Trends in Litigation: 2015
Contentious work in the financial industry has continued to drive activity over the past year, with more institutions facing increased scrutiny as a result of stricter regulation and subsequent enforcement in key financial centres around the world. While some contributors to last year’s edition intimated that high-profile banking litigation could “be winding down towards the end of 2015”, our research indicates that this has not been the case, and that in fact banking crisis contentious work will gain momentum heading into 2016. As one UK-based lawyer observed, “Cases involving several institutions are busier than ever and will continue to occupy a major proportion of my practice over the next 18 months.”
With many jurisdictions beginning to emerge economically from the effects of the global financial crisis, confidence is gradually returning to investors and global companies and there are increased corporate and M&A transactions in key markets including the US. While budgets for legal services remain tight, the increase in corporate activity has been feeding through into contentious work for lawyers over the past year, and corporate clients “have started to loosen the purse strings for litigation as they see opportunities for growth rather than consolidation”.
Large firms with cross-border disputes expertise for global financial services clients have thrived in the current marketplace and will continue to do so; increased cooperation between states with regard to regulatory investigations and financial plays to the strengths of firms with large international networks. As regulatory investigation work continues to rise, many have spoken of the need for firms to closely align their investigative and dispute resolution functions. For firms without the same roster of banking clients, it is more important than ever to maintain a reputation for excellence in their own respective specialist areas of commercial litigation.
Key Practice Areas and Trends
Contributing lawyers around the world have confirmed the ongoing trend for cross-border litigation, most prominently in the financial services industry. While the fallout from the financial crisis in 2008 did not influence litigious activity immediately, sources have observed “continuous growth” in this area over the past three years.
While Libor-related disputes are still prominent, lawyers can expect similar work arising out of foreign exchange (Forex) market rate manipulation, the US Justice Department having found four large global banks guilty of several federal crimes over a scheme to take advantage of the market’s decentralised structure and manipulate world currency values. The development “opens up a whole new can of worms, both in terms of regulatory investigations and civil and criminal litigation”. As cross-border transactions involving financial institutions continue to increase, regulatory bodies have “definitely upped their game” and it is clear that firms must operate across a truly international network in order to compete for big-ticket work. In the US, cases related to the Foreign Corrupt Practices Act (FCPA) have continued to dominate the practices of lawyers with relevant expertise, while in the UK the Financial Conduct Authority’s (FCA) appetite for enforcement means that more and more banking clients are subject to regulatory investigations. As one leading contributor remarked, “They are going after the biggest financial players now. The number of my clients which are subject to regulatory investigations has more than tripled over the past year.” With more and more disputes arising in the regulated industries, there is a clear case to be made for closer integration between investigations and dispute resolution teams at major firms, particularly given the need for litigators to maintain a strong working knowledge of the different cross-border and domestic regulatory systems that could govern an international corporate transaction. At the other end of the spectrum, niche firms with highly specialised expertise in regulatory investigations have continued to thrive as a result of being free from conflict, a problem that routinely restricts Magic Circle and Wall Street firms in particular.
While the US has long been a hub for class actions across a wide range of areas, the appetite for collective litigation appears to be growing further afield, with further financial class actions in the UK a distinct possibility following a landmark case involving RBS, which was initiated in 2014. As the RBoS Shareholders Action Group pursues legal action on the behalf of thousands of private and institutional investors, it is possible that the proliferation of major disputes in the banking sector will create an ideal environment for more class actions. This trend has continued in the past few months; in November 2014 more than 5,000 investors joined litigation against Lloyds Banking Group, claiming collective losses of £400 million as a result of the failed government-arranged takeover of HBOS in 2008. In terms of fees, third-party funding and contingency fee arrangements are well suited to the structure of such cases, creating an opportunity for firms and practitioners to distinguish themselves from rivals with competitive pricing in a very cost-conscious environment. While the aforementioned cases potentially open the door for more class actions, many contributors remained sceptical as to the longevity of this trend. Both cases mentioned above arose from misleading deals in the middle of the financial crisis and, while there could be similar disputes down the line, this is by no means certain. As one UK-based lawyer observed, “It is not clear how collective litigation would extend to other areas outside of these particular circumstances, especially given the cost liability issues for claimants if their action is unsuccessful.”
