New England Biz Law Update
The overall number of lawsuits filed against companies is down to 2005 levels, and companies are relying less on outside counsel than two years ago, according to a recent survey of corporate litigation trends conducted by Fulbright & Jaworski.
The fourth annual survey looked at litigation trends from the perspective of in-house counsel.
The sample included over 300 public and privately-held corporations (253 in the U.S. and 50 in the U.K.) with gross revenues ranging from under $100 million to over $1 billion. The companies are in a broad range of industries including energy, manufacturing, technology, health care, retail, insurance and others.
The respondents included general counsel, associate general counsel, vice president and deputy general counsel.
Below is a look at the survey’s key findings and what some seasoned litigators had to say about them.
(The survey can be found at: http://www.fulbright.com/mediaroom/files/2007/FJ6438-LitTrends-v13.pdf)
The number of lawsuits filed against companies is down from last year and has returned to levels similar to two years ago.
Only 20 percent of companies surveyed expected more litigation in the year ahead, and only one-third of companies with $1 billion or more in revenues expected more litigation.
Attorneys interviewed by New England In-House said this could be due to the increased regulatory activity – especially in the securities and health care fields – which could account for less lawsuits being filed.
“With Sarbanes-Oxley, things have shifted, and what you are seeing is less litigation and more investigations and regulatory matters and law firms are being hired to assist in those investigations,” said Barry Weiner, a litigator with Ruberto, Israel & Weiner in Boston.
The demise of the Milberg Weiss law firm could also account for the decline in the number of class actions.
But most attorneys In-House spoke with said they are seeing more litigation and expect that trend to continue.
“From our firm’s standpoint, our caseload is up across all sectors. We are hiring lawyers and continue to be in litigation growth mode,” said Rick Bien, a class-action defense litigator with Lathrop & Gage in Kansas City.
Companies are relying less on outside counsel than they did two years ago.
Among U.S. companies surveyed, 15 percent spent $10 million or more annually on outside counsel.
According to the companies surveyed, only 26 percent are using outside counsel for all of their litigation matters, as compared to 2005, when 63 percent of companies surveyed did so.
When companies were categorized by size, the change from two years ago was dramatic.
In 2007, only 8 percent of companies with revenues under $100 million used outside counsel for all of their litigation matters, down from 66 percent of companies of that size who used outside counsel for all of their litigation matters two years ago.
Similarly, for companies with revenues between $100 million to $999 million, only 34 percent used outside counsel for all of their litigation matters, compared to 66 percent in 2005.
And for companies in the over-$1 billion revenue category, 18 percent hired outside counsel for all of their litigation in 2007, down from 56 percent of similar-sized companies who did so in 2005.
Robert Molloy, vice president and assistant general counsel at Massachusetts-based Staples, Inc., said that “every in-house legal department has to look at working smarter and driving the budget down by handling certain types of cases internally.”
At Staples, for example, the legal department tries to handle as much of an adversary proceeding in-house, including disputes with vendors and EEOC complaints, according to Molloy.
In addition, more in-house legal departments are hiring lawyers with litigation experience, said Paul Cushing, head of the litigation and compliance group for Partners Health Care in Boston. Cushing was a litigator before going in-house eight years ago.
“You have to have people in-house with litigation experience who can handle cases themselves where appropriate, and who can take a more active role in larger cases that require additional outside resources – including handling motions, discovery responses, collection and review of documents and even taking and defending depositions,” Cushing said.
Labor and employment suits are the number one concern among U.S. companies; contract claims are second; personal injury third.
The top two concerns among in-house legal groups the past three years have been claims involving labor and employment issues, as well as contracts.
Lawyers told In-House that labor and employment litigation will continue to grow.
“You will continue to see discrimination cases filed as people continue to have issues in the workplace,” according to Cushing. “When someone loses their job there is a natural inclination to seek an outlet to grieve the termination formally and this often leads to an employment claim.”
Cushing noted, however, that employers will compete more for workers’ services in the coming years as baby boomers retire and the number of workers potentially decreases. This could potentially lead to fewer discrimination lawsuits, he said.
Some lawyers predict a shift away from discrimination claims toward employment claims over wage and hour and overtime issues under the federal Fair Labor Standards Act, as well as state wage and hour laws.
“Wage and hour class actions are a continuing trend. Plaintiffs are prospecting those cases,” said Bien.
Molloy agreed: “I would say for plaintiffs’ attorneys, this is the lawsuit du jour.”
A recent cover story by Business Week on the explosion of these types of suits will only help fuel the numbers, he added.
(The July 2007 issue of New England In-House covered this trend. See “Employers getting clocked with hourly wage suits” on page one of the July issue.)
