Litigation Continues to Rise

In today’s world, it is highly likely that any company will find itself in a dispute, and that dispute will lead to a claim being filed either in a court of law or with an arbitral body. Particularly as the global economy continues to perform sub-optimally, many businesses find themselves experiencing financial challenges, supply stream interruptions, or even customers that don’t want to pay what they are obliged to pay. Employee claims continue to rise, trade secret misappropriation claims are in vogue, data breaches continue to foment litigation, and statutory claims are filed against companies on a regular basis. These are just a few of the many types of litigation that continue to play out on a daily basis before judges and arbitrators.

All trends evidence that the number of lawsuits or arbitrations being filed continues to increase. Those trends further reflect that litigation is expensive, with electronic discovery contributing mightily to the high costs.

Litigation is affected by economic trends

It is no secret that on a global basis, interest rates have significantly increased over the past year, and countries are suffering from high inflation. The labour market remains tight. Not surprisingly, broader economic trends such as these stretch corporate resources, which in turn leads to circumstances that impact on litigation.

Over the past number of years, companies entered into joint ventures, combinations or other forms of transactions. Now, in a challenged economic time, lawyers are being engaged to examine the finer points of those deals in order to provide a road map for companies to extricate themselves from a “losing” business relationship. The likely result – a lawsuit.

Technology and litigation

Over the past decade, business has become more technology-centric and paper forms are becoming a relic of the past. Businesses depend on cloud computing and other online activities to compete on a global scale. Massive amounts of data are collected and stored as part of companies’ regular business operations. But as a result of this technological shift, the news is replete with stories about data breaches and cyber-attacks in companies ranging from the Fortune 100 to small start-ups. Inevitably, following such a breach, lawsuits are filed. Some of the claims are being brought as class actions by plaintiffs’ lawyers on behalf of consumers; others are asserted on behalf of the party whose IT system was hacked, against their insurers or other accountable parties to seek compensation for any damage that was suffered. 

Moreover, states such as Illinois have statutes regarding the collection and storage of biometric information. As businesses have digitised many of their security, payroll and timekeeping functions, they have (often) inadvertently run afoul of the state laws providing for the storage, collection and use of such information. This has led to a plethora of litigation that is poised to continue, although the trend for new suits in this regard seems to be slowing as companies adopt the necessary consents and other documents required to insulate their liability.

The next wave of such suits may be lurking around the corner, however, as companies gather genetic information. The collection of genetic information is governed by federal law as well as state statutes, often providing for steep penalties. These laws prohibit enquiries into family medical history, among other things, in connection with employment. In 2023 alone, more than 20 class action lawsuits have been filed alleging violation of the Illinois statute in this regard.

Another way that technology has led to increased litigation is in the trade secret arena. The odds today are substantially increased that a company will unwittingly find another company’s trade secrets on its computer system, or experience an unplanned disclosure of its own trade secrets. This stems from a variety of reasons, ranging from employee mobility being on the rise, reductions in force, workplaces that are remote or hybrid, and workers increasingly bringing their own devices to the workplace. The number of lawsuits filed alleging the misappropriation of trade secrets has been continually increasing over the past several years, and 2023 is no exception to this trend.

However, any discussion of trends relating to trade secret claims needs to start with the legislatures in various states passing laws restricting, if not banning, non-compete agreements, with the federal government poised to follow suit. As a result, a company’s only avenue for protection may be to enforce its rights in its trade secrets more aggressively than in the past. In recent years, litigation involving trade secrets has increased in sophistication, and clients have become more aware of the legal protections available under state and federal law.

Additionally, as competition has intensified in many industries, companies are often turning to trade secret protection for their core economic business drivers instead of seeking protection under the patent laws. Financial drivers such as customer lists, algorithms and other proprietary technology or business methods enjoy better protection as a trade secret, which essentially enables companies to continue to derive economic value from their protected secrets in perpetuity. As workforces with access to confidential and proprietary information remain increasingly remote, and workers display an increased willingness to speak out about business practices they do not agree with, the necessity for businesses to protect their confidential information is magnified.