The first half of 2015 emerged as one of the strongest in recent years for M&A activity with more than US$1.8 trillion worth of deals being announced, driven by US corporates that are fuelled by a stable dollar and relatively low funding costs. As a result, there is an expectation that M&A-related disputes will increase. In March 2015, Hewlett-Packard (HP) launched a £3.4 billion claim in the UK High Court against Mike Lynch, who sold British software company Autonomy to HP for US$11 billion in 2011. The claim alleges that Autonomy fraudulently inflated its value, and the fact that Autonomy’s management team has been referred to regulators on both sides of the Atlantic demonstrates the intrinsically cross-border nature of M&A disputes. With the potential for competition cases also arising from high-profile deals, the trend is certainly positive for international firms with corporate litigation expertise. The potential delay in M&A disputes, as seen with the initiation of proceedings four years after the event in Autonomy Corp & Ors v Michael Richard Lynch & Anr, reflects the unpredictability of the market for litigators specialising in this area. While it is likely that increased M&A activity will feed litigators, sources advised caution in terms of when the work will start to trickle through. As one US-based practitioner observed, “Contentious M&A has not surged just yet, but given the intense competition for this lucrative work, we want to make sure our team is ready to take it on.”
As cross-border disputes continue to rise several contributors commented on the possibility of a corresponding rise in arbitral proceedings, particularly with regard to recovery against professionals in the financial services industry and insolvency proceedings. As investors and companies pursue opportunities in emerging markets in the Asia-Pacific region and Africa, they also seek protection against the possibility of court proceedings in jurisdictions without a clear and expeditious court system. As one contributing dispute resolution specialist observed, as a result “there has been an inevitable rise in arbitration clauses for transactions in emerging markets”. US-based practitioners have mentioned a notable effort on the part of American firms to boost their arbitration expertise as their clients become more involved in international proceedings, not having been required to do so at a domestic level due to the structured US federal and district court systems. For global firms it will be important to adapt to the close relationship between litigation and arbitration and ensure that teams are fully integrated in order to meet their clients’ commercial aims in established and emerging markets.
As one of the world’s two biggest financial centres alongside New York, it is no surprise that London remains an international legal hub for major disputes, with lawyers continuing to see a rise in the number of international litigants pursuing commercial disputes in the city. In particular, Russian and CIS parties continue to demonstrate an interest in the clearly defined UK commercial court system, with multibillion-dollar “oligarch litigation” disputes generating work for law firms and UK barristers alike. However, contributors have also made it clear that the peak for this type of work may have come and gone. In its place, lawyers have highlighted a surge in instructions from clients in the Middle East, as Qatari and Saudi Arabian investors continue to populate the UK market in terms of property and other asset investments. As one UK barrister observed, “A combination of high-profile banking litigation and disputes involving Middle Eastern investment funds will be more than enough to keep me busy over the coming year.”
The drive across Asia to build its reputation as an international centre for dispute resolution has continued. This has tended to focus on arbitration, as demonstrated by the increasing workloads of the Hong Kong International Arbitration Centre (HKIAC) and the Singapore International Arbitration Centre (SIAC); contributors have noted SIAC’s growing importance as a hub for disputes involving major Indian and Chinese parties, due in no small part to its close assimilation with the trusted English legal system. Additionally, in May 2015 the Singapore International Commercial Court (SICC) officially opened and heard its first case in May 2015, a US$809 million dispute between Australian and Indonesian companies over a failed joint venture agreement in the coal sector. The court is designed specifically to deal with transnational disputes, reflecting Singapore’s aim to establish itself as a desirable forum for litigation as well as arbitration. While this is expected to take time, firms have already flagged Singapore as a key target for expansion, with one international lawyer stating, “Given the increasing globalisation of commercial disputes and the attraction of the Asia-Pacific region for multinational clients, the competition among global firms is already fierce and will only intensify as the SICC becomes more widely used.” While London continues to dominate as a forum of choice for many major disputes, Singapore’s growing reputation provides encouragement for other jurisdictions looking to draw high-profile disputes such as Hong Kong and Seoul.