New England ranked third in jurisdictions with the most significant cases related to risk, behind Texas and California.
Texas and California were not surprises, given their size and reputation for being plaintiff-friendly.
The eastern district of Texas in particular has carved out a niche as a jurisdiction with an expertise in patent litigation where plaintiffs can get a speedy trial, said Weiner.
Some attorneys were surprised to see New England near the top of the list, because it is not known for being plaintiff-friendly or awarding runaway verdicts.
However, many of the largest companies are based in New England, including those in the growing technology and health care sectors.
Bien also noted that the 3rd Circuit has allowed some employment benefits cases to go forward where other jurisdictions might find them preempted by ERISA.
The most popular forms of alternatives to standard hourly fees were fixed fees and then volume discounting.
Across the entire sample, 42 percent listed fixed fees as the preferred billing arrangement, and 26 percent listed volume discounts as their favorite alternative. Fourteen percent preferred hourly fees; 11 percent preferred contingency fees, and 7 percent favored success-based billing.
Interestingly, when asked whether they believed they saved money by paying fixed fees instead of by the hour, 42 percent of companies responded that they felt they had paid the same.
Brad Lerman, a litigator with Winston & Strawn in Chicago, said his firm is much more “flexible and creative” in coming up with alternative billing structures than it was two or three years ago.
“It’s becoming more and more common to discuss at the inception of litigation blended fees, flat fees or various structured fees where risks and rewards are built into them,” Lerman said.
From the in-house perspective, Molloy said he would not have confidence in a law firm which racked up the same amount on a fixed-fee arrangement as an hourly rate.
“If a law firm is working on a fixed fee, shame on them [if the company ends up paying the same as if it had paid an hourly rate]. Someone is not doing their job, and the law firm would not get hired again,” he said.
But Bien, whose firm has used a flat fee up to the time of trial for many years, said he was not shocked that some companies spent the same amount in fixed fees as standard hourly fees.
“Lawyers are smart people and they’re not going to discount so deeply that their bonus fee for success is going to have the net result of penalizing them,” Bien said.
There was a major jump in the number of companies hiring electronic discovery vendors and retaining national or regional e-discovery counsel compared to last year.
Fifty-one percent of U.S. companies surveyed hired an e-discovery vendor, compared to 37 percent last year, and 39 percent retained or considered retaining national or regional counsel specifically to handle e-discovery issues, compared to 18 percent last year.
There was a “modest increase” in the hiring of law firms with expertise in e-discovery; 30 percent of U.S. companies hired a law firm with e-discovery expertise in 2007, compared to 26 percent last year.
The new federal rules pertaining to e-discovery have made federal litigation more difficult, according to 27 percent of U.S. companies surveyed, although 18 percent believed the rules have made the process at least somewhat easier.
But even before the new rules, attorneys said, electronic discovery was and is a regular part of virtually every case and a cost that could easily get out of hand.
“There’s a fair amount of fear-mongering going on in the wake of the amendments to the federal rules,” Cushing said, “but the fact is you had to pay attention to e-discovery even before the amendments. It’s not surprising that some companies are responding and spending more money on applications, hiring consultants and buying hardware. Even before the amendments, we worked with vendors to help us segregate electronic information, put it on the proper medium and then work with us and our outside lawyers to ensure that we have met our discovery obligations.”
Bien was not surprised that a healthy percentage of companies found the rules facilitated litigation in federal court.
“For the unprepared, it can be a big shock. But if you are good with technology and your own documents are in a format that are easily searchable with the right tools, you can much more quickly winnow out the chaff,” he said.
Class actions appear to be growing broader with a majority of companies currently defending at least one class action.
Among U.S. companies surveyed, 60 percent said they were currently defending at least one class action.
However, securities class actions were one category of class actions that were down at the time of the survey.
Companies were asked why they thought securities class actions had declined. Fifty-five percent said Sarbanes-Oxley has made companies more careful, and 50 percent said increased government enforcement has made companies more careful. Other believed that the reason for the decline in securities class actions were strong equity markets (44 percent) and the indictment of the Milberg Weiss law firm (40 percent).
Bien, who defends class actions, said his firm’s class-action defense practice is at an “all-time high.”
But he disagreed that the Milberg Weiss indictment would curb class actions in the future.
“My sense is that was an isolated incident, and, yes, it will have an impact by taking those players out, but there’s another tier of lawyers just as hungry and aggressive who are ready to file,” he said.
Patent litigation is on the rise, and technology/communications companies are the most likely sectors to see an increase in such claims.
