Uncertainty seems to be the only thing lawyers working in Europe’s aviation sector can count on these days. The recent collapse of two established major European airlines demonstrated the volatility facing many sections of the industry, with UK-headquartered Monarch Airlines and Air Berlin becoming the latest casualties of turbulence. ‘Airlines are no longer seen as your triple-A bet,’ says Catherine Ledger, general counsel of UK-based airline Flybe.

Jet-Engine

But, like the aircraft themselves, aviation is a sector that rarely stands still. When a carrier takes a nosedive, there are competitors ready to seize the assets – not only the aircraft, but vacant routes and prized slots at key airports. For airlines, being opportunistic and agile is the key to staying airborne.

‘We had very little overlap with Monarch, but it did allow us to consolidate our presence in London Luton, where we are the second largest operator, and which remains Europe’s largest travel market,’ says Owain Jones, chief corporate officer of Hungarian airline, Wizz Air.

‘The collapse of Air Berlin, which then led to their subsidiary, Niki, disappearing [in December 2017], has enabled us to put in operations in Vienna, and later we’ll be starting a base in Vienna, with routes not just in Central and Eastern Europe but also to some western Europe routes as well.’

Some of the challenges are self-inflicted in a highly-competitive sector with the short-haul market being turned on its head by the advent of low-cost carriers (LCCs), which first arrived in Europe in the mid-90s. The ‘no-frills’ business model stripped the flight experience to the bone, removing seat classes, lounges, in-flight entertainment, complimentary refreshments and baggage check-in, in return for cut-price fares.

We stimulate markets. Our low cost means we stimulate a demand among people who have never travelled by air before.
We bring new people into the flying franchise.
Owain Jones, Wizz Air

The transformative impact of LCCs on the short and medium-haul market has come at a price for full-service, or ‘legacy’, carriers, who have found themselves under pressure to compete on price, or risk losses and even failure.

This pressure has been felt in more than ticket prices, forcing a shift in the business models by which routes are devised and offered to customers. The ‘hub and spoke’ model typically favoured by full-service carriers – whereby airlines fly their aircraft through ‘hub’ airports, and then out along various ‘spokes’ to smaller ‘node’ airports – is increasingly giving way to the ‘point-to-point’ model utilised by LCCs, in which flights are offered directly between destinations.

‘By expanding their presence in airports other than their traditional hubs, a number of large airline groups now operate multiple hubs. There are recent examples of these groups moving aircraft between these hubs, and as a result, these groups have greater buying power than they did in the past,’ notes Danijela Popadic, GC of Serbian flag carrier, Air Serbia.

Making your connection
To spread costs and commercial risk, co-operation and consolidation is increasingly in vogue among legacy operators, as was the case with International Airlines Group, the parent company of flag carriers Aer Lingus, British Airways and Iberia as well as low-cost airline Vueling.

There are also many collaborative arrangements that airlines enter into to extend their reach beyond traditional routes, or increase efficiency. A code-share agreement, for example, enables passengers to book tickets for a route with one carrier, while the flight is operated by a different carrier sharing the flight number.

‘People like to be able to have a seamless flying experience. It makes sense in lots of ways for airlines to have arrangements like codeshares to make the travel experience a lot more straightforward,’ says Ledger.

‘We are now doing far more codeshare arrangements with different airlines, which enables passengers to book a ticket that takes them from Exeter to Manchester, and at Manchester they can connect to a Virgin aircraft to fly to the States. As far as they’re concerned, it is one transaction rather than trying to buy two lots of tickets.’

Other forms of collaboration include wet leasing, where one airline provides and operates the aircraft, crew, maintenance and insurance for an aircraft for a fixed period, but it flies under the brand of a different airline. ‘It is really critical to have the right aircraft for the right route, and if you want the route to fit in with your network, you might have a look at somebody else to operate it for you. The big legacy carriers are leasing more for the shorter-hop regional flying, which doesn’t fit in with the larger aircraft,’ notes Ledger.

Also more common are risk-sharing models, comparable to joint ventures, where two airlines operate a route together, each providing different elements – for example, the aircraft, crew, marketing, advertising, and so on – and then sharing in the risks and rewards.

