Litigation has become the great equalizer of the modern corporation. Regardless of size, industry or location, there is certain to be a sizeable number of disputes diverting the resources of American businesses. Nearly 90 percent of U.S. corporations are engaged in some type of litigation, and the average company balances a docket of 37 U.S. lawsuits. For $1 billion-plus companies in the U.S., the average number of cases being juggled at home soars to 147.
Those are findings from the latest annual 2005 Litigation Trends Survey from the international law firm Fulbright & Jaworski LLP, one of the largest samplings of in-house counsel in the United States. The median-sized U.S. company surveyed reported annual gross revenues of $484 million.
Companies from 45 states were represented in the survey, with the heaviest concentrations from the Midwest, New York-New England, and the South. Among individual states, Texas and California were most heavily represented.
Accepting the reality that litigation is a constant in their business lives, close to 90 percent of U.S. corporate counsel have no plans to reduce the number of outside lawyers that handle their cases. The ubiquity of litigation in American business goes a long way toward explaining the overriding concern corporate counsel have with controlling litigation expenses. Indeed, respondents expressed more concern about what they perceived as the high costs of litigation than they did about winning or losing the underlying lawsuits.
Ironically, despite the certainty that litigation expenses will continually accrue, the inherent unpredictability of their pace or size makes budgeting for litigation a difficult task for many corporate counsel. Just under 40 percent of U.S. corporate counsel are still unable to predetermine the costs of managing business disputes, reporting that they could not quantify their litigation budgets in relation to their overall legal budgets.
To be sure, a great many companies are aware of the extent of their overall legal spending. Of the companies that did track spending (half of the respondents), their average legal budget was $20.1 million, of which $8 million was directed toward litigation. However, 10 percent of counsel reported that their legal spending accounts for 5 percent or more of their company’s overall gross revenues, which for a $1 billion business, would translate into $50 million.
The concern about costs manifests itself across the survey, whether respondents were ranking their five leading litigation concerns or describing their ideal outside counsel. When asked what message they would most like to deliver to their outside lawyers, the number one directive was “control costs.” That message took precedence over “win cases,” “get results” or an array of other results-driven choices.
Some of the survey’s findings seem to be ripped from recent headlines, including dramatically increased concerns about the burdens stemming from electronic discovery in light of high-profile events, such as the Frank Quattrone trial and the Arthur Andersen Supreme Court decision. Electronic discovery was the number one new litigation-related burden for companies with revenues over $100 million.
U.S. companies surveyed are mindful of the consequences of faulty record keeping: over 80 percent now have records retention policies and three-quarters have litigation hold policies.
“The advent of electronic discovery, coupled with more stringent record keeping requirements, has exponentially added to the burdens imposed by litigation,” said Robert D. Owen, a Fulbright litigation partner and leader of the firm’s records management and e-discovery practice group.
Companies with gross revenues under $100 million were more concerned about regulation and compliance. As many of the comments showed, the Sarbanes-Oxley Act, and its tougher requirements for securities filings, has had a large effect on smaller companies.
Despite the constant buzz about class actions, tort reform and corporate fraud, the top litigation concerns of corporate counsel are much more staid: contracts and labor/employment claims. Largely ignoring size or industry differences, these two areas each account for roughly one-quarter to one-half of the litigation dockets of American corporations.
Litigation as Corporate Reality
Key findings in the 2005 Fulbright & Jaworski 2005 Litigation Trends Survey:
1) Litigation Dockets–Eighty-seven percent of U.S. companies are engaged in some form of litigation in the U.S. Twenty percent had one to three cases pending, nearly a quarter had between four and 10 cases pending, and another quarter of respondents had up to 50 cases pending. That still left a full 20 percent facing an average caseload of 50 to 100 litigation matters. Given how much of an equalizer litigation is–hitting all companies regardless of size, industry or regional differences–it seems remarkable that as much as 13 percent of U.S. companies surveyed managed to avoid business disputes. Companies most likely to be litigation-free: those with revenues under $100 million. However, 12 percent of $1 billion-plus companies also reported that they are free of litigation, which may be one of the survey’s biggest surprises.
On average across all sectors, U.S. companies carried a U.S. docket of 37 lawsuits.
