Poll shows drop in number of lawsuits, regulatory actions

It may be too early to say that conflict has become passé, but U.S. businesses report a distinct drop in the number of lawsuits filed against them in the past year, according to the latest Litigation Trends Survey conducted by international law firm Fulbright & Jaworski L.L.P.

Based on interviews with in-house counsel at 250 major U.S. corporations, 17 percent of respondents said their companies had escaped the past year without having to defend a single new lawsuit, up sharply from only 11 percent in 2005-2006. 

American corporations also appear to have backed off as plaintiffs – 65 percent of respondents said their company had initiated at least one lawsuit in the past year, down from more than 70 percent a year ago and an even steeper drop from 2004, when 88 percent of U.S. companies said they had initiated litigation.

That litigation may have softened in recent months is evident on another front in the Fulbright survey: only 22 percent of in-house counsel said they expect to see the number of legal disputes their companies face increase over the next 12 months; a year ago, 33 percent said they were anticipating a rise in lawsuits involving their company. 

Even the government seems to have lightened up a bit: 48 percent of companies reported some regulatory proceedings brought against them in the past 12 months, down more than 4 percent from a year ago. Internal investigations fell even more sharply. 

By contrast, United Kingdom companies have experienced significant increases in both categories.

This is the fourth year that Fulbright & Jaworski has undertaken a broad overview of the litigation climate in the U.S. and the United Kingdom, and the first time the firm has detected a decline in overall case filings. Yet even as some types of actions appear to have dipped in the past year – notably securities and bankruptcy disputes – other kinds of litigation are on the rise, particularly patent cases and lawsuits stemming from product liability.

And despite the slowdown in new filings this past year, U.S. companies continue to face large numbers of pending cases in multiple areas and jurisdictions, enough that a third of corporate law departments surveyed count more than 25 lawsuits at any one time, including 18 percent juggling at least 100 actions in U.S. courts.

The sheer economic stakes of litigation remain daunting. Forty percent of U.S. companies say they were hit with at least one suit in the past year with more than $20 million at issue. Among billion-dollar businesses, 62 percent were served with at least one $20 million lawsuit.

Is there a contradiction here? Could U.S. business litigation really be shrinking, even as companies face greater magnitude verdicts and settlements, and increase their budgets for disputes? Indeed, nearly 20 percent report that their annual litigation spending (apart from cost of judgments and settlements) is $5 million or higher.  

“The data this year point to a pronounced drop in new case filings – both against, and by American companies, a reversal of the upward trajectory in the number of new lawsuits from our previous three surveys,” said Stephen C. Dillard, chair of Fulbright & Jaworski’s global litigation practice. 

Dillard said a stable economic climate through the first half of 2007 – including a generally rising stock market – likely lessened the number of public company disputes (64 percent of firms represented in this year’s survey are publicly held). At the same time, he noted that the ebbing of the big corporate accounting scandals from earlier in the decade had brought a decline in securities class actions and other kinds of investor strike suits.

As Dillard observed: “Companies confront a host of actions – and adversaries – in so many areas impacted by credit market jolts, government regulations, media investigations of corporate misbehavior, stepped-up enforcement activity, and one-time events like a recall or environmental accident. Any and all of these occurrences tend to provoke a litigation response in many segments, including consumers, employees, investors, enforcement agencies and competitors.”

To illustrate the breadth of the litigation landscape, Fulbright & Jaworski asked corporate counsel to name three to five types of disputes that most concern them. U.S. respondents cited 15 different categories of litigation exposure, with nearly all competing for high priority attention.

“The lesson in our trends survey is that litigation can come from any direction and companies need full peripheral vision,” Dillard added.

The Fulbright survey, the largest study of its kind, takes a macro look at U.S. and U.K. litigation and arbitration issues, covering such topics as internal investigations; electronic discovery and records retention; average settlements; use of outside counsel and attorney billing (including alternative fee structures); alternative dispute resolution; compliance and regulatory matters; class actions; stock options backdating; and company attitudes toward their outside lawyers.