As the value in IP rights “continues to rise almost exponentially”, relevant commercial disputes have been another particularly active area for firms with strong integration between their IP and dispute resolution expertise. In Europe, lawyers are preparing clients with large IP portfolios for the introduction of the European patent with unitary effect, which requires EU member ratification before entering into force; some sources predict that this could happen by 2017. The two regulations governing the unitary patent will also create the Unified Patent Court (UPC), which will have its central division seat in Paris and two specialist sections in London and Munich. Germany is already regarded as a major power for patent disputes due to its unique court system which deals with the issues of infringement and validity separately, known as bifurcation. The UPC seat in Munich will serve to maintain the strength of the German market in this area while providing similar opportunities for litigators based in the UK and France. As one IP litigator observed, “The leading firms will compete closely for UPC work, and it will be interesting to see how things progress given the difficulty of breaking into the German dispute resolution market.”
The Legal Marketplace
In a marketplace where disputes are increasingly global in nature, it is evident that established international firms are best-placed to compete for the big-ticket commercial cases. For disputes with a cross-border element, corporate clients value a full-service whereby IP, regulatory or competition issues can be handled expeditiously by integrated teams; as such, it is likely that “the biggest firms will only continue to get bigger”. Nonetheless, repeat business is crucial in order for leading firms to maintain profitability, and in order to do this they must also build a reputation in specialised, complex practice areas. As one source explained, “There are more than a few firms with the ‘full-service’ tag, so that alone is not enough to make you stand out anymore. Strength of expertise and experience in key practice areas is what really defines the best.” In terms of lateral hires, this means a highly tailored approach to recruitment and a focus on being adaptable in light of developing trends such as the levels of banking litigation; many contributors mentioned the need to take on more regulatory investigation practitioners or lawyers familiar with the criminal implications of civil judgments and fines. As one expert stated, “Clients think of the dispute at hand rather than in terms of clearly defined practice areas, so the leading firms must be flexible to their specific commercial needs.”
The international marketplace is populated with firms trying to break into both established markets and growth areas including the Asia-Pacific region and Africa. Given London’s reputation for commercial litigation, it is no surprise that overseas firms have been making an effort to break into the city. Contributors have remarked upon the push by US firms such as Quinn Emanuel Urquhart & Sullivan, White & Case and Debevoise & Plimpton to expand their presence in the market through the recruitment of respected individuals who are motivated by the opportunity to take on leadership responsibility and build a practice around their core clients and expertise.
Leading boutique firms have maintained a strong roster of clients through the retention of talented individuals who have developed their practices to a high degree of specialisation. Firms with expertise in regulatory investigations and IP disputes have fared very well due to the complex technical issues involved. For all firms in the litigation sphere, adaptability is crucial as technological developments place pressure on firms to update their resources and service provision. E-discovery is a key part of the litigious process in the US and UK, and as new tools are brought into practice it is likely that there will be increasing numbers of dedicated practitioners in the field over the coming years. As one UK-based expert observed, “Law firms must adapt to the use of e-discovery platforms in order to remain fresh in their expertise, and there may be further changes required as new technology could drastically affect both client and law firm business models.”
As in most practice areas fees are a core concern for clients, who are “more tuned in than ever on what they can expect to pay for legal services for commercial disputes”. Even the biggest global firms must demonstrate a level of fee flexibility in order to compete on client panels for big-ticket disputes work, and as one prominent UK-based lawyer said, “The days of non-negotiable flat fees are almost over.” Contingency fee arrangements, fixed fees and blended rates are examples of how firms can offer clients pricing structures that set them apart and, considering the current surge of banking litigation, firms that can offer this in conjunction with freedom from conflict are certainly in a strong position. Firms must be adaptable with regard to fees but also in terms of the sophistication of their practice. Many clients have managed to cut costs by implementing internal document review systems and “cutting up contentious jobs” by outsourcing the routine jobs to smaller firms with competitive pricing offers. In this environment, it is crucial that firms stand out by offering sector-leading expertise at a high level of specialisation, to the extent that clients compete to instruct them.