2) Sector Specific–The U.S. health care industry had the greatest number of pending litigation matters in the U.S., with an average of 64 cases. Energy companies were second in line with 49 pending litigation cases, followed by technology/communications (with 42 pending cases) and manufacturers (with 40 pending cases) in third and fourth. Tied for fifth were insurance providers and real estate companies (with 39 pending cases each). Filling the remainder of the field: finance (34 pending cases) and retail/wholesale (22 pending cases).
3) Litigation as a Percentage of Overall Legal Spending–Among counsel who track litigation costs, about a quarter said that they account for 21 to 50 percent of their legal budgets; an additional 12 percent reported that litigation expenses accounted for more than 50percent of the total legal budget. Broken out by size, counsel for 15 percent of mid-market companies and 16 percent of businesses in the $1 billion-plus range reported that litigation consumes over half of their legal budgets. For companies with revenues under $100 million, that figure dropped dramatically to only 8 percent. Translated into the bottom line, nearly a quarter of U.S. companies are spending 2 percent or more of their gross revenues on legal fees; 10 percent of them spend more than 5 percent.
By industry sector, 23 percent of insurance company in-house counsel reported that their litigation budgets account for over half of their total legal budgets. Over a third of manufacturing and energy companies spend between 21 percent and 50 percent of their legal budgets on litigation; the same is true for more than a quarter of retail/wholesale, health care and tech/comm companies. In contrast, 26 percent of real estate and finance company respondents reported spending less than 20 percent of their legal budgets on litigation.
4) Litigation Cost Averaging–Respondents had difficulty in averaging costs for specific types of litigation matters, with many saying that costs varied too widely to make hard estimates.
5) Is That a New Suit?–Two-thirds of the companies surveyed were slapped with a summons and complaint during the past year; almost a third of them were hit with between six to 20 suits, and 18 percent were hit with more than 21. On average, small companies were hit with only three new suits on average, while mid-market companies were hit with 17. Businesses in the $1 billion-plus club were served with an average of 65 new suits.
6) Shifting Roles as Plaintiffs/Defendants–More than half of the companies surveyed are comfortable in the role of plaintiff, filing at least one action in the last year; the average U.S. company initiated 11 new suits and two arbitrations during the past year. Larger companies are more litigious in general: the $1 billion-plus group was two times as likely as their under-$100 million counterparts to commence lawsuits or arbitrations. Finance firms turn out to be the most proactive in starting litigation.
7) Who’s Minding the Docket?–Only 8 percent of corporate law departments manage to get by without the necessity of a staff lawyer managing company litigation matters, while 44 percent had at least one staff litigator.
8) Top Current Litigation Matters–The top two slots on the in-house litigation docket are contracts claims and labor/employment matters. For mid-market and $1 billion-plus companies, these types of actions accounted for as much as half of their litigation matters. For smaller companies, contract disputes account for more than a quarter of their caseload. Following contracts and labor/employment actions, the third most frequent type of case filling corporate America’s litigation plate is personal injury actions. Rounding out the top five–product liability and intellectual property disputes. The most frequent type of case pending against health care companies was professional services litigation, while insurance litigation topped the list for insurers. For manufacturers, product liability cases were most commonly pending, while real estate companies face personal injury lawsuits. The most common cases for other industries were: energy and finance (contracts); tech/comm (labor/employment); and retail/wholesale (split equally between contracts and labor/employment).
9) Emerging Lit Pressures–In-house counsel pointed to electronic discovery as the number one headache, followed by “increased regulatory/compliance” issues, which is a certain legacy of the Sarbanes-Oxley Act of 2002.
10) What Litigation Concerns Are On the Horizon?–Contract and labor/employment actions topped the list of matters that U.S. counsel were most concerned about for the future followed by intellectual property disputes and class actions. For counsel at $1 billion-plus companies, however, class actions rose to the number two spot, over concerns about contract-based litigation. Technology companies are focused on intellectual property/patent issues, while real estate and energy companies are more concerned about environmental/toxic tort litigation. Professional services litigation was the leading concern for health care companies, but not for others, while insurance litigation was of principal concern only for those in the insurance industry. Only the financial and real estate industries had serious concerns about securities litigation/enforcement in the future.
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