Norton Rose Fulbright’s Annual Litigation Trends Survey

US companies increasingly concerned about regulatory investigations

April 15, 2014

Contacts

The number of US companies facing regulatory proceedings increased for the third consecutive year, according to Norton Rose Fulbright's Annual Litigation Trends Survey.

The upward trend is the result of a stricter regulatory environment and increased scrutiny from a broad range of state and federal agencies. Close to 20 percent of survey respondents said their companies had faced a regulatory/investigation matter in 2013, up from 9 percent in 2012. The increase was consistent among all industries and companies of varying sizes, but was most pronounced among technology/communications organizations (27 percent versus 10 percent in 2012).

Otway Denny, US Disputes Head, Norton Rose Fulbright, said:

"We continue to see the scope and frequency of regulatory investigation matters increase in the US, as government agencies take a more proactive approach in determining compliance. Stricter regulations governing financial, environmental and workplace issues create a more complex environment for businesses, and these results show that a serious regulatory investigation is a reality for a growing number of companies each year."

Norton Rose Fulbright's 10th Annual Litigation TrendsThe survey also found that 59 percent of respondents had retained outside counsel for assistance with a government or regulatory investigation during 2013, basically unchanged from 2012. The majority of cases cited involved the Department of Justice (34 percent), the Securities and Exchange Commission (23 percent) or the Environmental Protection Agency (22 percent), in addition to investigations led by a number of other federal, state and local entities.

Not surprisingly, legal counsel concerns over regulatory/investigation matters are also up sharply in the 2013 survey, with 41 percent of respondents indicating it as a top concern, versus just 23 percent in 2012. The increase is most pronounced among technology/communication companies (56 percent in 2013 versus 16 percent in 2012), as well as financial services (57 percent versus 24 percent) and healthcare (52 percent versus 24 percent).

The survey also found that labor and employment disputes and contract matters once again were the most common litigation issues facing U.S. companies. A total of 48 percent of respondents said that labor and employment issues topped the number of cases their organization faced in 2013, and 36 percent said contract issues were most numerous.

In general, the number of lawsuits filed against respondents' companies in the past 12 months was stable, with no significant change since 2010.

This is Norton Rose Fulbright's 10th annual litigation trends survey of corporate law departments in the United States. A total of 401 senior corporate counsel executives – representing a broad range of industries – responded to the survey, which was conducted in late 2013/early 2014.

Lawsuits steady but impact rises

While respondents reported little change in the total number of lawsuits against their companies, the potential financial impact of the litigation they face – and the expenditures needed to manage those cases – continue to increase.

The percentage of companies facing at least one lawsuit with more than $20 million at issue rose to 34 percent in 2013, continuing a trend in recent years that's left fewer respondents untouched by high-value cases. In 2011, for example, just 23 percent of respondents' companies were involved in a lawsuit with more than $20 million at issue.

Overall, 18 percent of respondents reported no lawsuits against their companies in 2013. Twenty-seven percent reported between one and five lawsuits; 25 percent reported between six and 20 lawsuits; and 12 percent reported between 21 and 50 lawsuits. Eighteen percent said their company faced more than 50 lawsuits during the year.

Healthcare industry respondents had the most litigation matters compared with other industries, with 55 percent indicating more than 20 suits versus 30 percent for the overall sample. That increased activity also led to higher spending – 49 percent of healthcare respondents reported a 2013 litigation spend of $5 million or more, closely followed by energy at 46 percent.

Large companies were most likely to have more than 20 suits filed against them (48 percent versus 30 percent among all respondents). In fact, of the companies surveyed with more than $5 billion in annual revenue, 60 percent had 20 or more lawsuits currently pending, and 43 percent had more than 50. Just 12 percent of the largest companies in the survey had no lawsuits pending.

At the same time, small companies were more likely to escape litigation throughout the year (35 percent versus 18 percent for the overall sample).

The number of arbitrations pending against companies surveyed also remained stable. As with lawsuits, healthcare companies are the most likely to have one or more arbitrations pending against them (60 percent versus 44 percent for the overall sample), and larger companies reported a higher incidence of arbitrations against them than their smaller peers (57 percent versus 44 percent of the total sample).

One in four respondents has commenced at least one arbitration against other parties. This rate has remained steady in recent years, with no significant change in the period 2011 to 2013.

Technology Impacts on Litigation

The rise in social media and mobile connectivity is having an increasing impact on litigation and regulatory proceedings for companies across a wide range of industries. Twenty percent of respondents said their company had to preserve or collect data from an employee's social media account in 2013 in response to a dispute or investigation. Fifteen percent of respondents said their company had been required to produce social media postings via the discovery process in the previous 12 months.

In addition, close to half of the survey respondents (41 percent) said their companies had to preserve or collect data from employees' mobile devices for litigation or investigation purposes. Those figures were over 50 percent for engineering (58 percent), retail/wholesale (52 percent) and energy (52 percent).