‘From a legal perspective, it can be interesting because there are lots of new ways of doing things. Sometimes we are doing things that have not been done before. Our team has to be willing to be flexible,’ says Ledger.

Not all airlines are as keen to share, however. ‘We have a very specific business model, of generating growth from our home markets without the need to get into the complications of cooperating with other airlines. A key point at Wizz is achieving low operating costs. When you start dealing with other carriers, that introduces costs into the equation,’ says Jones.

New business
Under pressure from the low-cost sector, established carriers have diversified, offering low-cost options that were previously the domain of the LCCs. However, Popadic believes that consolidation in terms of service levels is happening in all sections of the market: ‘To attract business passengers, most LCCs have modified their practices. These trends imply that LCCs are increasingly competing for business passengers, a demographic that traditionally flew with [traditional carriers].’

The advance of LCCs continues apace, even into the long-haul market. Of the 15 low-cost, long-haul operators launched globally since 2012 according to 2017 CAPA figures, five (Norwegian Air Shuttle, Eurowings, WOW air, French Bee and Level) are European. New aircraft technology has greatly reduced operating costs on long-haul routes, enabling carriers to encroach into intercontinental routes, increasing customer choice of airports in the process through the LCC model of bypassing traditional hub airports.

Popadic is not too concerned: ‘LCCs will operate more on long-haul. However, the long-haul, low-cost business model will not make such a huge impact on the air transport market as on short-haul. Many of the features which enable LCCs to compete so effectively are less applicable on long-haul.’

The politics of flight
Operators like Ryanair and easyJet are opening up new markets by making flying more affordable. Others, like Wizz, harness geopolitical tail winds to drive growth.

‘We stimulate markets. We have the benefit of operating in Central and Eastern Europe, one of the highest GDP growth regions in Europe. GDP growth leads directly to airline growth; there’s always an increase in demand for air travel. Our low cost means we then stimulate a demand among people who, in some cases, have never travelled by air before. We are bringing new people into the flying franchise,’ asserts Jones.

‘It is a very different game to western European airlines, which are battling to take customers from one another. In Central and Eastern Europe, the rate of travel by air is still around a quarter of what it is in western Europe, so significantly higher GDP growth is what’s contributing to our strong growth.’

Despite the scope of expanding economies in an increasingly competitive environment, not everyone can be a winner.

‘Some rationalisation with capacity in Europe was long overdue. One of the functions of a liberalised market tends to be that the strongest survive and the strongest airlines are the ones with very controlled cost bases. If you look at the US, which started liberalisation some time before Europe, there were a very large number of airlines. Now four airline groups provide around 80% of the capacity,’ says Jones.

‘Europe is way, way behind – we’re still a very, very fragmented market, even with the low-cost carriers. Failures are part and parcel of aviation; rationalisation in Europe has to happen and we still have a number of airlines which are supported by the state – whether that’s legally or by contravening state aid laws.’

Following last year’s collapse of Air Berlin, Ryanair was a vocal critic of the German government’s provision of €150m in state aid.

Nevertheless, the European Commission (EC) approved the loan and, in December 2017, approved Lufthansa’s acquisition of certain Air Berlin assets – with the notable exception of Niki.

But the issue of state subsidisation continues to dog the aviation sector, as LCCs and legacy carriers alike condemn perceived attempts by state actors to undermine competition. EC guidelines, however, do not expressly prohibit state aid to airports and airlines.

‘There are a number of other airlines that may be driven by political decisions at the moment. There are some airlines that do not have a particularly rational approach to business. That will shake itself out. There is going to be quite a change in the aviation landscape in the next ten to 20 years,’ argues Jones.

Hurricane Brexit
For established carriers and LCCs alike, the greatest uncertainty currently is Brexit. In an interview with The Telegraph, the founder of Monarch’s major shareholder, Greybull Capital, highlighted a weak pound and Brexit, along with terrorism, as reasons for the airline’s failure.

‘That is at the forefront of every airline’s mind at the moment and, like every other airline, we are talking to every authority that we can to try and get clarity on what’s happening,’ says Jones.