In looking at trends in government enforcement, the survey addressed the issue of attorney-client privilege and found that a growing number of businesses – including one-third of the billion-dollar firms responding to the survey – reported waiving privilege as a show of cooperation with regulators. “Companies facing government investigations have increasingly found themselves in a tough place. They don’t want to expose an employee, but they’re acutely aware of the penalties and fines that can accrue if they hold onto privilege at all costs,” said Robert Owen, head of Fulbright’s New York litigation group and one of the architects of the annual litigation survey.

Fulbright took a close look at intellectual property disputes this year, with particular emphasis on patent litigation. 

“There is a clear sense that patent cases are trending upward, and not just among technology companies,” Dillard said. He observed that corporate counsel ranked their methods for defending against IP claims, everything from negotiating licenses to going all out to trial for final judgment. 

The survey also addresses company policies on retention of employee voice messages and instant messages, which are playing an ever-growing role in discovery and disclosure during so-called litigation hold periods.

“Our goal for the survey is to provide in-house law departments – as well as management, boards and other stakeholders – a detailed situation map of the U.S. and international litigation scene,” Dillard said. “We hope the findings can help them make informed decisions and be prepared to act should they find themselves facing a similar set of circumstances.”

Below is a recap of findings from the 2007 Fulbright & Jaworski Litigation Trends Survey. For a direct link to the full survey findings, go to: www.fulbright.com/litigationtrends.

Litigation Exposure

1. Plenty of New Cases to Go Around – Even with fewer companies reporting new lawsuits this past year, Fulbright’s survey shows that the vast majority of U.S. businesses remain significantly exposed to litigation. Eighty-three percent of in-house counsel reported at least one fresh case commenced against their company in 2006-07, with 25 percent counting more than 20 new suits. Larger enterprises are targeted more often – only 3 percent of billion-dollar companies managed to get through the past year without being named a defendant; 50 percent were served with at least 20 new actions, including a third hit more than 50 times. Alternatively, 44 percent of companies under $100 million sailed through the past year without a single new suit and only 2 percent saw more than 20 new cases. 

2. Full Plate of Pending Cases – The scale of the domestic litigation scene is even more apparent when total pending matters are taken into account. Only 10 percent of U.S. companies said they had no cases on their books in American courts or regulatory agencies. A third of respondents are contending with more than 25 suits, including 18 percent looking at a domestic docket of at least 100 cases. More than half of billion-dollar companies responding to the survey face more than 25 U.S. litigation matters, with 34 percent coping with a minimum of 100 domestic cases. Manufacturers are the overall case leaders – 41 percent have more than 100 pending U.S. matters. For insurers, 40 percent hit the 100-case threshold; energy concerns (26 percent); and engineering/construction firms (20 percent).

3. High-Stakes Action – They may not all be “bet the company” cases, but it still strains corporate coffers when four in ten new lawsuits had more than $20 million at issue. Seventeen percent of smaller companies saw at least one $20 million action this past year; for middle-market companies, the figure was 30 percent; and for billion-dollar companies, it jumped to 62 percent, including an unfortunate 3 percent facing more than 50 cases exceeding $20 million. 

4. Industry Breakouts – Ninety-three percent of insurers and retailers reported having to defend at least one new case this past year, and more than half from both sectors got stung with one or more $20 million disputes, the highest of 10 industry segments represented. Insurers contended with the most $20-plus million cases – 54 percent taking on more than 20 such actions. Other segments with above-average representation in the $20 million club included: energy (47 percent facing at least one $20 million-plus suit), technology (44 percent), and manufacturing (42 percent). Education and financial services saw the fewest new filings – 38 percent of both industries had zero actions taken against them. Not a single education or real estate firm was looking at even one $20 million case.  