The number of companies using cloud computing also continued to increase in this year's survey. Forty-seven percent of respondents said their companies stored data in the cloud in 2013, up from 37 percent in 2012 and 27 percent in 2011.

Smaller and mid-sized companies were much more likely to report the use of cloud computing (56 percent and 58 percent, respectively) than were larger organizations (43 percent).  Engineering/construction and technology/communications companies reported the highest cloud-usage rates, with 68 percent and 65 percent, respectively. Among energy companies, only 36 percent report being users of cloud solutions. Thirty-seven percent of the companies that used cloud computing reported that they had needed to preserve and/or collect data from the cloud in response to litigation or investigation.

Survey Note

Norton Rose Fulbright's 10th Annual Litigation Trends Survey was conducted by Acritas, a UK-based legal services market business research firm. The survey, which debuted in 2004, polls corporate counsel on litigation issues and concerns.

This year's survey reflects the views and responses of 401 in-house attorneys, up slightly from participation levels in 2012. More than half of those responding identified themselves as general counsel (51 percent). Other positions included head of litigation (25 percent); associate/assistant/deputy general counsel (11 percent); and other, including C-levels, VP and senior litigator (13 percent).

Ninety-four percent of respondents said their companies were headquartered in the United States.

The companies involved in this year's survey span a broad range of industries, including energy, healthcare, financial services, technology/communications, manufacturing, retail/wholesale, insurance, engineering/construction, real estate, trade association and more. Within each sector, companies represent a variety of subgroups and segments. The largest sector represented is energy at 21 percent of respondents, followed by healthcare (17 percent) and financial services (15 percent).

As in years past, companies of all sizes participated in the survey. Large companies – those with more than $1 billion in revenues during 2013 – were represented by 66 percent of respondents who provided their gross revenues. Nineteen percent of respondents were from mid-sized companies, with annual revenues of $100 million to $999 million, and 15 percent of respondents were from small companies with annual revenues under $100 million. Of the insurance companies responding, 82 percent were considered large; retail/wholesale, energy, manufacturing, healthcare, and technology/communications industries were next, all with more than 50 percent of industry respondents representing large companies. The trade association, real estate and engineering/construction industries dominated the small-company sector.

What follows is a bulleted summary from Norton Rose Fulbright's Annual Litigation Trends Survey. For a link to the descriptive "white paper" go to: http://www.nortonrosefulbright.com/litigationtrends2014.

