expect to see a decrease in legal disputes involving their companies over the next year, outnumbered by more than four-to-one by those forecasting a rise in disputes,” Dillard explained, noting that the level of concern was running especially high among billion dollar companies — only 3 percent of whom said they expected lawsuits to fall, compared to 43 percent predicting an increase in the coming year.

The 2008 survey asks in-house counsel to consider the types of cases they fear most, as well as their attitudes on outside counsel, litigation costs and staffing, arbitration and regulatory issues, and projections for the future. Most of the respondents identify themselves as principal general counsel and senior counsel.

Spanning 10 industry groups — from financial services to energy, manufacturing, health care, retail, real estate, insurance, education, and technology and telecom —companies were spread across all regions of the country and were well represented by size: 22 percent report revenues under $100 million, while 39 percent have sales between $100 million and $999 million, and another 39 percent at $1 billion and above. Forty-four percent are publicly held (including 58 percent on the NYSE) and 57 percent maintain at least one foreign office, with 19 percent boasting locations in more than 20 countries worldwide.

For a link to the complete survey findings and a descriptive white paper go to: www.fulbright.com/litigationtrends28.

Source: Fulbright & Jaworski LLP