Emily O’Neill, Chief Counsel IP and Litigation at Spectris plc, considers how in-house litigators can support their business’ liquidity and operational challenges during the coronavirus pandemic and mitigate the effects of litigation.
While we are individually grappling with full-time remote working, physical isolation, and perhaps even homeschooling, businesses are grappling with maintaining liquidity and balancing employee utilisation.
Cash is king: access to cash is essential for businesses in order to pay suppliers and wages and continue operations. Although the risk of COVID-19 to company liquidity may be felt more acutely (in terms of impact and velocity) in small and medium-sized businesses, it is, of course, a consideration for all organisations in planning how to react and respond to the current environment. This article will consider the ways that in-house litigators can support their business in maintaining liquidity during this time, and in the recovery phase.
Businesses are also focusing on adapting their operations. Demand for products and services in some sectors has dried up overnight, such as the travel industry. Employees may be furloughed or on short-time working, and so are not available to support in-house litigators in building or progressing cases. Other businesses are facing unprecedented demand, such as those producing ventilators or PPE. But employee absence through sickness may be higher than normal in these businesses, and delivery of products to customers or others in the chain of production could be more challenging, and therefore time-consuming. As such, those who are working to meet increased demand must prioritise operational tasks over litigation support.
It is therefore likely that in-house litigators will experience challenges to their day-to-day role in securing company time to advance their dispute resolution cases.
Dispute resolution can form a significant portion of a business’ legal spend, and also requires input from various teams within the business, from IT in providing access to and gathering discovery documents, to management’s time in tracking the progress of the litigation and taking strategic decisions as they arise.
Now that businesses have moved out of the “react” and “respond” phases of their crisis management plans and are focusing on day-to-day operations in the “new normal”, the time may be right for litigators to add value by helping their organisations to weather the recessionary storm, and consider ways in which they can contribute to safeguarding company liquidity and employee utilisation.
The most direct way in-house litigators can help to alleviate the significant strain on their organisation’s balance sheet, while obtaining access to justice for the business, is by securing third party funding or alternatively selling new or ongoing claims.
The pandemic has caused businesses and their investors to scrutinise spending. Organisations will want to focus their spending on strategic operational areas, which may mean that decisions are taken not to pursue recovery of losses. Such decisions may be based on the need to reduce expenditure in dispute resolution during the financial years impacted by the pandemic and avoid starting new cases. Cases may take several years to reach a point where damages are awarded, and so would not help companies to maintain liquidity in the short term and so businesses may decide to forfeit their claims.
The most direct way in-house litigators can help to alleviate the significant strain on their organisation’s balance sheet is by securing third-party funding
Litigation funding is an arrangement whereby the costs of litigation are paid by a third party in exchange for a success fee. Litigation can be funded by an organisation specialising in litigation funding, or an agreement could be made with your instructed law firm to defer part of the fees in exchange for a success fee under a damages based agreement. Some specialist funders may also be able to provide support in managing the litigation (in jurisdictions where it’s permitted) and ensure that actions are streamlined and run efficiently, while saving time for stretched in-house advisers.
Where a law firm is used to defer litigation costs, the company would usually agree that a portion of the legal costs incurred by its instructed firm are deferred, or a discount applied. The law firm would then recover the deferred / discounted fees, as well as receiving a success fee on a successful outcome to the case.
Agreements with law firms are unlikely to cover third party litigation expenses, such as legal, expert and court / arbitral tribunal fees or other disbursements, such as translation and travel expenses. These costs may be a significant part of the overall budget and would still need to be borne by your organisation. However, it may be difficult to reach a favourable agreement with a law firm at a time when many have announced furloughing or lay-off of staff, pay cuts, or called on partners to contribute capital.
In contrast, a specialist litigation funder will usually pay legal, expert and court / arbitral tribunal fees, as well as disbursements, such as e-discovery, translation and travel expenses. The funding agreement will also usually cover payments to be made in security for costs, as well as paying the other party’s costs if the case is unsuccessful. In most cases, the funder will only be paid after the successful completion of a case. If the case is lost, it receives nothing.