More than one-third of U.S. companies surveyed believe patent infringement claims have increased over the last three years, and more than half of the large companies (over $1 billion in revenues) surveyed see an increase in patent litigation.
Fourteen percent of the largest companies surveyed have received more than 10 patent infringement claims against them over the past three years.
Technology companies were most likely to see an increase in patent claims over the last three years (65 percent), followed by financial services (44 percent), manufacturing (35 percent) and retail/wholesale (33 percent).
Cushing, head of litigation and compliance for Partners Health Care, was surprised that health care and life sciences were not among the industries most likely to see an increase in such claims.
Manufacturing was the industry most prone to defending patent infringement cases in court; 75 percent of that industry’s respondents said their companies had defended one or more cases, and 40 percent had defended 10 or more.
Retail/wholesale, financial services and technology/communications were the next most frequent defendants.
The survey also found that companies tend to litigate to final judgment as part of their licensing strategy, especially larger companies.
This was not surprising, given what’s at stake in the larger patent cases, said Molloy.
“If the only legal monopoly that exists is your patent, you have to go out and stop [competitors from infringing]. And as a defendant, you may absolutely believe the patent is crucial to your business, so you can’t just roll over. These are high-stakes,” he said.
* * *
Where’s the growth in litigation?
Some areas of litigation are on the upswing and predicted to grow in the years to come, according to in-house and large firm attorneys interviewed by New England In-House. Those growth areas are highlighted below.
Labor and employment
Many attorneys expect labor and employment claims to continue to rise – especially in the wage and hour arena.
“We’ve seen a steady diet of labor and employment and significant defense of several class actions in wage and hour and discrimination claims,” said Rick Bien, a litigator with Lathrop & Gage in Kansas City, Mo. “I see that continuing as a trend.”
Unlike discrimination claims – which the Supreme Court recently held not to be a “continuing violation” based on each paycheck paid to the plaintiff – no similar barriers to wage and hour lawsuits have arisen yet, said Robert Molloy, vice president and assistant general counsel for Staples, Inc. based in Framingham, Mass.
Intellectual property
Intellectual property cases are on the rise and will keep rising. Technology and pharmaceutical patents are two likely areas of growth as those business sectors continue to develop.
“A lot of companies are trying to maximize their revenues with their patent portfolio, and litigation becomes part of that,” said Molloy, who noted that retail companies like Staples should also expect to get caught up in patent infringement claims, as IP claims cover sellers, as well as makers, of products alleged to infringe a patent.
“We’re seeing more and more, and it’s just going to get bigger,” he said.
Privacy litigation
The explosion of electronic data has brought more opportunities for breaches of privacy of personal information – from credit card numbers to medical records and even genetic information stored on corporate servers.
“This is an area that may be ripe for more litigation. With the proliferation of electronic information, we’re likely to see at some point more and more breaches that could lead to regulatory action and could also lead to private litigation,” said Paul Cushing, head of the litigation and compliance group for Partners Health Care in Boston.
Financial industry class actions
A weakening economy will typically bring more lawsuits and some litigators are already seeing a wave of suits related to the financial industry, such as mortgage lenders, brokerage houses and large commercial banks.
“Our class-action defense practice is at an all-time high,” said Bien, who added that there are numerous class actions across the country against title insurance companies over their sales practices.
And he expects to see more class action suits as the sub-prime lending issues unfold.
“Anything having to do with the sub-prime market is kind of in a sandwich. They get sued by consumers in class actions and by investors who say, ‘You didn’t tell us how heavily invested you were in the sub-prime market,’” Bien said.
White collar crime
Greg Curtner, a litigator who practices in Michigan, New York and California, said he has seen an uptick in white collar criminal litigation.
“There’s an emphasis on criminal law where the threat of investigation or criminal sanctions used to just be a wrongdoing with civil penalties,” he said.
He noted that his firm, Michigan-based Miller Canfield, 10 years ago had no white collar criminal defense attorneys, but now has six.
Green technology
Because litigation tends to follow growth industries, lawyers predict an increase in litigation over new environmental products such as alternative fuels, as well as energy sources like wind, solar and hydro-power.
“Given the concern with global warming, environmental products will be an emerging industry, so you’re going to see more activity and, as a result, more business disputes and accordingly more litigation,” said Barry Weiner of Ruberto, Israel & Weiner in Boston.
He expects to see an array of legal work as a natural part of this developing industry, from transactional to employment to litigation and intellectual property.
Bien, who practices in Kansas City, also predicts new types of environmental lawsuits over the increasingly industrialized agricultural sector in the Midwest.
“These could involve anything from employment-based suits to nuisance suits that challenge a large cattle or hog or turkey operation, to suits over new bio-fuels,” Bien said.
