A wave of litigation work has helped protect global law firms from the worst ravages of the financial crisis. But with the post-Lehman dispute boom starting to die down, Caroline Thorpe asks whether regulation is emerging as the new 'no cap' area of legal business

September 2007. A month Ian McDonald remembers well. "My banking and finance colleague Kevin Hawken came to see me and said: 'What do you know about SIVs [structured investment vehicles]?'" recalls McDonald, London head of commercial dispute resolution at Mayer Brown. "I thought it was a kitchen gadget. I really had no idea – but that is part of the challenge as litigators."

His ignorance was short-lived. Mayer Brown's litigators were among the first called upon to help restructure SIVs – complex financial products once worth an estimated $400bn (£247.3bn) – when the 2007 credit crunch halted the short-term funding that underpinned them. For McDonald and his colleagues, it marked the start of busy few years.

"We really maintained momentum from there," he explains six years on. "We did five or six SIVs, then Lehman collapsed and through 2009, 2010 and 2011 there was a massive amount of litigation and financial work following that. There wasn't the tsunami that some predicted, but there was a big uptick in litigation, and because of the sums involved it tended to be very big." 

It was also lucrative. "In the immediate aftermath of Lehman, firms could charge a good rate at a time when clients were short on cash; charge-out rates of £500, £600 and £700 an hour were okay for appropriate expertise and matters." 

The narrative is familiar. Litigation, stemming from the fallout of the financial crisis or otherwise, has allowed disputes departments in the world's busiest jurisdictions to prop up the rest of the legal market as other practice areas have fallen victim to the recessionary forces that took up where the credit crunch left off. 

When Legal Week, with Hogan Lovells, surveyed more than 200 predominantly UK-based corporate counsel in 2011, it found that 43% spent more than a fifth of their annual legal budget on dispute resolution.

Meanwhile, a similar survey of global in-house lawyers, published by legacy US firm Fulbright & Jaworski in February, noted an increase in the volume of litigation conducted between 2011 and 2012. It also found that the number of clients spending more than $1m (£618,750) a year on litigation rose over the same period (see charts, right).

But the world is changing in ways that cast doubt on whether or not the great litigation boom can continue. The UK economy has followed the US and returned to growth (albeit fragile), traditionally a prelude to deal-making displacing disputes in the pecking order of client priorities. 

And although demand for their services remains, pressure on litigators' fees is increasing globally as clients demand more for less. So what can the world's leading litigation practices do to preserve their status as prized profit drivers?

Please come again

A thriving litigation practice, as every senior partner knows, relies on discovering the area with the greatest potential for repeat business. As much of the post-Lehman financial services litigation winds down, many law firms are confident that it can be replaced by regulation-related work.

"There's ever-increasing regulation," says Sonya Leydecker, global head of dispute resolution at Herbert Smith Freehills (HSF). "For example, the growing impact of the UK Bribery Act and the Foreign Corrupt Practices Act (FCPA) in the US."

Multiple regulators and government agencies are keen to use these laws. Take the now infamous 'Lord Libor' case in which ICAP, a brokerage, recently agreed a $55m (£34.03m) settlement after accepting global rate-rigging findings with US and UK regulators.

Meanwhile, three of the firm's former employees face criminal charges for their alleged role in the scandal, levelled by the US Department of Justice (DoJ), which is also investigating ICAP.

Both the DoJ and US Securities and Exchange Commission (SEC) have brought multiple FCPA enforcement actions in recent years. The DoJ launched more actions in the first half of this year than during the whole of 2012. In the UK, meanwhile, last month saw the first Serious Fraud Office prosecution under the Bribery Act come to court following the law's full enactment in April.

"Since the financial crisis, we have seen that litigation and disputes have been particularly busy and we expect that to continue given the enhanced regulatory and enforcement climate," says David Zornow, global litigation practice head at Skadden Arps Slate Meagher & Flom. He predicts that financial institutions on both sides of the Atlantic will face the prospect of US watchdogs using civil enforcement tools more often. 

In the US specifically, Zornow expects both financial and corporate clients increasingly to "choose to take their regulatory cases to trial rather than negotiate settlements… partly because the new SEC chair [Mary Jo White] has made it clear that many more cases will require an admission of liability, in contrast to the 'no admit, no liability' basis of the previous regime". 