As it currently stands, the UK’s aviation industry will ‘continue to benefit from the existing liberal market access until the end of 2020’ (Department for Transport, April 2018), although the EC has stated that, eventually, after exiting the EU, UK-based carriers will no longer ‘obtain and keep an EU operating licence and benefit from the intra-EU air traffic rights’ (EC, Directorate-General for Mobility and Transport, January 2018) – the EU single aviation market.

Dublin-headquartered Ryanair and Budapest-based Wizz Air have applied for UK air operator certificates, while British easyJet is setting up a new UK subsidiary alongside its European one in an attempt to operate in both jurisdictions.

‘We cannot afford to wait and see. Our view very much is that the liberalised industry, which started back in 1994 in Europe, has produced huge benefits both for businesses and for citizens of Europe,’ says Jones. ‘Liberalisation has resulted in the growth of carriers like Wizz Air, which provides opportunities for people to travel throughout Europe, connecting the newer countries in the EU to the West. Liberalisation is something which was long fought for and, ironically, long fought for by the British.’

Airlines aside, the potential implications of the Brexit deal reverberate around the aviation sector, with even a tariff-free environment likely to prove deeply disruptive to cross-border trade in the hardware keeping the industry airborne.

John Harrison, GC of aircraft manufacturer Airbus, which has 14,000 employees and £6bn of activities in the UK, notes: ‘We make more than 80,000 business trips between continental Europe and the UK every year. If Brexit causes a delay to each of these trips, that will have a big impact – even just the bureaucratic and administrative impact. The turnaround time to load a wing into one of our Beluga aircraft – which fly parts around – is very carefully timed and if you add 45 or 75 minutes, that can have a bad impact on production. If we have to warehouse products because of a slowdown in the supply chain, this is going to add cost. Then there is increased bureaucracy and form-filling for goods coming out of the UK and into the UK. Because 70% of what we do is outsourced, we have more than 4,000 suppliers in the UK, and some of them don’t have the bureaucratic size to be able to deal with form-filling.’

He adds: ‘The problem is, you’ve got the political message up here, but then you’ve got the down-to-earth, practical reality of delivering parts. You can’t deliver an aircraft if the toilet doors are not there. This is all impacted by the single market, by no tariffs, by free movement. By introducing friction, the impact could be absolutely dramatic. So, we were publicly against Brexit – we think it’s a step backwards.’

Innovating on the fly
In a world as competitive as aviation, keeping pace with change is crucial and most players are investing in online platforms. Flybe, for instance, has recently upgraded its digital platform.

‘Technology generally has been a big issue over the last few year for airlines – there’s a need to get on board and make the passenger experience as good as possible,’ says Ledger.

We were publicly against Brexit – we think it’s a step backwards. John Harrison, Airbus
We were publicly against Brexit – we think it’s a step backwards. John Harrison, Airbus
‘We are adopting a programme that will help us with a lot of things like GDPR, but also in terms of our IT position. It provides us with a whole new ticketing system, a whole new passenger booking platform, a central e-commerce platform to enable us to do our marketing and a departure control system, interfacing with all the airports in terms of check-in, managing baggage and assessing aircraft load.’

Jones echoes the need for a strong online presence: ‘We have the youngest customer profile of any major [ultra-low-cost carrier] or low-cost carrier in Europe. That means we need to be looking at our e-commerce capabilities, our website, as that is how our generation of customers operate. We need to make sure that we are delivering their needs in terms of how we communicate, how we make our products available.’

Leveraging tech in aircraft design is another area in which airlines and their suppliers strive to get an edge on rivals in terms of operational efficiency providing more comfortable craft.

‘I see a growing trend in questions about integrity, sustainability and the environment. If you take the new engine options on our aircraft, they are 15% more fuel efficient, so our environmental footprint is becoming more favourable each year,’ says Harrison.

‘In addition to delivering margins, we have to be thinking about how we’re perceived in the market and do the right thing.’

For Wizz, this is an integral part of its low-cost model: ‘We make sure that we use the latest equipment, our fleet is four years old and, in January 2019, we are scheduled to start taking the first of our Airbus A321neo aircraft, which is equipped with new engine technology,’ says Jones.