Trade secrets are often core to a business’s economic viability, if not its success, and rank among a company’s most valuable assets; put another way, they are often a company’s “crown jewels”. Well-known examples include the formula for Coca-Cola, Google’s search algorithm, and the secret sauce recipe of McDonald’s. None of these examples enjoy patent, copyright or trademark protection – rather, each is a protected trade secret. A trade secret enjoys significant advantages over the other forms of IP protections in that disclosure is not required and the “secret” can be protected for an unlimited period. While many of the big IP litigation battles historically involved patent challenges, that is no longer the case. Many well-known companies are or have been involved in costly trade secret litigation in recent years.

This litigation in the trade secret space cuts across a wide swathe of industries ranging from cannabis to fashion and retail, e-commerce and consumer products. Historically, trade secret claims had been brought in state courts, but since the 2016 passage of the federal Defend Trade Secrets Act (DTSA) which created a federal cause of action for trade secret theft, claims are now routinely brought in the federal courts.

On the recovery side, successful plaintiffs in trade secret cases have continued to see courts make substantial damages awards. While most claims are resolved prior to trial, federal court trade secret claims over the past five years have resulted in large jury verdicts. If nothing else, the past few years serve as a stark reminder that the damages that are being awarded for trade secret claims remain staggering.

Another trend exacerbating the rise of trade secret litigation is the demise of employee non-compete agreements as a way for businesses to protect their economic viability. In January 2023, the Federal Trade Commission proposed a ban on most employee non-compete agreements. Existing non-competes would need to be rescinded under the proposed rule and future agreements would be prohibited. The growing trend among states (such as, Massachusetts and Illinois, which recently enacted new laws, and New Jersey, where legislation has been under consideration for more than one year) is likewise to limit non-compete agreements. As a result, trade secret protection will be increasingly important in the future.

ESG and shareholder lawsuits

During recent years, many businesses, both public and private, have embarked on environmental, social and governance (ESG) initiatives. Some of these plans have been large and audacious, while others have been more modest in scope. Either way, while companies have traversed through increasing scrutiny from consumers, government agencies and investors related to ESG issues, the risk of litigation related to these efforts has never been higher.

The past year has seen an increase in claims over corporate responsibility regarding ESG agendas.

Most of this litigation is brought by private litigants or by government agencies intent on pushing back against ESG initiatives. And there are no signs of that changing any time soon.

This is especially true in the aftermath of the US Supreme Court’s 2023 decision in Students for Fair Admissions v Harvard, in which the court broadly endorsed race neutrality in college admissions. Although the court offered little guidance regarding the scope of its opinion or the permissiveness of affirmative action in other contexts, the court’s reasoning has been appropriated by private litigants to challenge corporate diversity, equity and inclusion (DEI) efforts.

The implications for private employers have not yet been determined, but in the short term, cases are on the rise, as evidenced by the recent public challenges to McDonald’s and Anheuser-Busch by anti-ESG activists for promoting DEI; pronouncements by certain state government agencies; and new lawsuits filed against major law firms and other companies challenging their minority hiring initiatives.

In addition to hiring initiatives, companies have embarked on board diversity policies, driven in part by institutional investors, that will likely be challenged in court. In 2021, the US Securities and Exchange Commission (SEC) adopted a rule mandating public disclosure of board-level diversity statistics and requiring that certain operating companies have at least one board member who is female and another who is either from an under-represented minority or LGBTQ+, or explain why the requirement cannot be satisfied. A legal challenge has been brought to this SEC listing rule.

Likewise, multiple states have adopted requirements that public companies domiciled in those states meet minimum diversity standards for board composition; so far, lower-level courts have ruled these efforts to be unconstitutional and appeals are pending.

