Research Trends and Conclusions: Commercial Litigation 2009
Richard Woolley -
It is widely accepted that in a recession clients are more likely to pursue litigation.
Disputes arise as finance is withdrawn, contracts become harder to perform and businesses fold. It has happened before: “During the last recession in the early 2000s people went to the law very quickly,” says John Heaps of Eversheds LLP in London, “and the assumption was that the credit crunch would throw up a lot of litigation. But so far it has had less impact than was expected, except in specific areas such as fraud and regulatory work. There are also plenty of requests for advice on long-term contractual commitments.”
Unlike previous recessions, the current financial crisis is characterised by a general lack of credit on both sides of a dispute. Lawyers in Europe and North America report that clients with tight budgets are being deterred by the considerable cost of litigation proceedings, and litigation funds aren’t providing credit to chase bad debt. “Clients are more likely to settle as a result of the credit crunch,” according to Saverio Lembo of Bär & Karrer AG in Geneva. “Some think it’s better to get a bad settlement than to pursue long and expensive litigation.”
For firms with a heavy dependence on their litigation turnover such a drop-off can have severe consequences. The demise of Heller Ehrman LLP in 2008 can be attributed, at least in part, to the series of potentially lucrative litigation cases that settled in quick succession the previous year.
Litigation practices have lost key litigation partners and large groups of associates due to departmental restructuring and downsizing efforts over the past year or so. Many firms, however, are now bolstering their litigation teams in preparation for an increase in work as market liquidity returns and long-expected “mega-cases” come to the surface. Rod Phelan at Baker Botts LLP in Texas predicts: “Litigation will continue to pick up as the economy stabilises and companies can turn their attention to the backlog of disputes that have arisen amid the downturn,” and adds that the firm has made numerous disputes hires in recent years. Bär & Karrer, Freshfields Bruckhaus Deringer LLP, Berwin Leighton Paisner LLP and McGuireWoods LLP have all made high-profile additions to their litigation benches in the past year.
In some cases, demand for litigation services is already outstripping supply. “I’ve never had so many cases; I’ve had to turn work down!” says Fred Bartlit at trial boutique Bartlit Beck Herman Palenchar & Scott LLP in Chicago, whose current caseload encompasses antitrust, securities, product liability and IP disputes. The American Lawyer recently reported a 5.4 per cent rise in profits for Gibson Dunn & Crutcher LLP, a large portion of which is also accounted for by IP litigation work. “Bankruptcy activity is extraordinarily high,” according to Alan Salpeter of Dewey & LeBoeuf LLP in Chicago, and one of our sources in Italy reports “an increase in contentious insolvency, along with pre-contention remedies”.
Active Sectors
One of the chief sources of work for litigators will be bankruptcies. The dramatic collapse of Lehman Brothers last year has already lived up to Lord Falconer’s prediction, made at Legal Week’s London Litigation Forum, of a flood of litigation “on a scale we have not seen before”. Bloomberg expects Lehman to have paid out nearly $1billion to bankers, accountants and lawyers by the end of its bankruptcy. And with recent high-profile insolvencies such as General Motors, Chrysler and Arcandor impacting markets around the world, a trend looks set to emerge.
In the UK, recent figures from insolvency and restructuring specialist Begbies Traynor show a 43 per cent rise in companies with serious financial problems over the past year, with many of these predicted to enter insolvency over the next 12 months. The American Bankruptcy Institute meanwhile reported business filings for the first quarter of 2009 to be 14,319, with the total number of filings in 2008 reaching their highest level for 10 years. “The litigation flood hasn’t happened yet, but there will be a lot more insolvency-related litigation in the future,” says John Fordham of Stephenson Harwood in London.
One of the consequences of a rise in insolvency work, according to Fordham, is that “such cases frequently lead to the uncovering of fraud”. Fordham’s firm is one of many in this edition to have taken a share of the many litigation cases across the world spawned by the $65 billion Bernard Madoff scandal, which saw the fraudster imprisoned for 150 years in March.
Despite a general downturn in securities class actions in the US, there have been 15 class action filings in the first half of 2009 relating to Ponzi schemes, according to a report by Stanford Law School and Cornerstone Research. A recent article in the Irish Independent notes that a total of 42 Madoff-related lawsuits are pending in the Irish High Court, with Luxembourg also playing host to numerous cases. Several law firms have assembled interdisciplinary teams to tackle the complex work arising from Ponzi schemes.