Funding is usually available to claimants with a strong case, as the funder’s fee would be paid from the recovery made. Funders will not support weak or frivolous claims, as their business model relies on success. Some funders will consider funding defendants who have a strong counterclaim, provided they can agree upon an acceptable definition of “success” with the defendant. Law firms will generally support claims financed by specialist litigation funders, as this is also a means by which they can ensure that their own bills are paid.
It may be desirable to extend litigation deadlines where possible, so that the costs of the dispute resolution activities are spread over a number of financial years
Insurance for litigation brought against your organisation may be available, both as before the event (BTE) and after the event (ATE) policies. Legal expenses cover may be available as part of your business insurance policy (primarily for small businesses up to a limited cap, such as £500K). It can also be available for specialist litigation, such as in defending IP claims, although the premiums could be expensive, and caps may not cover all of the costs liability that a business could face.
ATE policies are available to cover claims once litigation has been commenced against a company. However, because the risk of a claim being made has crystallised, premiums for ATE policies are likely to be high, and cannot be recovered from the other party in the event that the insured is successful.
Managing the timetable
The lockdown measures have had a direct impact on case schedules, as the courts seek to adapt to virtual litigation by expanding capacity in the remote access options already in place. Both HMCTS and the US Patent and Trade Mark Office have adapted quickly to offer increased numbers of remote hearings where possible; bear in mind, however, that the judicial systems in some jurisdictions require in-person hearings. In order to ensure access to justice, courts need to ensure that the governance is in place to ensure fairness in remote hearings.
HMCTS has released guidance on the operation of remote hearings.
In-house litigators will need to assess the requirements of the judicial systems in which they are operating, and the impact on their case of that system’s reaction to the pandemic. The Law Society has mapped out the current status of the courts in England and Wales.
Companies may face increased costs in connection with hearings in the short term, as advisers and courts adapt to the “new normal”. As such, it may be worthwhile extending deadlines to a time when teething issues may have been ironed out to help contain the litigation budget.
Evaluating the speed of each case is another key area to consider. In maintaining company liquidity, it may be desirable to extend deadlines where possible, so that the costs of the dispute resolution activities are spread over a number of financial years. However, the costs of resolving the dispute over a more leisurely timetable may be higher overall than if the case was managed on a more aggressive timetable. Given that profits are inevitably going to be impacted in the current financial year, it may be strategically desirable to pursue a quick timetable to complete the case during this financial year, so that future years are not impacted by the litigation spend.
Engaging prematurely in ADR may increase costs and could even make settlement less likely
Extending the timetable may also be useful where working with key witnesses is not currently possible due to witnesses being furloughed. However, the guidance to the Government’s Coronavirus Job Retention Scheme encourages employers to offer training to employees who are furloughed. On this basis, it could be a good opportunity for them to attend witness preparation courses to avoid impact on operational time once they are back at work.
Defendants should also consider the ongoing liquidity of the claimant: should a security for costs application be made?
Resolving cases by agreement in the form of settlement will inevitably lead to a saving in organisational time and in litigation costs and expenses. With the majority of cases being resolved through settlement, being able to exploit each settlement point in a case is a useful tool for the in-house litigator.
Traditional settlement points are during the pre-action phases; shortly after issuing the claim; and then after each key phase in the litigation – disclosure and exchange of witness and expert evidence. The current pandemic may provide an additional settlement opportunity. Are there additional aspects to the case other than money claims which could be settled in the current environment, such as providing consultancy services to resolve claims in respect of defective products (if operational pressures allow this)? Is there sufficient trust remaining between the parties to achieve a practical settlement on this basis, or could this just lead to additional cost?
In-house litigators should consider the full range of alternative dispute resolution (ADR) mechanisms available, such as early neutral evaluation or mediation. However, engaging prematurely in ADR may increase costs and could even make settlement less likely. In-house litigators also need to be conscious of the availability of decision-makers to engage in the settlement process. Do those individuals already have sufficient background information in order to agree to a settlement proposal, or will they need to be briefed? Do they have sufficient time to consider settlement and get up to speed on the details of the case, or are they focused on operational matters?
There are a range of options available for in-house advisers to consider in supporting their business through this pandemic. All of the options I discuss may not be appropriate for your business, but demonstrating that you have considered the options available and discussed them with management can demonstrate your alignment with their priorities and another way in which you can add value.