An Introduction to Economic Analysts

As we navigate toward a post-COVID-19 world, new challenges confront firms in a range of areas and require sophisticated economic analysis.

Current economic conditions will impact industries differently. Bankruptcies and reorganizations are expected to continue in key industries such as travel, hospitality, and retail. This will likely lead to an uptick in litigations. In addition, breach of contract cases, employment litigation, wrongful death, and insurance/business interruption cases are likely to see upticks as the effects of the pandemic play out in the legal system.

Litigation that may be viewed by companies as more discretionary and sensitive to the business cycle, however, may see a downtick if the pandemic-induced recession is long-lasting. The net effect on the legal industry and consulting associated with dispute resolution is difficult to gauge due to these countervailing effects; however, there are likely to be demand shifts toward certain types of litigation and away from others.

Investors likely will experience liquidity challenges, and thus have an incentive to delay proceedings or more reluctantly incur expenses associated with dispute resolution. One question concerns the role of third-party funders, which employ private monies to fund litigation. With interest rates at or near zero and increased volatility in equity markets, these entities may have greater ability to raise capital and, thereby, fund disputes that would have otherwise gone unresolved.

A downturn where there are constraints on financing/capital would result in a decrease in litigation rates. However, in a downturn where there is a decline in productivity but credit is still available, litigation rates may increase. Given the US Federal Reserve’s accommodative monetary policy, it seems less likely that there will be tight credit markets, at least in the short run.

Meanwhile, the banking and wider financial services sectors increasingly are leading the disputes landscape in terms of frequency, complexity, and size. Courts and other legal bodies continue to be inundated with claims against financial institutions by shareholders, investors, customers, joint venture partners, and other stakeholders.

Brexit is another event expected to bring with it different claims arising out of changed circumstances, along with the potential for a range of treaty claims. We could see, for example, certain types of competition claims with an EU dimension being heard in the EU, especially where liability has been established by EU courts and authorities.

Concerning the disputes market more broadly, we could also see a pivot toward disputes being resolved via mediation as a lower-cost alternative to arbitration or other methods.

BRG’s approach is evidence based, theory informed, and insight driven—a framework that helps clients move forward in the current environment, where we see the following trends across practice areas.

International arbitration 

There exist a number of directly and indirectly related economic and policy forces that are impacting foreign direct investment in the short term: the pandemic and the subsequent drop in many commodity prices, the US-China trade war, and China’s Belt and Road Initiative.

The pandemic will continue to force states to wrestle with tension between quarantine-based policies and the reduction in economic activity, with its attendant social and financial impacts. Reduction in public revenues (and increase in emergency public outlays) is likely to force states to revisit initiatives being undertaken by the government, including arbitration-related costs. Budgetary impacts would be exacerbated where fees, royalties, and other payments from natural resource activities constitute a significant portion of government revenues.

Significant changes in energy and commodity prices often disrupt parties’ expectations, if not their ability to perform under the contracts. The provision of power and petroleum products tends to be highly regulated, with the latter often being purchased under long-term contracts. Changes in prices, rather than being passed through to the end consumer, often serve to benefit the investor or the state. Significant changes in how those benefits get allocated provide the incentive for one party to breach or attempt to rewrite terms of underlying agreements.

Over the medium term, states will have incentives to “rewrite” existing agreements based on the forces described above. This could take various forms: abrogation of explicit or implied contractual obligations; increased regulatory intervention and/or amending regulatory rules to the detriment of the investor; enactment of new fees, taxes, or other levies; or acceptance of competing investors that appear more attractive (e.g., lower upfront costs).

While many businesses are taking a cautious approach and preserving cash in the short term, the global shock to supply, demand, and pricing expectations brought on by the pandemic and the ongoing US-China trade war will inevitably increase the scope for disputes. We expect a significant increase in enquiries relating to business interruption and contractual disputes as parties look to extricate themselves from commercial arrangements that no longer appear attractive. Force majeure clauses will require economic and legal interpretation.

China’s Belt and Road Initiative (BRI) continues to encourage large-scale investment in construction and infrastructure projects across Central and Southeast Asia. These projects involve complex financial, political, and legal considerations in multiple jurisdictions. As increasing numbers of BRI infrastructure projects move toward completion, we are likely to see more infrastructure disputes relating to BRI projects. Arbitration is the preferred method of resolving these cross-border disputes.

No new specific regulatory changes are expected to impact parties to FDI disputes. Anticipated resource constraints, however, may give new impetus to issues related, in particular, to the cost of these disputes. Arbitration has been viewed historically as more efficient and, hence, less costly than the customary forums for dispute resolution. For example, discovery has been more prescribed in arbitral proceedings historically. Efficiency, however, has been questioned as the use of the forum has grown, and law firms have brought to the process strategies and practices employed in conventional disputes. Corporate counsel in recent years has questioned the expanding scope of discovery and the attendant direct and indirect costs imposed on the clients.