Insolvency and lack of liquidity among businesses is also contributing to a rise in contract cancellations and failed transactions. Claus von Wobeser of Von Wobeser y Sierra SC in Mexico City says: “Most of our current caseload is focused on breach of contract litigation, in which companies cannot find the money to honour commitments.” Similarly Peter Rees QC of Debevoise & Plimpton LLP in London notes an increase in clients “either seeking to get out of a deal, or to keep the other side from getting out of a deal”.
In June, Allen & Overy LLP expanded its IP litigation team in London with two high-profile lateral hires, a move that further strengthens its presence in the area after its notable victory for Research in Motion in its international dispute with Visto in the English capital last year. Elsewhere, Bingham McCutchen LLP has added to its IP litigation team in Tokyo alongside recent patent and copyright victories for ConAgra Foods and Yoko Ono. Howrey LLP has also expanded its already formidable capabilities in this field by absorbing Silicon Valley-based IP litigation boutique Day Casebeer Madrid and Batchelder LLP in July.
“In tough times it is important to protect patents,” according to a source in New Jersey, one of many lawyers who noted an increase in pharmaceutical patent litigation. A prominent example is the $1.67 billion award attained by a unit of New Jersey-based company Johnson & Johnson against Abbot Laboratories in Texas in June, marking the largest patent verdict in US history and the largest jury award in any US case in 2009 according to Bloomberg.
In Europe, discussions are taking place over the viability of a unified patent litigation system among member states. A memo published by the European Commission in March argues that “the absence of a unified patent litigation system renders access to the patent system complex and costly and hampers effective enforcement of patents”. A recent report in the Economist highlights the fact that European patents can be up to 10 times more expensive than in the US, Japan, China and South Korea, while a unified system could eliminate legal uncertainty between jurisdictions and reduce the cost of obtaining protection by 60 per cent.
Fees, Costs and ADR
In June 2007, the UK Civil Justice Council (CJC) issued a paper entitled “Improving Access to Justice”, which recommended that greater consideration be given to the use of US-style contingency fees in UK litigation cases in the hope of improving access to the courts in light of the possible collapse of the current conditional fee arrangement system. Under the US contingency fee system, legal fees are represented as a percentage of the award. Traditionally, the EU forbids the lawyers to take cases on a contingency basis, however, Germany and Sweden have already begun to allow the use of contingency fees under certain restrictions.
The CJC paper is part of a broader discussion in the UK surrounding Lord Justice Jackson’s ongoing review of costs, due for publication in December 2009. The main focus of the review is the affordability of litigation. Concerns have been raised among judges and lawyers that the cost of bringing cases in London is pricing the UK out of the international litigation market. While many lawyers in the UK are sceptical about how radical the resulting proposals will be, the review itself is indicative of the level of dissatisfaction in the UK (and elsewhere) with the prohibitive cost of litigation in the current financial climate.
One way in which disputes lawyers and their clients are reacting to this situation is by devoting more energy to alternative dispute resolution. According to Nick Gray of Slaughter and May in London: “Arbitration is constantly on the increase and ever more popular with clients.” King & Spalding LLP is one of many firms in this edition to take advantage of the rise of ADR: alongside the recent expansion of its arbitration presence in Paris, the firm secured a $113 million award for Waguih Elie George Siag, the largest sum ever awarded to an individual claimant in an ICSID case.
Many lawyers are supplementing their litigation work with an increased focus on mediation. A source in Hong Kong highlighted a recent justice reform that means lawyers must advocate mediation over litigation when advising their clients. Elsewhere in Asia, the Singapore Mediation Centre has reported more than 1,400 referrals up to April 2009, with 82 per cent of lawyers who used the centre reporting savings in costs. “Clients often find litigation too expensive and too unwieldy,” says Nick Gray. “There has to be an alternative to slugging it out in court and as such we are seeing a significant increase in mediation work.”
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Nearly two years on from the start of the credit crunch, much of the anticipated large-scale disputes between financial institutions are yet to materialise. Credit is scarce and clients, for the most part, are focusing resources on survival rather than conflict, particularly when faced with the prospect of long, costly trials and defendants that may not be able to pay out.
This is far from a universal picture, however. As many of the lawyers we spoke to testify, clients in a number of sectors are continuing to bring cases to court. Widespread bankruptcies and contractual defaults, as well as greater incentives to protect IP portfolios, have generated some of the largest recent cases in international litigation.
Of course the role of the commercial litigator is to help clients avoid disputes as much as it is to win them in the courtroom, and with such unpredictability in the marketplace their skills are more sought after than ever. The fact that many firms are expanding their litigation departments is a testament to the demand for expertise in this area, which can only increase as larger cases come to the fore.