For the past year a dark cloud of litigation risk has hung over the European and US banking sector, dragging down share prices.
Analysts at JPMorgan Cazenove recently estimated legal costs would set back UK banks a further £15bn over the next three years, on top of the £30bn they have set aside since 2011.
Dozens of banking institutions in Europe and the US, including Bank of America, HSBC, Lloyds, UBS and Deutsche Bank, have been facing an array of civil litigation and regulatory issues relating to their past, ranging from mis-selling of mortgage-backed securities and alleged sanctions-busting to conduct related to Libor and interest rate swaps.
The legal strategies that some banks are deploying to deal with their litigation and handle their regulatory risks are, therefore, being closely watched by others in the industry.
One example is how some of the Swiss banks handled the US Department of Justice’s clampdown on offshore bank accounts as it sought to pursue institutions for allegedly helping US account holders commit tax evasion. Following an agreement with the Swiss government, the DoJ announced a programme in August 2013 through which it encouraged Swiss banks to co-operate with its investigations rather than face criminal proceedings. The programme, which meant institutions could reach a non-prosecution agreement with the DoJ if they met stringent requirements, was unique.
Since then, more than 100 institutions have been assessing whether to sign up to the programme. It has tough requirements, including paying penalties for all non-disclosed US accounts held by a bank since March 2009 and giving information on accounts held directly or indirectly by US taxpayers since August 2008.
About a third of the Swiss institutions affected turned to law firm Baker & McKenzie, which has offices in the US and Switzerland, for guidance. The firm’s global approach and its Swiss partners helped bridge the cultural divide between the US and Switzerland – a crucial issue as the US pressed for total disclosure from a notoriously secretive industry. This included dealing with the thorny issue of data privacy – under Swiss law, employee data cannot be disclosed without the employee’s consent.
Marnin Michaels, a tax partner with Baker & McKenzie in Zurich, says the programme was challenging for a number of reasons. “Typically, DoJ investigations take years, yet this was done within six months,” he says. “At one time or another we worked with 40 or more institutions. We had to balance the local data protection laws with the US’s need to have as much information as possible and we had to train our people to do this as quickly as possible to encourage clients into self-disclosure.”
Other law firms have had to adopt an innovative approach to handling civil litigation brought by consumers who claimed they had been mis-sold payment protection insurance (PPI).
In recent years, thousands of consumers in the UK have brought court proceedings, that have clogged up county courts in lengthy litigation. Where banks chose to settle, they faced paying the high legal costs of “no-win, no-fee” solicitors. An additional issue was that the PPI claims were all specific, so the banking industry could not bring a legal test case where a judgment would bind all subsequent claims – as the industry had done with consumer claims over current account charges in 2007.
However, law firm Simmons & Simmons, acting for Barclays, brought two legal cases that led to rulings clarifying the legal position. This effectively resulted in claims being directed away from the county courts into the bank’s internal complaint functions.
In the first case of Andrew & Ors v Barclays, Mr Justice Waksman ruled in favour of the bank, staying PPI claims for eight weeks so that the bank could process them as complaints. He gave guidance that complaints should be brought first to the bank, rather than swamping the scarce resources of the court system.
A second ruling, Binns v Firstplus Financial, effectively meant any consumer who turned to the court after having their complaint upheld by the bank would see their claim struck out.
While the banking industry has been busy dealing with its legacy issues, the volume of litigation in the technology sector has increased significantly because laws have failed to keep up with the rapid pace of technological change.
One of the most significant rulings this year has been by the European Court of Justice, which gave European citizens the right to ask internet search engines to remove results for queries that included their name – the ruling was dubbed “the right to be forgotten”.
Other cases have also trodden fresh ground in the developing area of intellectual property – law firm Garrigues won five cases for Google.
One notable case saw the Spanish court siding with Google and Garrigues on a dispute with broadcaster Telecinco, finding that Google’s YouTube service did not have to check television clips for potential copyright violations before posting them online.
Other cases have involved trademark disputes between retailers, which are increasingly seeing the internet as a sales driver. Law firms have used new techniques, such as big data, to help them win these trademark cases. One example involved Marks and Spencer, which lost a long-running court battle after a judge ruled that the retailer had infringed the trademark of Interflora, the flower delivery business, by using it to promote M&S flowers on the internet.
Interflora had sued M&S in the High Court because it said the retailer had used its trademarked name as a keyword on Google, via the Google AdWords system. AdWords allows companies to buy online advertising that will appear when users type particular words into the search engine. As a result, typing in “Interflora” as a search term into Google brought up an M&S advert under the “sponsored links” heading, even though that advert bore no relationship to Interflora.
Law firm Pinsent Masons, which won the case for Interflora, broke new ground by using Google Analytics and online metrics, rather than traditional survey evidence, to demonstrate to the court the confusion caused among consumers when they used Google.
This was the first time the courts had accepted this type of anonymised big data as evidence of consumer confusion – and demonstrates the value of using the latest tools.