5. Litigation Now – As they have in previous surveys, in-house counsel identified labor and employment matters as the most frequent source of lawsuits filed against them during the past year, followed by contract disputes and personal injury cases. Those areas reflect risk factors universal to all companies. Interestingly, companies reported litigation across a dozen other categories, and nearly every industry group was a magnet for at least one type of dispute. Financial services reported the highest degree of securities litigation; energy companies saw the most environmental/toxic tort cases; technology firms drew more IP/patent actions; health care providers were tops in professional services suits (i.e., malpractice); insurers had to defend more class actions than anyone; and retailers were first in product liability actions, even ahead of manufacturers.

6. Litigation Later – Respondents also considered the kinds of disputes that pose the greatest concern to their companies in the future, with labor/employment, contracts and personal injury again top of mind. Almost every other category, aside from real estate and tax, vied as a top concern, especially for mid-market and billion-dollar companies dealing with so many simmering issues. Once again, certain types of cases stuck to certain industries – financial service firms worry more about regulatory actions; technology businesses focus more on IP/patent cases; and real estate companies about bankruptcy.

7. Playing Plaintiff – U.S. counsel continue actively to advance their companies’ causes by bringing suit where necessary to assert ownership rights, enforce contracts and protect IP assets, and sometimes pre-empt actions by others. Despite a 5 percent drop in offensive litigation from last year’s survey, two-thirds of companies initiated at least one lawsuit in 2006-07, nearly a quarter filing more than five new cases. Larger companies are even more prone to litigate actively – nearly 40 percent of billion-dollar firms commenced more than five cases, including 7 percent who brought 20-plus suits in the past year. Engineering and real estate firms were the most active plaintiffs, followed by insurers, manufacturers and energy concerns.

8. Settling Often – Despite a willingness to bring suit where necessary, companies tend to seek solutions to the cases they file: 56 percent said they settled the majority or all of their new plaintiff’s litigation in the past year before going to trial. Notably, smaller companies were actually less willing to settle than mid-cap or billion-dollar firms – only a third said they resolve the majority of their cases, compared to two-thirds for large companies. The energy industry saw the highest overall settlement rates (80 percent), followed by engineering, health care and insurers. Companies based in the Midwest settled more often than those in other parts of the country.

Class Action Findings

9. Still an Active Force – Class actions continue to be a driving force in U.S. litigation: 60 percent of companies report having to defend at least one case comprising a group of “similarly situated” parties. The cases span everything from employment claims to personal injury and discrimination suits. Smaller companies regularly feel the sting of class actions – 45 percent are facing them, including 13 percent with more than six; among billion-dollar firms, the rate is 69 percent, including 19 percent having to juggle more than 20 class-based suits. Retailers are fending off the most class actions, followed by manufacturers, engineering firms, insurers and financial service providers. Real estate firms had the fewest class actions.

10.Lull in Securities Litigation – One area that has softened on the class action front is securities litigation, supported by recent university studies noting a drop in new case filings alleging accounting and investor fraud. Fulbright survey respondents said that the leading factor behind the decline was greater corporate care and more internal controls in the wake of Sarbanes-Oxley legislation, closely followed by an increase in government enforcement that has kept companies on best behavior. The strength of the U.S. equity markets in the past several years was another inhibition on shareholder suits. Worth noting: a third of in-house counsel attributed the indictment of leading class action plaintiffs’ firm Milberg Weiss as having been a key check on new securities filings.

Compliance/Regulatory/Enforcement

11.Fewer Knocks at the Door – This year’s survey suggests that government actions – an elevated concern a year ago – have lessened for many U.S. companies. Thirty-six percent of in-house counsel said that their business had been the target of a regulatory proceeding or investigation in the past three years, compared with a 49 percent response last year. And only a quarter of those surveyed responded that regulatory proceedings against their company would be going up any time soon. The industry most sensing a spike was health care (42 percent), followed by energy and insurance. Interestingly, only 16 percent of financial service firms project a near-term rise in government actions. 