Managing Litigation: Budgets, Fees and In-House Hiring

  1. Spending going up: Litigation spending rose once again in 2013, with 71 percent of U.S. companies reporting an average spend of $1 million or more, up sharply from 53 percent reported in both 2011 and 2012. The high-dollar ranges also grew significantly, with 38 percent of companies reporting an annual litigation spend of $5 million or more, up from 27 percent last year and 23 percent in 2011. Twenty-six percent of companies in the survey spent $10 million or more in 2013 – up from 17 percent in 2012 and just 11 percent in 2011.
  2. Higher costs for all: Among smaller companies, those spending $1 million or more on litigation, excluding costs of settlement and judgments, increased substantially to 32 percent in 2013 from the previous two years (15 percent in 2012 and 17 percent in 2011). The percentage of larger companies spending $10 million or more annually increased to 43 percent for the second consecutive year of growth (33 percent in 2012; 19 percent in 2011). Industries with the highest levels of companies that spent $5 million or more on litigation in 2013 are healthcare (49 percent) and energy (46 percent), compared with 38 percent of companies across the total sample that spent at that level.
  3. Alternative fees remain popular: After a slight dip last year, the number of companies using alternative fee structures rose in 2013, to 60 percent, up from 51 percent last year. Alternative fee arrangements (AFAs) were far more popular among larger companies, with 71 percent saying they had used AFAs in 2013, compared with less than half of small and mid-sized companies.  Although AFAs make up a small percentage of most companies' overall spend on outside counsel – 44 percent of respondents said more than 20 percent of their overall spend was billed via AFAs – the proportion of spend represented by AFAs was up from last year, when 34 percent said AFAs accounted for more than 20 percent of their spend.
  4. Fixed-fee arrangements popular: For companies using alternative fee arrangements, fixed fee, capped fee and blended rate arrangements continued to be popular in 2013. Sixty-five percent of companies that used AFAs in 2013 used fixed fee deals, followed by capped fees (51 percent) and blended rates (40 percent). Performance and rewards-based fee (35 percent) and contingent fees (26 percent) were less popular.
  5. Who uses AFAs?: Engineering/Construction(83 percent), manufacturing (80 percent) and technology/communications (80 percent) relied most heavily on fixed fees in 2013. The financial services sector used fixed and capped fees in almost equal numbers (64 percent and 62 percent, respectively). The industries most likely to use performance/rewards-based fees in 2013 were healthcare (51 percent) and energy (45 percent).
  6. AFA rates highly: Of companies that used AFAs, every form of AFA scored above 85 percent in being very effective or somewhat effective. In fact, 47 percent of respondents say they expect the use of AFAs to increase in 2014. Financial services and retail companies were the most likely to say they expected an increase in AFA use in 2014, each at 56 percent.
  7. Fixed fees ranked high: The highest approval rating for fixed fees came from mid-sized companies, with 78 percent finding them to be very effective. Among industry respondents, 63 percent of energy companies consider fixed fees very effective – the highest rating among industry sectors.
  8. Pleased with quality of AFA work: Companies that have experience with AFAs overwhelmingly reported that they were satisfied with the quality of work provided under those arrangement with 96 percent satisfied with the structure. Satisfaction increased markedly compared to 2012, when nearly one in four US companies were unsatisfied with the quality of work provided under AFAs, compared to just 4 percent in 2013.
  9. Most satisfied with quality: Larger companies reported the highest level of satisfaction with quality of work under AFAs at 79 percent. Among companies that spend $10 million or more on litigation annually (excluding costs of settlement and judgments), the satisfaction level with AFAs was 86 percent. The energy sector showed the highest rate of satisfaction with work provided under AFAs at 75 percent of respondents. Manufacturing (73 percent) and financial services (71 percent) were close behind.
  10. Staff sizes increasing: The proportion of in-house litigation teams with more than five lawyers has increased over a three-year period, up to 33 percent of respondents (from 30 percent in 2012 and 25 percent in 2011). Industries with the highest percentages of in-house litigation management teams consisting of more than five lawyers are insurance (52 percent), healthcare (47 percent) and financial services (36 percent).
  11. Large companies lead the way: Among larger companies, 45 percent had more than five litigation lawyers on staff in 2013, and 30 percent had more than 10. Just 9 percent of smaller companies and 13 percent of mid-sized enterprises had more than five lawyers. The percentage with more than five attorneys among the largest companies surveyed (>$5 billion in revenue) was 60.
  12. Firm hiring up: Twenty-five percent of respondents said their companies increased the number of outside counsel firms on their rosters in 2013, up from 20 percent last year. The number of companies streamlining their rosters remained unchanged at 14 percent. The engineering/construction industry led the way in hiring outside counsel last year, with 42 percent of respondents saying their companies hired additional outside help.

Regulatory Investigations

  1. Focus on regulatory matters: Though the number of regulatory matters continued to increase in 2013, the number of firms hiring outside counsel to support them in regulatory investigations remained steady at nearly 60 percent.  But the breadth and reach of these matters is staggering: two-thirds of the companies in the insurance, energy, financial services and healthcare industries faced some type of regulatory investigation in 2013, and 52 percent of respondents said their companies are spending more time on investigative requests and proceedings than in years past – up from 43 percent in 2012 and 40 percent in 2011. The industry sectors that reported spending more time on regulatory investigation requests or proceedings during 2013 were financial services (69 percent), insurance (67 percent) and energy (59 percent).
  2. Who's targeting whom? As might be expected, the regulatory bodies that are most actively involved in investigations vary by industry.  For example, 48 percent of energy companies involved in a regulatory matter were investigated by the EPA and 34 percent by the DOJ; for financial services firms, the SEC (54 percent) and FINRA (44 percent) were most involved; for healthcare, the DOJ (50 percent) was a primary investigator; for engineering/construction, it was split between the DOJ (36 percent) and OSHA (36 percent).   For many companies, state regulators played a major role, as well, especially state attorneys general offices.
  3. Concerns cross industry lines: The increase in concerns over regulatory/investigation is most pronounced among respondents in the technology/communications sector (56 percent in 2013 versus just 16 percent in 2012) as well as in financial services (57 percent vs. 24 percent) and healthcare (52 percent vs. 24 percent).  By company size, regulatory/investigation concerns have increased most among mid-sized (40 percent vs. 17 percent) and smaller (31 percent vs. 17 percent) companies, while larger companies remain most concerned (43 percent in 2013 compared to 27 percent in 2012.

