Houston - The insurance industry, where companies face an average of 1,696 lawsuits, spanning product liability and environmental class actions to directors and officers claims, and even coverage fights over hurricanes and terrorist attacks, faces the most litigation when compared to other industries, according to a survey from international law firm Fulbright & Jaworski LLP, headquartered in Houston. Retailers and energy firms reported average caseloads north of 330 per company, which doesn't even come close to the insurance industry.In its third annual survey of corporate litigation trends—pulling data from 422 in-house law departments worldwide—Fulbright found that U.S. companies face an average of 305 pending lawsuits internationally. For large U.S. companies—those with $1 billion or more in annual gross revenue—the number of lawsuits soared to 556 cases, with an average of 50 new disputes emerging each year for close to half of them.
As lawsuits have multiplied—brought by shareholders, regulators, consumers, employees and competitors—so has another related event: the internal investigation. Nearly two-thirds of the U.S. companies interviewed by Fulbright reported that their companies had launched at least one such probe in the past year necessitating use of outside counsel, a certain byproduct of Sarbanes-Oxley legislation, as well as the recent mega-scandals of Enron and WorldCom.
U.S. companies report spending 71% of their overall estimated legal budgets on disputes. Nearly 40% of Fulbright's U.S. respondents reported at least one $20 million suit commenced against them in the past year. Two percent faced 50 new suits or more involving at least $20 million in claims, or more than $1 billion worth of new disputes on the table for some large companies.
Large U.S. companies commit an average of $19.8 million to litigation, approximately 58% of total average legal spending of $34.2 million.
Despite the recent heat generated by investigations into stock options backdating, companies say their No.1 litigation fear stems from labor and employment claims, followed by old-fashioned contract disputes, and ahead of regulatory actions, patent and other intellectual property suits, and class actions.
One of this year's surprises, according to Stephen Dillard, chair of Fulbright & Jaworski's global litigation practice, was the large percentage of companies—nearly two-thirds—that had undertaken internal investigations in the past year requiring outside counsel. "Partly this is an outgrowth of our modern regulatory and enforcement climate in which companies are put on fast-track notice by government agencies that an action may be forthcoming, which prompts them to conduct a full-scale investigation," he said.
"The surge in investigations is also an inevitable consequence of the big corporate meltdowns that have occurred in recent years," Dillard suggests. "Management and corporate boards have become much more proactive at taking the lead in policing themselves for possible wrong-doing and potential liability. Whether borne from the fear of enforcement, litigation, or negative publicity, internal investigations are actually a means of containing future financial or reputational damage."
As litigation has risen across most business sectors, so has the specter of government investigations. Forty-nine percent of U.S. counsel surveyed reported an increase in regulatory inquiries at their companies in the past three years. Two federal agencies – the Securities & Exchange Commission (SEC) and the Occupational Safety & Health Administration (OSHA)—made the most frequent visits: 33% of companies had a knock at the door by either the SEC or OSHA since 2003.
Insurance companies, historically the object of disputes brought by policyholders and class action claimants, are by far the biggest litigation magnets, according to Fulbright. More than half of insurance company counsel reported taking on 50 or more new lawsuits in the past year. Insurers appear to get embroiled in the biggest stakes cases—17% reported having more than 50 lawsuits pending with at least $20 million at issue.
The average litigation expenditure for the 311 U.S. companies participating in the Fulbright study was $12 million—an amount that does not include ultimate case settlement or judgment payments. That figure looms larger considering that it represents more than 70% of overall legal spending by the average American business. For a number of industries, the costs associated with litigation—everything from attorneys' fees to document production, court filings and jury consultants—was considerably steeper. Engineering and construction firms averaged $39 million annually on litigation—not only more than three times the survey average, but 59% higher than what the average U.S. company spent on all its legal work (an estimated $17 million). Insurers came in second, averaging $36 million for litigation.
Despite the growing concern in legal circles over the potential impact of electronic discovery, says Fulbright, most companies do not appear to have had their discovery protocols and procedures tested in court. A 70% majority of U.S. counsel said that e-discovery issues had rarely or never been the subject of a motion, hearing or ruling in one of their cases over the past year. Only 4% indicated they faced an e-discovery challenge with any frequency. For now, technology/communications companies feel the greatest heat from e-discovery contests—43% reported litigating e-discovery disputes with a high degree of frequency in the past year. The only other sectors showing a meaningful blip in the number of e-discovery contests were health care (14%) and manufacturing (8%). Should a wave of e-discovery problems wash over American business, as some observers have predicted, companies may have to scramble to get ready: Only 15% of U.S. counsel surveyed by Fulbright said their companies were well-prepared to handle a difficult e-discovery challenge as part of a contested civil matter or regulatory investigation.
Source: Fulbright & Jaworski LLP
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