12.Agency Scramble – Among government regulators, the Securities & Exchange Commission has been the most active regulator the past three years, followed closely by the Occupational Safety and Health Administration; to a lesser extent, the Environmental Protection Agency. More companies reported inquiries from their state Attorney General than the Federal Trade Commission, the Food & Drug Administration or the Federal Communications Commission. Another surprise: a far higher percentage of smaller companies (62 percent) than billion-dollar firms (44 percent) reported being on the receiving end of an SEC inquiry in the past three years.

13.Internal Probes Decline – In a possible sign that companies have recently improved their internal controls and compliance, Fulbright survey respondents in the U.S. reported a sharp drop in the number of internal investigations undertaken with assistance of outside counsel. Fifty-four percent confirmed they had launched a company probe in the past year – not an insignificant amount, but a decline from last year, when 63 percent of counsel reported having initiated an investigation. Real estate firms were the least subject to investigations. Retailers showed the highest rate of internal probes.

14.Options Backdating – Given considerable media and regulatory pressure generated the past year over stock options backdating, the survey gauged to what degree in-house counsel are focused on the issue. Only 26 percent of counsel said they had considered an options investigation in the past year; for billion-dollar companies the figure was 37 percent. Among technology companies, 19 percent had contemplated a probe into backdating.

15.Attorney-Client Waivers – The survey provides evidence that the government has partially succeeded in its efforts to compel companies to cooperate in enforcement proceedings by dispensing with the all-important attorney-client privilege for employees. Many white collar cases have hinged on the privilege issue, which prompted the famous Thompson Memo and fueled a number of government enforcement proceedings. Fulbright found that 17 percent of in-house counsel had indeed waived privilege to demonstrate cooperation and avoid harsher penalties in a government case in the past year – a small number in absolute terms, but a substantial proportion in light of the debate raging about waivers. Nearly one-third (31 percent) of billion-dollar companies responding to the survey waived privilege in 2006-07, as did 26 percent of their smaller counterparts. For several industry segments – health care, financial services, technology, energy – the percentages of those taking waivers hovered around 25 percent.

Litigation Costs

16.The Big Spend – Even with a reported drop in new cases, litigation remains a significant part of many corporate budgets – 44 percent of U.S. companies said their annual litigation spending is $1 million or higher, compared with only 28 percent for U.K. firms. However, company size and industry both play a role in dispute costs. Only 4 percent of smaller companies (revenues of $100 million or less) said their annual litigation expenditure reached $1 million; for most, the total was under $500,000. For billion-dollar enterprises, 75 percent said their yearly litigation tab was at least $1 million, including 21 percent for whom spending exceeds $10 million. Manufacturers felt the biggest bite – 43 percent said their annual litigation outlay was at least $5 million; insurers were next at 31 percent reaching the $5 million plateau, followed by energy firms at 21 percent. Only a tenth of technology companies are spending $5 million, while none of the education or real estate companies reached the $5 million threshold. 

Growing IP Caseload

17.Pop in Patent Matters – If some types of litigation tend to be cyclical – for instance, bankruptcy and securities – others reflect longer-term secular changes in business. That could be true with intellectual property cases, which appear to be climbing as companies increasingly battle over the value and ownership of intangible assets. A third of Fulbright survey respondents said they had been hit with at least one patent infringement suit in the past three years and nearly 40 percent said the pace of filings against them had gone up in the same period. One-quarter of companies said they had initiated their own patent claims against other parties. Twenty-eight percent confirmed that they were bringing more new patent cases now than they were three years ago. For billion-dollar firms responding to the survey, IP/patent disputes were cited as the top concern on their near-term litigation horizon, ahead of the usual top anxieties over labor/employment and contract problems.

18.Serial Cases – Among companies litigating patent claims, 74 percent said they’ve defended at least one new case over the past three years, and 18 percent have coped with 10 cases or more. For billion-dollar companies responding to the survey, 6 percent reported fending off at least 30 new patent actions over the last three years. Not surprisingly, most technology companies – 85 percent – have been named in at least one patent case since 2004, but counsel at both retail and financial firms reported even higher frequency at 89 percent. Twenty-two percent of financial companies have been barraged by more than 50 new actions, likely stemming from new generation software and business method patents issued in recent years. Finance companies also reported the greatest increase in patent claim filings as plaintiffs over the past three years.