Skadden has been duly beefing up its stock of trial lawyers, while the US market as a whole is hungry for the regulatory nous of "people coming out of the SEC, Commodity Futures Trading Commission, Department of Justice, Treasury and US Attorneys' Office", Zornow adds.

Fulbright's data provides more evidence of an increase in regulatory litigation. Of the companies polled, the proportion seeking outside counsel on government or other regulatory investigations rose from 55% in 2011 to 60% in 2012 in the US, and soared from 27% to 72% in the UK. 

"There is a huge amount of work in the corporate crimes investigation area, managing the risks associated with large and complex issues for clients," confirms HSF's Leydecker. "While [demand for regulatory work] is not some metaphor for us rubbing our hands with glee… it is a very active area and remains so. In some of our offices, it is probably one of the more significant parts of the contentious practice."

Like their US counterparts, London firms are hiring accordingly. At Norton Rose Fulbright, EMEA head of dispute resolution and litigation Deirdre Walker (pictured) says her department is entering an "aggressive" growth phase. 

"I'm keen that litigation in EMEA should be more of an equal partner with banking and corporate. That's a strategy that the firm's management has bought into," she reveals, adding that regulatory work is a central pillar of that approach.

"Regulatory and investigations is definitely beginning to build," Walker states. This summer, the firm announced the UK hire of investigations specialist Elisabeth Bremner from DLA Piper.

She follows last year's additions of white collar crime expert Neil O'May, previously at Bindmans, in the London office, and Christian Dargham, a compliance litigator who left Clifford Chance to join Walker's team in Paris last year.

"Our experience is that regulation is generating significant revenues," Walker adds. "We've found that… this type of work is less fee-sensitive. Clients are interested in fees, but their main concern is avoiding reputational damage and potential fines."

Walker also regards the scope of regulatory practice as a significant attraction: "Certainly [increased regulation affects] the financial sector, but it is much broader than that because the UK Bribery Act applies to anybody and everybody and has extra-territorial effect that gives it real bite, more so than the US FCPA." 

She says her team is handling matters for clients across Norton Rose Fulbright's target industries including construction and the energy industry. 

Further illustrating the range of regulatory work is the appointment in September of Lord Gold, former head of litigation at legacy Herbert Smith, to conduct a third-party review of Serco following Government allegations that the outsourcing group committed fraud on two Ministry of Justice contracts. Since 2011, Gold has run David Gold Associates, a consultancy that offers "high-level strategic litigation advice".

Some argue that boutique outfits are ideally positioned to take advantage of a significant challenge faced by bigger players when pursuing contentious regulatory instructions and advisory work: conflicts. 

"It's quite conflict-sensitive," admits Philip Rocher, senior litigation partner at Gibson Dunn & Crutcher in London (which recently welcomed regulatory and investigations litigator Penny Madden from Skadden's City practice). "You can't be representing both sides and so the work has to be split around more firms. It's difficult to navigate. It's hard to sit with a blank piece of paper and plan how it's going to be."

In London, some leading litigation departments have felt the impact of conflicts more keenly than others. Last year, Helen Brannigan and Graham Huntley, both highly respected litigation partners at Hogan Lovells, left the global firm to launch a dedicated commercial litigation practice without the conflict problems associated with full-service law firms.  

A strong first-year performance at the duo's Signature Litigation, which operates a collaborative remuneration model, saw all 26 staff awarded profit shares of between 21.2% and 36.1% of their salaries.

Long a feature of the notoriously litigious US market, observers suggest the appearance of what are sometimes dubbed 'plaintiffs' firms' is a trend that will continue and will even boost the volume of UK litigation. Unsurprisingly, the arrival of such upstart rivals is played down by Michael Davison, head of litigation and arbitration at Hogan Lovells, who points to several panel wins made by his team since the firm's merger, including Vodafone, the Financial Conduct Authority and pharma company Merck.

"As disputes become increasingly complex and ever-more international, it's going to be very hard for the smaller London boutique firms to make a big impact in the big litigation market," he argues. 

Going global

Yet international reach is hardly a problem for another relatively new arrival on the London litigation scene. Quinn Emanuel Urquhart & Sullivan sells itself as a '600-lawyer business litigation firm' with offices across the US and an expanding presence in Europe, Asia and, since September, Australia. The US-based firm launched its London office in 2008. After a rocky start, it seems to be gaining traction. "It took longer than anticipated to put ourselves on the map," admits partner Bill Urquhart. "Now we're in a great position to attract more talent." 