Internal Investigations

  1. Internal investigations rise sharply: Since 2008, the number of companies reporting that they conducted at least one internal investigation that required the assistance of outside counsel has fluctuated between 30 percent and 50 percent. But in 2013, that number rose to 55 percent, up from 42 percent last year.  Twenty-five percent of respondents reported that their companies undertook three or more internal investigations that required outside counsel assistance. Twenty-six percent of respondents said their investigation resulted in reporting the matter to a regulatory agency.
  2. Prevalence at larger companies: Internal investigations are more common at larger companies, with 67 percent of large companies saying they had conducted at least one internal investigation that required the assistance of outside counsel, compared to 47 percent of mid-sized companies and 38 percent of smaller companies.
  3. A sector shift: In last year's survey, financial services, manufacturing and retail reported the most companies with internal investigations. In 2013, however, the healthcare, engineering/construction and energy sectors led the way, each with more than 60 percent of respondents saying their firms had used outside counsel to support an internal investigation in 2013. Industries with the largest proportion of companies that have conducted six or more internal investigations requiring assistance of outside counsel were healthcare (19 percent) and technology/communications (17 percent), versus just 9 percent for the total sample.

Labor and Employment Litigation

  1. Most common type of litigation: Forty-eight percent of respondents named labor and employment disputes as one of the three most common types of litigation for their companies in 2013.  The technology/communications industry reported a significant increase in labor and employment matters, with 65 percent of respondents in 2013 including labor and employment among the most frequent types of litigation, compared to 52 percent in 2012 and 40 percent in 2011.
  2. A major concern: Forty-four percent of respondents said labor and employment matters were among their companies' biggest concerns. Along with the growth in actual labor and employment matters, 72 percent of retail companies listed it as a growing concern, up from 62 percent in 2012. The biggest increase, however, was seen in the technology sector where 47 percent of industry respondents listed labor and employment matters as a concern, up from 26 percent in 2012.

Intellectual Property and Trade Secrets

  1. IP/patents a growing issue: Companies in the survey recognize that IP and trade secret matters are an important issue. Twenty-eight percent of respondents said IP and patent issues were a major concern for their companies, up from 19 percent in 2012. Nineteen percent said IP matters were one of their three most active areas of litigation last year.
  2. Healthcare sees biggest jump: IP disputes are up significantly among healthcare respondents with 29 percent saying IP/patent matters are one of their most numerous types of litigation, almost doubling from last year's 15 percent. While, technology/communications leads the way, with 38 percent, disputes in this sector declined from 55 percent in 2012. Compared with their smaller peers, larger companies are more likely to see intellectual property matters as critical, with 35 percent saying it was a major concern.

Arbitrations vs. Lawsuits

  1. Arbitrations stable: The number of arbitrations pending against companies surveyed has remained relatively steady since 2011, with no significant change. Forty-four percent of respondents said their companies had one or more arbitrations commenced against them in during the last 12 months, with larger companies reporting a higher incidence (57 percent).
  2. Who is impacted most?: Healthcare companies are the most likely to have one or more arbitrations pending against them (60 percent versus 44 percent for the overall sample). Roughly one in 10 respondents indicated they had one or more arbitrations pending against their companies with more than $20 million at issue.
  3. Initiating arbitration: One in four respondents had commenced at least one arbitration against other parties during the past year. This rate has remained steady in recent years, with no significant change in the period 2011 to 2013. Less than 8 percent of respondents initiated at least one arbitration with more than $20 million at issue.
  4. Lawsuits numerous but steady: Although the total number of lawsuits initiated against respondents companies has remained relatively unchanged, the majority of companies (82 percent) had at least one lawsuit filed against them in the last year.
  5. Who is involved?: Healthcare industry respondents have the most litigation matters compared with other industries, with 55 percent indicating more than 20 suits versus 30 percent for the overall sample. Smaller companies are much more likely to have no lawsuits filed against them (35 percent versus 18 percent for the total sample), and large companies are more likely to have more than 20 suits filed against them (48 percent versus 30 percent among all respondents).
  6. Large companies impacted more: Among the largest companies surveyed (more than $5 billion in annual revenue), 60 percent have 20 or more lawsuits pending against them, 43 percent have more than 50 and just 12 percent have none.  Energy companies are more likely to have one or more large lawsuits ($20 million or higher) pending against them compared to other industries (52 percent versus 34 percent for the total sample).
  7. Lawsuits initiated by companies: The number of lawsuits initiated by respondents has remained stable in recent years, with no significant changes from 2011 to 2013.  Companies with $1 billion or more in revenue are much more likely to have commenced one or more lawsuits – and nearly one in four larger companies has initiated at least one lawsuit with $20 million or more at issue.

Privacy and Data Protection

  1. Growth in data causing problems: The rapid growth in electronic data, mobile computing and wireless communication is creating significant legal issues for companies. Forty-three percent of this year's respondents said their companies had encountered issues with privacy/data protection in a dispute or investigation during 2013, up from 31 percent in 2012 and just 25 percent in 2011. This was most prevalent in healthcare, with 67 percent of respondents reporting their companies had faced a privacy/data protection issue, along with technology/communications at 60 percent.
  2. Top data concerns: The No. 1 concern, cited by 55 percent of respondents, was the search for or collection of data from company equipment used by employees. Second was the issue of third-party vendors collecting and processing data on behalf of respondents' companies.