19.Motivating Factors – Mindful of the obstacles, corporate counsel say they approach patent litigation with caution: 40 percent of those bringing cases said they prefer to take a host of other actions short of actually filing suit. One quarter said they litigate claims as a necessary part of their company’s overall licensing strategy. And 19 percent of respondents said they decide to sue only after failed attempts to secure licensing agreements with other parties. On the defense side, 40 percent of counsel said they will litigate to judgment if it means upholding their licensing strategy, but 28 percent acknowledged they would prefer to negotiate a license to avoid trial, and 12 percent confessed they choose litigation only if the technology at issue is vital to their company.

20.Trademark Protection – In defending claims of trademark infringement, companies are definitely not in a hurry to litigate. Only 7 percent said they tend to take trademark disputes to court, while more than half would rather resolve any issues quickly to prevent protracted and costly litigation. Even when enforcing trademarks, only 11 percent of companies said they tend to litigate as a first course of action, whereas nearly half either avoid litigation altogether or pursue claims only after a failure to settle with another party.

Electronic Discovery

21.Paying the Price – Some companies have already been stung by not having a strong handle on their e-discovery methods: 17 percent reported that they had lost their right of document privilege due to inadvertent production of electronically stored information (ESI); among U.K. companies, the quotient was an attention-grabbing 40 percent. U.S. financial and retail firms both admitted a near-40 percent rate of lost privilege owing to errant ESI practices, suggesting there is much room for improvement in the way many businesses execute retrieval of archival electronic records.

22.Not Quite a Federal Case – More than 70 percent of counsel reported that e-discovery issues “rarely” or “never” figured in their litigation matters. Meanwhile, 6 percent said e-discovery is a frequent component of motions, hearings or rulings in which they’re involved. Thirteen percent of billion-dollar firms said e-discovery plays a frequent role in their matters. 

23.Jury’s Out on New Rules – In-house counsel say they are not yet seeing much benefit from the new e-discovery directives that went into effect at the end of 2006. Although the rules were ostensibly designed to help opposing parties establish protocols for disclosure and discovery of electronic information, more than half of the Fulbright survey respondents detected no change in how their companies are handling federal litigation; 18 percent felt the e-discovery guidelines have eased their litigation issues, while 27 percent said the rules have actually made their litigation lives more difficult. Most of the ten reporting industry segments likewise claimed the new rules have created more litigation hardships than gains.

Records Retention

24.Back-Up Plan – While the majority of companies maintain some degree of records retention as a form of litigation readiness, typical back-up periods might strike some trial lawyers as inadequate given the long lag time for most lawsuits. The average business said it retains documents for just two to three months; 14 percent are backing up for one year or longer; and not a single under $100 million company responding to the survey maintains a back-up threshold of one year or longer, which could prove costly in the event of a court-ordered document request. Technology companies had the longest storage rates, with 25 percent backing up for at least one year; energy and real estate firms also showed above-average retention of company data.

25.Preserving Records – In one key aspect of records retention – responding to a preservation order or so-called litigation hold – businesses have taken heed: 89 percent of in-house counsel said their companies now have procedures to ensure preservation of all data that may relate to a legal or regulatory action. For billion-dollar companies, litigation hold policies reached a near-uniform 98 percent of respondents. Typical litigation hold directives cover electronic as well as paper documents, and are supposed to kick in even when a lawsuit or investigation is “reasonably anticipated,” suggesting that even though companies prefer not to back up historical data too far in the past, they are acutely aware of the penalties for not holding everything in the face of pending litigation. It is noteworthy also that 81 percent of U.S. companies said they had reviewed their retention policies over the previous 12 months.

26.High Cost of Preproduction Privilege Review – Survey respondents are attuned to the costs of that exercise – more than a quarter estimated that at least one-fifth of their annual litigation expense went toward a pre-production privilege review, including 16 percent for whom it represented at least 30 percent of litigation spending. Even for smaller companies, 30 percent said the pre-production process accounted for a fifth or more of overall litigation costs; for billion-dollar firms, it was 33 percent of annual spending – vivid reminders that companies might do well to revisit best practices for this critical task.