Labor and employment 

Wage and hour claims continue to be among the most popular lawsuits filed. Today’s environment may also give rise to new exposures to wage and hour claims, such as Private Attorneys General Act claims for unreimbursed business expenses, general off-the-clock claims for hourly employees with inadequate home-tracking systems, and misclassification issues in which salaried employee compensation has been lowered below minimum compensation thresholds.

Labor and employment decisions, which encompass the analysis of hiring, placement, promotion, performance evaluation, termination, and compensation decisions, among others, likely will be another active area. The analysis of these decisions may be the result of single-plaintiff, class action, or government claims of discrimination with respect to demographic group status. To avoid being sued and to assist with employee retention, some firms prepare pay equity studies and other studies of employment decisions.

Current economic conditions have different effects depending on the type of employment decision. There has been an increase in the demand for analyses related to reduction-in-force, furlough, and reduction-in-pay decisions. As firms restructure their organizations, they make employment decisions that result in the demand for analyses to be conducted to determine whether these decisions are adverse to particular demographic groups. Lawsuits are being filed alleging that reduction-in-force decisions have resulted in adverse impact. There may be an uptick in hiring claims when firms begin to hire workers, to the extent that older, female, or minority workers are not rehired or are replaced by younger, male, nonminority workers.

Pre-COVID-19, the biggest trend with regard to employment decisions was the concern over pay equity by employers. In January 2016, California’s Fair Pay Act required employers to pay workers the same for “substantially similar work.” Several states followed with variations of the law regarding legitimate factors to explain differences in pay. Simultaneously, the “Me Too” movement increased the exposure of not only equal pay but also glass-ceiling concerns. Increased demand is expected from employers to assess the gender composition of its employees by level of authority and to determine whether pay differences exist among similar groups of employees that cannot be explained.

With regard to COVID-19, the trend is for claims of disparate impact with respect to reduction-in-force decisions and the expected trend in hiring claims as employers make rehiring decisions. Further, the Equal Employment Opportunity Commission (EEOC) and states are continuing to provide guidance to firms to test for the virus and establish workplace rules. Firms will seek to assess questions like whether the practice of requiring a positive antibody test could result in disparate impact by age, gender, and minority status given the rates of contraction among these groups.

There is an expected future demand for calculation of economic damages involving employment claims associated with COVID-19-related deaths or injuries that are allegedly linked to the employer (e.g., meat processing plants).

Class certification 

Recent case law has affirmed the importance of expert economic evidence in the class certification process and has imposed more rigorous standards for that evidence. While an economist might be asked to opine on criteria listed in Rule 23 of the Federal Rules of Civil Procedure, the focus of an economist is most often on analyzing the question of “predominance” stemming from classes brought under the third prong of Rule 23(b). In evaluating predominance, economists are generally asked to analyze two issues: first, whether the challenged conduct, if true, would have affected all, or nearly all, proposed class members in a “common” manner; second, whether a formulaic method, common to all or nearly all proposed class members, exists to measure damages stemming from the challenged conduct.

Judicial decisions over the past decade have helped to clarify the role of an expert economist in the class certification process. A decision rendered by the Third Circuit in 2008 in the Hydrogen Peroxide litigation (involving allegations of price fixing for hydrogen peroxide and related chemical products) ushered in new standards of rigor for analyzing issues related to common impact and for evaluating opposing economic evidence advanced by defendants’ expert(s). It also opened the possibility that issues related to the merits of the case (i.e., issues related to whether the challenged conduct occurred) could be considered at the certification stage.

Another major decision was rendered by the Supreme Court in 2011 in Wal-Mart. A proposed class had filed suit against Wal-Mart for discriminating against female employees by allegedly granting pay raises and promotions disproportionately to male employees. In reversing class certification, the Supreme Court noted that neither the plaintiffs’ statistical evidence nor their anecdotal evidence was sufficient to tie Wal-Mart’s alleged conduct to any common impact that may have been experienced by the proposed class members.

More recently, economic analysis has become critical in class actions that allege a common misrepresentation or omission and fall under state consumer protection laws for economic injuries related to a product’s usefulness, market value, repair costs, or other costs of risk avoidance. This is the case with many newly filed class actions alleging mislabeling and false advertising for products claiming to address coronavirus risks, provide protections, and offer vaccines. Class actions alleging economic losses will seek damages that place the plaintiffs in the same economic position they expected absent the defendant’s conduct.

The future of class actions in the UK is in the hands of the Supreme Court (i.e., Merricks), which could lead to a dramatic rise in opt-out class actions by victims of competition law infringements seeking redress, particularly in cases where the level of harm does not justify a claim being brought on an individual basis.

Intellectual property 

There has not been an observed downturn in new case filings in the US in the intellectual property space. In particular, new patent case filings appear to be up when compared to 2019 filings. Patent Trial and Appeal Board institution rates of an Inter Partes Review (IPR) challenging the validity of a patent outsider of a court system are leveling off; and, with it, patent cases filed in district courts are expected to go up.

