The rising costs of legal disputes

AGAINST a general expectation that exposure to legal disputes will be sustained, UK businesses have reported that the increase in regulatory proceedings is a major concern. The eighth annual Fulbright & Jaworski Litigation Trends Survey, which considered the views of over 400 corporate counsels, suggests that the consequences and costs for UK businesses of dealing with regulatory proceedings are becoming increasingly significant.

Enhanced exposure to regulatory proceedings

More than a third (36%) of all UK companies faced at least one regulatory proceeding in the last year, an increase from 32% in 2010. At a global level, 40% of all respondents reported involvement in at least regulatory proceeding over the last year, up from 37% in 2010.

Dealing with these matters is increasingly disruptive to businesses. One quarter of UK respondents to this year’s survey reported an increase in regulatory inquiries or investigations against their company, compared to 18% in 2010 and 19% in 2009.

The leading agencies instigating investigations among the UK regulators were the Financial Services Authority (15%), the Competition Commission (15%), Her Majesty’s Revenue and Customs (8%) and the Serious Fraud Office (8%).

The conduct of internal investigations by UK businesses remains a common feature. In the last year, almost half of UK respondents embarked on an internal investigation with the assistance of outside counsel. Internal investigations have led to serious consequences, with businesses required to follow up internal investigations by reporting issues to regulators. One in five of UK companies went on to report the matter to a regulatory agency.

The increasing impact of whistleblowing

The prevalence and adverse impact of whistleblowing has continued to have a significant impact. One fifth of UK respondents have been subject to whistleblowing claims in the last three years, up from 13% in 2010 and a threefold increase since the 2009 survey when 6% of U.K. respondents reported having been on the receiving end of whistleblowing allegations in the previous three years.

The consequences of these allegations are serious; 40% of U.K. respondents stated that whistleblower allegations led to an internal investigation, 20% reported a regulatory investigation and 33% reported that third party proceedings followed. Over half of all respondents were subjected to third party proceedings as a result of whistleblower allegations, an increase from 46% in 2010.

Bribery and corruption – an ongoing concern?

In 2011, the number of UK and US respondents instructing outside counsel to assist with a bribery or corruption investigation declined towards 2008 levels, following a sharp spike in 2010. Over the past year, 6% of U.K. respondents instructed outside counsel to assist with a bribery or corruption investigation, compared to 26% in 2010 (12% in 2009, 5% in 2008).

In a similar vein, one fifth of UK respondents expect the newly implemented UK Bribery Act to force changes in their operations, down from 35% in 2010. However, this may be explained by the fact that almost four out of ten UK respondents reported having already undertaken a review of existing procedures in light of the implementation of the Act in July 2011.

Expectation of increased litigation

Nearly three quarters of all respondents were sued in the last year, and businesses continue to expect more litigation in the year ahead. One in five UK respondents anticipate an increase in the number of legal disputes, a slight rise in the UK from 16% in 2010.

Consistent with the expectation of increased exposure to regulatory proceedings, enhanced regulation is expected to lead to greater litigation. One fifth of U.K. respondents expect their legal disputes to increase as a result of heightened regulatory scrutiny and enforcement, a sharp rise since 2010 when 7% of U.K. respondents raised concerns about stricter regulation leading to legal disputes.

In contrast, the impact of the economic climate on legal disputes is expected to decline over the next year. This year one fifth of U.K. respondents considered the state of the economy as a reason for an increase in the legal disputes they may face, down from 47% in last year’s survey.

Legal spend on disputes

The overall litigation spend of businesses is increasing. Around a half of U.K. respondents recorded an annual litigation spend (excluding the cost of settlement and judgments) in excess of $1m.

However, the use of alternative fee arrangements (AFA) to pay for legal services in the context of disputes is becoming increasingly common. Two-thirds of U.K. respondents stated that they had used AFAs, up from 50% in 2010 and 39% in 2009.

That said, despite the increasing use of AFAs, they continue to account for only a minority of all legal spending on disputes. The hourly rate remains dominant with nearly 70% of respondents saying they use alternative fee arrangements for less than 30% of their outside counsel billings.

Privacy, data protection and the impact of new media

Businesses are increasingly required to search employees’ social media accounts and mobile devices in the context of disputes. Over a quarter of UK companies (compared to 18% in 2009) have been required to produce electronically stored information from a social media site for e-disclosure purposes during the past 12 months.

Businesses may also face further issues in connection with new forms of data storage including ‘cloud computing’. One in three UK respondents reported using cloud computing and half of those have already reported having to preserve and/or collect data from the cloud in connection with actual or threatened litigation, disputes or investigations.

One in five UK respondents encountered privacy and data protection issues in litigation, disputes or investigations over the past 12 months. More positively, significant numbers of participants have adopted a more co-operative approach to the e-disclosure process, with eight in ten UK respondents reporting that a more co-operative approach to e-disclosure led to lower litigation costs.

Businesses are operating in a global climate of enhanced supervision, intense scrutiny, and significant enforcement including increasing penalties. As a result, companies and their advisers in the US, UK and internationally are handling increasing numbers of internal investigations and regulatory proceedings, often as a result of whistleblowing allegations, at substantial cost to the business and often on a multi-jurisdictional basis.

Importantly, however, while businesses expect to experience sustained and increasing exposure to international and domestic legal disputes UK businesses are becoming increasingly sophisticated in managing their regulatory and litigation spend, seeking ever more effective ways to ensure they obtain value for money in purchasing legal services to deal with these matters.

Lista Cannon and Chris Warren-Smith are partners in the global disputes and investigations practice at Fulbright & Jaworski International in London