Capturing Data in the Workplace

27.Watch Those IMs – As instant messaging gains widespread use at many companies – 53 percent of in-house counsel said employees use IM, while the rate among billion-dollar firms was 70 percent – businesses have the added burden of capturing and retaining those running online conversations in the event they are needed in a litigation hold instruction. The portion of companies logging employee IMs is considerable – 28 percent said they retain the messages as routine policy or in certain cases; for billion-dollar firms, the segment was 40 percent. While many companies may archive IMs for only several weeks or a month, 43 percent keep them for two months or longer, including 15 percent holding on for at least a year; among large companies, 25 percent maintain IMs for one year. One-third of all companies permit employees to attach documents to instant messaging – which can take on added significance in light of the extended holding periods in place at some businesses. 

28.And Those Voicemails – Besides IMs, companies these days have to consider holding on to another ephemeral slice of office life – voicemail. Forty percent of in-house counsel said they have a retention policy for employee voice messages. As with IM, much of the phone chatter is saved for a month or less, but 31 percent of companies store their voicemail for at least two months, including 9 percent with a one-year or longer hold policy. The retention protocols become even more complex considering that 37 percent of companies said their phone systems allow voice messages to be forwarded to others via e-mail, creating a potentially huge web of vocal documentation.

29.Minding the Grey Areas – Further complicating e-discovery and document retention practices is the line that employees regularly cross between their business and personal discourse. Thirty-seven percent of the Fulbright survey respondents said they allow employees to access outside e-mail accounts using company-issued computers; for billion-dollar companies, the allowance rate was 44 percent; and for tech shops, it rose to 61 percent. Meanwhile, 74 percent of companies let employees access the corporate network from their home computers. The high degree of co-mingled communication could lead to unexpected challenges in a litigation context.

30.Privacy, Please – With data breaches and electronic security lapses becoming all too common, many companies have beefed up their privacy policies, yet only 39 percent of in-house counsel said their firms have in place a full-time privacy officer; 60 percent said they have no current plans to hire one. Health care providers have the highest level of privacy officers at 71 percent, followed by retailers (61 percent) and financial services firms (59 percent). Technology firms are quick to tout their robust privacy tools and practices, but only 35 percent have an in-place privacy officer.

International Matters

31.Global Litigation – With 40 percent of U.S. respondents maintaining operations outside the U.S., it is not surprising that corporate law departments see their share of cross-border disputes, though for most it is not a full-time concern. For U.S. respondents, the highest rate of foreign litigation is in Canada – 23 percent of U.S. companies have at least one matter pending north of the border; 14 percent report actions in U.K. courts; 12 percent have cases pending elsewhere in Western Europe; and 11 percent are litigating in Asia. Large companies are the only segment seeing any appreciable level of non-U.S. litigation: 48 percent have matters in Canada; 37 percent have at least one U.K. case; 21 percent report cases in Australia; 19 percent in South America; and 18 percent in Asia. Very few companies face more than 10 cases in any non-U.S. jurisdiction. 

32.Arbitration Levels – U.S. respondents’ arbitrations rates are largely domestic, with the vast majority of reported commercial arbitrations pending before U.S. tribunals. Forty-two percent of U.S. respondents report at least one arbitration with its seat in the U.S. The U.K. draws the highest volume among 12 international jurisdictions, with 7 percent of U.S. companies reporting arbitration matters there. For some regions – the Middle East, Africa, Central America, Mexico, and Australia – companies report zero arbitrations. Nonetheless, 17 percent of in-house counsel in U.S. companies said they expect to see arbitration levels increase. Much of the increase is projected in the U.S.; however, U.S. respondents anticipate marked upticks in the U.K., Europe and Asia and, to a lesser degree, South and Central America. Only 2 percent foresee meaningful arbitration growth in the Middle East, despite the boom in U.S. investment and business activity in the region. 