Ted Greeno (pictured) recently left HSF to become the Quinn Emanuel's 11th City partner to "help us with our English court litigation and be part of our expansion of international arbitration", says Urquhart.

After regulation, an increase in international arbitration is perhaps the trend most often cited by leading litigators, followed by growth in intellectual property and data privacy disputes. There is consensus that all require firms to display increasingly sophisticated cross-border capacity. 

"We continue to see that the matters we're handling are global in scope," says Skadden's Zornow. "That matters in the sense that they involve authorities in multiple countries, sometimes working together, sometimes not. Issues are multi-jurisdictional in nature which means they are increasingly complicated and difficult to navigate."

Gary Seib, speaking from Hong Kong where he is global dispute resolution chair at Baker & McKenzie, echoes this view as he describes the Asian international arbitration market: "General counsel from Chinese-owned enterprises are making use of international arbitration for their African investments.

"My practice is heavily engaged in Hong Kong disputes that involve a Chinese party and the Hong Kong arbitration centre is a venue that is used regularly, though the Chinese will also use arbitration venues in London and Stockholm."

Mayer Brown's McDonald agrees that there's work to be won "as Chinese companies are investing around the world and considering how they are going to resolve disputes".

The firm is exploring other emerging markets and, for the past 18 months, has sent regular delegations of UK and US litigators to India. "We think the potential is huge," he explains. "There are huge entities there with interests in all sorts of different regions around the world." 

Mayer Brown is not alone. Norton Rose Fulbright, for example, recently defended Bharti Airtel, headquartered in New Delhi, against a $1bn-plus (£618.53m) claim relating to the telecoms group's Nigerian business.

Yet what of the US, still widely regarded as the planet's most litigious nation? "I do think it's a massive help to have a strong US practice," says McDonald. "It helps to have ability on both sides of the Atlantic to deal with the moment when concern about regulation or litigation spills out of the US (or vice versa) and you are there to pick it up. I suspect firms that have nothing in the US at some point will start missing out."

The question is how to deal with that. While the US presence of firms including Freshfields Bruckhaus Deringer, Clifford Chance and Linklaters is limited to branches in New York and Washington DC, all eyes are on Norton Rose Fulbright and the impact its recent transatlantic merger will have on its litigation practice. 

"You can't just ignore the US," says Walker of the rationale behind the move. "For us, the combination means the globalisation of the practice, particularly in terms of regulatory litigation. Litigation now accounts for 34% of the firm's revenue, compared with 14% of legacy Norton Rose LLP's revenues two years ago. That's a real positive."

Davison was head of Lovells' international arbitration practice when it merged with Hogan & Hartson in 2010 – delivering 13 US offices, including on the west coast: "Our merger is three years old. We've spent that time telling the big global companies about the idea that we can handle all disputes in all the major litigation markets. 

"That just makes sense as an idea and we've seen real dividends in the number of global panel appointments we have won."

Merging, though, can prove risky. While Leydecker describes the recent HSF merger – which did not provide additional US offices – as offering "capacity in almost all the places clients would like you to have it and we are actively building it in Germany", others suggest the deal offers a salutary lesson that tie-ups can hinder a litigation offering.

Greeno's recent departure is one of several pre and post-merger HSF partner exits said to be the result of culture clashes. These include litigator Kevin Lloyd's move to Debevoise & Plimpton in London, and dispute specialists Michael Mills and Michelle Fox who left to launch Quinn Emanuel's Sydney office. "My understanding is that the merger's not gone all that well. They are still a formidable force, but not as great as they were," says an observer. 

"Different people left for different reasons," responds an HSF spokesperson. "Some departures were actually strategically aligned with our plans for the practice. But, most crucially, none of the departures have materially impacted on our existing client relationships or our ability to win work." 

Matters handled post-merger include representing Credit Suisse in a mis-selling dispute raised by one of the bank's private clients, and acting for Apple in its 'tablet war' litigation with Samsung in Australia.

Billing blues

Wherever they are in the world, litigators share the view that clients are demanding more for less. As McDonald's memories of 2007 attest, the ability to charge hefty hourly rates has long been the organising principle of litigation billing practices.

This is due partly to the premium clients have been prepared to pay for high stakes advice and because litigation is unpredictable and its costs hard to forecast. Now that is changing as clients question why litigators should not offer the alternative fee arrangements they have become accustomed to receiving for non-contentious advice.