Recent indications that patentees are faring better in IPRs, as compared to historically, may help spur new patent litigation. Trademark and copyright cases are down when compared to 2019 filings, but not enough to offset the increase in patent case filings. This comports with the economic areas hit hardest due to the pandemic (e.g., travel, hospitality, and retail) not being as patent-centric as industries that have been less hard hit or have even performed relatively well (e.g., hi-tech, biotech/pharma).

The International Trade Commission (ITC) continues to be a popular venue to litigate patents outside of the district courts. Section 337 of the Tariff Act empowers the ITC to exclude articles of commerce on a finding of infringement. A 12- to 18-month expected timeframe to reach a resolution for disputes and the unique ability to exclude infringing articles from entering the US borders makes the ITC an attractive venue for patentees. In 2020, Section 337 cases are expected to continue to increase (the ITC predicts a 28% increase), combined with a much lower settlement rate as compared to district court litigations.

To the extent that the economic effects of the pandemic affect credit markets, there could be an impact on the number of cases brought by Patent Assertion Entities and contingent-fee attorneys engaged by patentees.

Patent eligibility continues to be a fundamental issue. For example, courts use what the Supreme Court decided, commonly referred to as the Alice/Mayo test. The practical application of this two-part test has resulted in a large number of patents being invalidated. The Federal Circuit has indicated this is an issue ripe for Supreme Court intervention. However, with the Supreme Court refusing to hear recent petitions on this subject, it may be left to the Federal Circuit to achieve more clarity and nuance in application of the Alice/Mayo test.

Antitrust merger and litigation 

The current world environment will lead to restructuring in various industries due to changes in supply chains, demand, and other factors. Countries have relaxed regulations to varying degrees to address competitor collaborations temporarily, e.g., the Department of Justice (DOJ) and Federal Trade Commission’s (FTC) Joint Statement Regarding COVID-19 regarding their commitment to expedite their review of proposed collaborative conduct among competitors. The European Commission (EC) is offering similar temporary guidance through ad hoc “comfort” letters. Business reviews issued by the DOJ under its expedited procedure are typically good for one year, so ongoing collaborations could face antitrust scrutiny down the road.

Merger work is down because of the economic climate. Parties are unsure how to price deals, and companies are more focused on surviving. Legal clients have less merger work in the pipeline, though merger reviews take months to complete, so changes are gradual. Reductions in merger work free agency staff to focus on other investigations, such as the DOJ and FTC investigations of Big Tech.

Bankruptcies will accelerate, and some buyers will seek to complete strategic acquisitions. Restructuring often involves mergers and other transactions as assets are recombined or used differently. Increased horizontal consolidation in some industries impacted by COVID-19 may lead merger parties to appeal to the “failing firm” defense, which could be more viable now.

The FTC and DOJ recently released vertical merger guidelines that may indicate a growing interest in investigating vertical mergers. We expect to see more vertical integration as firms in a stronger position coming out of the recovery look for complementary bargains (e.g., Uber and Grubhub), or perhaps to lock down supply chains and reduce risk. Given these developments, vertical merger challenges and/or investigations into vertical practices (including private litigation) will be an area to watch.

The potential for a change in administrations may impact investigative priorities and the degree of merger enforcement, and potentially usher in new legislation. For example, political pressure has emerged that antitrust should be concerned with issues of equity (i.e., a potential vehicle for transferring wealth). If formalized, this would be a substantial shift from the past and current criteria of focusing on consumer welfare, disproportionately impacting larger, more successful firms. The consumer welfare standard provides a relatively objective basis for assessing an antitrust violation. Adding an equity component would introduce substantial uncertainty with regard to the criteria or analysis for determining an antitrust violation. Further, other jurisdictions are considering antitrust enforcement modernization (e.g., how to deal with data), which may prompt further evolution in the US.

In the long term, COVID-19 likely will generate increased demand for attorneys and economists in antitrust. Generally, downturns generate monopsony cases during the recessionary period and claims of price fixing during the recovery period. The greater the change in price from the peak of the business cycle to the bottom to the next peak, the more claims of both monopsony and price fixing depending on the phase of the business cycle.

Asia has seen a steep rise in the number of M&A-related disputes, especially involving private equity investors. The pandemic is affecting markets with confidence waning, valuations plummeting, and businesses failing. Buyers’ commercial rationale for M&A transactions is looking increasingly unstable, with many attempting to pull out. However, contractual obligations remain and are likely to be vigorously enforced by the seller.

EMEA competition policy and antitrust may see increases in state aid cases, price gouging cases (as we already are seeing in the South African market), price fixing, and failing firm mergers. In regulation, the normal cycle of price determinations may continue, but there will be increased pressures on keeping prices low. Further, as certain sectors might face more financial pressures, we could see governments intervening (or even renationalising firms), as we have already started to see in rail. In South Africa, we also expect to see a rise in competition cases due to recent changes to the Competition Act and the introduction of the Arbitration Act.