33.Non-U.S. Court Judgments and Arbitrational Awards – The challenge in any litigation or arbitration outside U.S. borders is often its aftermath, in enforcement of any successful judgment or award. For the most part, U.S. companies see no appreciable difference in enforcement abroad, though 16 percent said they actually found it easier to satisfy judgments in foreign jurisdictions; for billion-dollar companies, 27 percent reported more successful enforcement when the matter is outside the U.S. And among energy firms, which face more international disputes than most industries, 41 percent said it is easier to collect or enforce a court judgment or arbitral award in another country than at home.

34.Time and Expenses – On two other fronts, international arbitration appears to be more or less on par with international litigation. Ninety-three percent of companies with foreign matters found non-U.S. arbitrations took no longer than international litigation, including 15 percent saying it actually ate up less time to conclude an international case. Eighteen percent of billion-dollar companies reported that international arbitration took less time than international litigation, and for energy firms, the figure was 20 percent. Only 7 percent of companies said it took longer to resolve international arbitration matters. Meanwhile, only 12 percent of U.S. in-house counsel said that foreign arbitrations are more expensive than international litigation, with 10 percent reporting that their international arbitration disputes were, in fact, less expensive.  Twenty percent of technology companies discerned a cost advantage to international arbitration compared to international litigation; 17 percent of both energy and health care providers felt the same.

35.Favorite Seats – U.S. companies are fairly set in their arbitration preferences. More than 70 percent identified the American Arbitration Association and International Center for Dispute Resolution as their top designee for arbitration institutions in any contracts stipulating arbitration. Twenty percent singled out the Paris-based ICC, with a smattering of preference shown for other arbitral institutions, including the CPR and the World Intellectual Property Organization. Ninety-one percent of U.S. companies expressed a preference for non-administered arbitration under the UNCITRAL Rules. U.S. businesses also expressed clear preferences for location: more than 60 percent chose New York City as their top seat for handling an international arbitration, with 28 percent naming London as their prime host. While the Paris-based ICC was listed as a favorite arbitral institution, only 2 percent of U.S. companies said they designate Paris as the preferred seat for any international arbitration. Other locations cited included Geneva, Amsterdam and Stockholm.

Law Firm Billings

36.Not as High as You’d Think – Easy as it is to accuse companies of out-of-control legal spending, many businesses have made efforts to reign in expenses in recent years. Nearly half of U.S. companies responding to the survey said their annual spend for all outside counsel is under $1 million, including a third for whom lawyers’ fees fall below $500,000. Eighty-five percent of smaller companies keep yearly law firm spending under the $500K mark, as do 42 percent of middle-market firms. A fortunate 16 percent of billion-dollar companies responding manage to keep outside counsel spending below $1 million, including 6 percent whose law firm spend is under $500K, and that’s for all types of firm advice – transactional, tax, environmental, etc., as well as litigation. U.K. companies are tighter still – almost 60 percent of British companies surveyed spend less than $500K annually on outside lawyers.

37.The $10 Million Club – There is another view of legal economics, which shows that 53 percent of U.S. companies are spending more than $1 million on outside counsel, including 15 percent committing at least $10 million. Size and large legal bills go together: only 2 percent of smaller firms reach the $5 million plateau, compared to 7 percent for mid-tier companies and 45 percent of billion-dollar businesses, including 27 percent spending $10 million. Manufacturers may be the biggest legal spenders – 35 percent struck $10 million and above for outside counsel, followed by engineering firms (25 percent) and insurers (23 percent). Of note, only 2 percent of financial service companies reported a $10 million spend on their law firms, below nearly all other segments. And not a single U.K. company reached the $10 million milestone.