"Clients are carefully watching fees and firms have to be responsive to that," reports Zornow. "This has accelerated since the financial crisis; there has been a focus on alternative fee structures and we've had experience of that with a number of clients."

In the UK, another big change has arrived through the Government's Jackson reforms, which demand more stringent cost management in civil law cases. While it is early days in assessing the legislation's effects, it chimes with an international move towards flexible billing and transparency. Firms that do not want to be out of pocket as a result are investing in systems that assist planning and monitor costs closely. HSF is among them. 

"The art of project management is to identify where the risks are and then to identify them in relative real time," says Leydecker (pictured). "From there, you must manage the project both in terms of its substantive steps and its costs."

Still, it is not all over for hourly fees – particularly when it comes to regulatory work, regarded by some as "the new no-cap area of business". Others stop short of that description, but concede that clients remain prepared to pay top dollar in big-ticket cases. 

"There's a tendency for lawyers to try and commoditise all legal services that's bled over to some of the litigations," says Urquhart. "Yet there is a really small sub-class of litigations filed in the US where there's lots of money on the line or some principle at stake. If there is a 5% chance of obtaining a $2bn (£1.24bn) judgment, you're not looking at the amount the lawyers charge you." He estimates that 90% of Quinn Emanuel's US litigation load is of this type.

McDonald reports a similar picture in London, particularly in financial services and regulatory work. Even so, he says: "There is a market still and I don't think firms can just charge what they like."

Time will tell whether the great litigation boom has peaked. But its nature has certainly changed. "The days of litigation lawyers being able to handle disputes in the traditional way are long gone," concludes Davison. "We are now expected to be far more innovative and creative than ever before in the quality and efficiency of service we provide. Firms must get the right people with the right expertise in the right places – and all at the right price."

———————————————————————————————————————————————– 

Inside out: a general counsel's approach to litigation

"We try to deal with as many disputes as possible within the legal function," says Michael Stocks, dispute resolution (DR) counsel at BAE Systems' UK headquarters. "However, where a dispute cannot be resolved by the respective parties – and particularly in cases where a dispute could be a long and protracted process, or document-heavy – we will often involve outside counsel.

"Generally speaking for document-heavy, high-value or high reputational risk cases, we will always use external legal expertise to make sure we've covered all the angles. We work with a selective number of law firms and those relationships work well. We also instruct counsel directly on more discrete pieces of work, which has proven popular and successful.

"BAE has a panel of around 10 firms and they all have dispute resolution capabilities. Some are the so-called 'magic circle' firms that we would use for the very high value, more document-heavy litigation. On our panel, we have several regional firms that the DR team uses for the less high-value increased volume work, as they are better value in terms of the hourly rates charged, with no drop-off in standard.

"I was in private practice at Kennedys before I joined BAE nearly four years ago. Many of our other in-house lawyers are the same. I think there's a strength in that; we know how law firms work and how cases are resourced, so, if need be, we can challenge firms on fees and charging structures.

"Our panel law firms are generally very happy to consider fixed fees and volume discounts on work we send them. Some of the law firms on our panel now offer hotlines – 30 minutes of free advice – which is really useful if a lawyer needs a quick bit of assistance that doesn't justify a formal instruction. Not only does the hotline help in solving legal queries, but it also brings the law firm and the in-house legal function closer together.

"That said, it's very difficult to get an accurate fee proposal for litigation work. Most in-house legal functions are increasingly concerned with costs and so firms are getting better at preparing upfront fee estimates for each stage of a dispute.

"It's fair to say there's a lot riding on disputes. Perhaps in the past, in-house lawyers have been less rigid about sticking to their budgets. But times have changed and, although there's often a lot at stake, the costs of a dispute are a critical factor to think about and I will always encourage our law firms to prepare an estimate for the lifespan of a dispute in advance. I need to let my internal clients know how much to put aside. One of my roles is to make sure firms come in at or below the budget they've set.

"That doesn't necessarily mean there's been a change in the quality of service we receive. The only thing I'd perhaps point to is firms putting a bit more responsibility on junior fee earners, which is fine as long as there's partner overview and sign off." 

The globalisation of criminal and regulatory enforcement is just one of the panel sessions at this month's Legal Week Commercial Litigation Forum, which will be held in London on 24 October. For bookings, call Charlie Liles on +44 (0)20 7968 4529 or email [email protected].