In the past several years, an increasing number of companies have had to defend themselves against shareholder lawsuits resulting from their commitment to diversity and equity, and statements about those efforts that were purportedly misleading.

At the same time that corporate DEI efforts are under fire, companies are being challenged for their ESG initiatives as a whole. As a result, companies may be taking a new approach to laying out their environmental goals. Namely, they are not doing so, demonstrating an increasing trend toward “greenhushing” (or being radio silent regarding their approach to environmental goals). This most certainly does not mean that companies have eschewed setting environmental goals for their businesses. To the contrary, they continue to set goals, but are simply not discussing those goals publicly so as to avoid fomenting litigation.

While engaging in “greenhushing” may be one antidote to the problem of increasing ESG litigation, it also deprives companies of the inherent value underlying public pronouncements of an ESG programme. Whether it be investors or consumers, many are looking to engage with companies that are deemed to be advancing ESG initiatives. By staying silent, companies miss out on these associations and any attendant benefits that may accrue.

One path that some companies have engaged in as part of a litigation avoidance programme is to make their environmental statements aspirational rather than definitive. These statements are made in the vein of “we hope to achieve” or “we expect that we will improve” rather than definitive statements espousing concrete, measurable goals. Properly substantiated aspirational claims may prove to be a path to success.

Businesses need to be forewarned, however, that merely transforming goals into “aims”, or putting “want” or “should” in front of a stated goal may not suffice to render that goal aspirational. And if the goal is aspirational, is it definite enough for investors or consumers to rely upon it? If so, it may still be actionable, even if properly substantiated.

But what does it mean for a claim to be “properly substantiated”? How much substantiation is needed? Can the substantiation be from an industry group, or does it need to be “independent”? These are just a few of the questions that need to be considered in substantiating claims. Best practices appear to suggest that independence and scientific rigour go a long way in providing a safe harbour for aspirational pronouncements.

Green marketing has also been a recent hot source of claims. While companies have responded to increasing calls for environmentally and ethically sustainable products by marketing their new offerings as “green”, private lawsuits alleging that these efforts are misleading or deceptive have multiplied exponentially, a trend that will most probably continue its upward trajectory. As a result, companies should engage in heightened efforts to avoid making environmental claims that may be overstated, inaccurate or misleading in any way.

“Clean” and “sustainable” are marketing words that are often used. But these words are currently giving rise to false advertising claims, proving once again that language matters. And the risk is not only a false advertising suit. For public companies, if their marketing claims about a product lead to a decrease in the stock price, a derivative or securities claim will likely follow.

Litigation costs continue to rise

The discovery process in litigation used to be marked by teams of lawyers visiting warehouses where documents were maintained and reviewing those documents page by page looking for the proverbial “smoking gun” and identifying what documents had to be produced in discovery and what might be left untouched, hidden in a company’s annals. But today, this largely no longer happens, as most company information is stored electronically.

Ironically, the existence of electronically stored information has not decreased the cost of litigation – it has increased it. The vast amount of electronically stored information means that there is so much more data to be collected and combed through. Companies are required to store their data, or face claims that they have spoliated information, which can often have drastic consequences. In addition, there is often a significant imbalance in information, meaning costs related to e-discovery are disproportionately borne by one party to a dispute.

The end result of this mountain of information is that the timeline for a typical piece of litigation gets extended and the associated costs continue to rise.

Where do things go from here?

Litigation will always exist. Business disputes exist and plaintiffs’ lawyers will continue to explore new causes of action as businesses take steps to minimise risks based on existing types of claims. As long as insurance companies do not adopt a business model of paying out on every asserted claim, insurance litigation will continually be on the court dockets.

Recent litigation trends are not likely to disappear in the coming year. Companies need to assess these trends from a strategic perspective and consider how business operations may be affected. There are certainly steps that can be taken to minimise risk. But litigation risk cannot be avoided completely.