38.Alternative Billing – Many companies are willing to explore new approaches to law firm compensation. Most in-house counsel surveyed by Fulbright chose fixed fees as their preferred fee arrangement, followed by volume discounts, with only 16 percent saying they would stick with hourly rates for outside counsel, and a small minority asking for firms to consider success-based billing. Another 12 percent said they would ask for contingency fees, which is itself a form of performance-based compensation. As the biggest customers of legal services, billion-dollar companies chose volume discounts as their ideal alternative to conventional hourly billables. 

39.Fixed Rate Theory v. Practice – While fixed rates were the favorite option for alternative billing, they have not yet gained much traction in the legal marketplace: 80 percent of in-house counsel said they have rarely or never paid their law firms on a flat fee basis in the past year; only 5 percent have done so with any frequency. Only 3 percent of small companies have even seen a minimal utilization rate of fixed fees; 15 percent of middle-market firms have tried it, but only 1 percent with any frequency; 35 percent of large corporations have experimented with flat billing for their law firms, including a bold 1 percent that have instituted fixed fees for all their legal work. Technology companies seem to have had the most success – 12 percent reporting fixed law firm billing on a frequent basis. 

40.What, Pay More? – Though by no means a universal arrangement, some companies contract with their law firms to pay a so-called premium fee in the event of a successful litigation. Twenty-two percent of U.S. companies responding have paid a premium fee to their counsel. As opposed to volume discount billing, premium fees are more typically used by smaller companies facing bet-the-company cases: 41 percent of companies under $100 million had agreed to a bonus litigation payment to their law firms, compared with 32 percent of billion-dollar companies using the premium method. Over half of financial service companies agreed to a premium payment in the past year, the highest percentage of any industry group.

Liability Insurance Coverage

41.Covering the Risks – U.S. businesses have turned to a variety of specialized insurance products in recent years to try to mitigate their increasing vulnerability to litigation. General liability coverage remains the most common source of protection – 58 percent of companies said it is their first line of defense in a lawsuit. More than 40 percent of counsel reported that they turn to directors & officers policies. Mid-cap and larger companies increasingly turn to employment practices liability policies, which are not in favor among smaller firms. Companies also generally reported making use of errors & omissions policies to cover litigation risks. A substantial segment of U.S. companies – 16 percent – said they are now self-insured, compared to a third of U.K. companies taking the self-insurance route to hedge litigation exposure.

What Have You Done Lately?

42.Winning Trumps All – Companies place a premium on successful litigation outcomes. In-house counsel reported that the three most impressive deeds performed by their outside lawyers in the past year were, in order: winning a case, settling a case, and having a case dismissed. Good service followed, ahead of completing a business transaction. Only 4 percent of respondents said that good advice was in itself a good deed apart from its use in successfully overcoming a litigation opponent. U.K. companies responded similarly: 50 percent said that the best service given by outside counsel in 2006-07 was a case win. Fulbright respondents found a number of memorable ways to characterize their lawyers’ top accomplishments in the past year, including:

• “Achieving an impossible and important settlement.”

• “We didn’t get sued, but every other company involved did.”

• “Got dismissed from 136 class action cases.”

• “We settled out-of-court for half the cost it would have been if we went to court.”

• “A slam-dunk jury verdict.”

• “They win all their cases.”

Survey Note

The Fulbright & Jaworski 2007 Litigation Trends Survey was performed during May and June of 2007 by Greenwood Associates, a market analysis and business research firm. This is the fourth litigation trends survey since 2004. This year’s survey drew 253 U.S. respondents, 52 percent of whom serve as their companies’ general counsel and nearly 40 percent as deputy or associate GC. (An additional 50 U.K. law departments participated.) 

Ten key industries were represented, led by financial services, manufacturing and energy, followed by technology/communications, retail, insurance, education, engineering/construction insurance, and real estate. Forty-two percent of participants work for companies with revenues of $1 billion or higher, with 36 percent employed at firms of between $100 million and $999 million in annual sales. Sixty-five percent of companies surveyed are publicly held and more than 40 percent also have operations outside the United States, including 17 percent with offices or facilities in 20 or more countries; 9 percent maintain more than 50 non-U.S. locations.

Fulbright & Jaworski L.L.P.

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