‘New engine technology will deliver significant savings in operating costs, which then directly feeds through to our pricing, and keeps that virtuous circle of bringing more people into the flying franchise.’

The sector is also benefiting from innovation on the maintenance and overhaul side of the market. ‘We’ve had a lot of programmes to reduce fuel. With every new aircraft type, like with the modern fleets, the reduction of fuel is one of the main topics the airlines try to implement,’ says Olaf Johannsen at Lufthansa Technik.

There is also much talk now of ‘predictive maintenance’ – a concept whereby data analysis will allow aircraft maintenance and repair companies to predict requirements more precisely.

‘The use of big data is going to transform the way that we build and maintain aircraft. You’ll say: “You have to change this part next year in February, because all of the digital predictability that we’ve got from the fleet that’s in operation tells us this has to happen.” This data should ultimately mean that we will be able to develop an aircraft quicker, which means it will be cheaper and brought to market quicker,’ says Harrison (see box, below).

Depending on your vantage point within the industry, aviation continues to be buffeted by head or tailwinds. Seismic market shifts, political and regulatory fallout and technological advancements continue to challenge players, and their in-house lawyers.

Olaf Johannsen at Lufthansa Technik explains how predictive maintenance is harnessing data to increase efficiencies
‘The maintenance, repair and overhaul business has changed a lot, and it’s consolidating as well – in recent years, the OEMs [original equipment manufacturers] have entered this market. That has changed our view on how to approach customers, how to produce products and how to offer products.

We are developing a new digital product strategy. Digitalisation in the maintenance business came later than in other businesses, but at the moment, every player is trying to develop new digital products as well. The advantage for Lufthansa is we are working with so many airlines together, we have a wide variety of databases that we can put into digital products.

We have developed a new platform called Aviatar and are offering our own third-party apps, which take the data of an airplane and figure out how our customers can save money. For example, every airplane component has a life cycle and has to be replaced after a specific time. The challenge now is to find out if it is always necessary to replace those components within that life cycle. For example, if an engine is flown over a desert or over the sea, then corrosion does much more harm to the engine than flying it in Central Europe. So we try to figure out how to extend these life cycles with the data we are getting from engines.

It’s challenging, because you have to do that together with the authorities, you have to do that internally, and you have to do that with the customers. We are at the concept approval stage; we have to prove that the system works first of all to our customers but also to the authorities.’

We’ve had a lot of programmes that are trying to reduce fuel, for example, you can wash an engine every three or six months and then the engine uses less fuel than without washing. Or you can have winglets on airplanes, which reduce fuel consumption as well. With every new aircraft type, like with the modern fleets, the reduction of fuel is one of the main topics the airlines try to implement.

Alex Novarese, The In-House Lawyer: Will the UK legal system be more or less trusted post Brexit?

Andy_Tyler_Photography_Legal_Business_Roundtable_08.02Abhijit Mukhopadhyay, Hinduja Group: As a business, we trust English law and the English courts. Whenever we do business in any part of the world, unless it is in the US, we always go for English law. So long as the courts remain a brand – and they will, irrespective of whether Brexit happens – London will be attractive.

Natasha Harrison, Boies Schiller Flexner: A combination of the certainty of due process, the quality of the judiciary, and a common law system that is constantly evolving means the UK delivers a level of certainty, sophistication and trust that European jurisdictions cannot match. Maintaining that will be critical. The one area we want to think about in negotiations is reciprocity and enforcement of judgments across Europe. It would be good to secure that.

Gaby Dosanjh-Pahil, SSE: There is also the independence of the judiciary, which in other countries is questionable.

Claire Drury-Axford, Barclays: I agree about predictability. As lawyers, we are always keen to advise our clients properly. It is very difficult to do that in an unpredictable jurisdiction.

Ken Beale, Boies Schiller Flexner: For London as a seat of arbitration, it will be at worst neutral and at best a positive. The UK has established itself as the gold standard for arbitration. The English judiciary is highly respected and the Arbitration Act 1996 is as good as you get anywhere in the world. Brexit is not going to change any of that but might offer opportunities. When English law is decoupled from EU law, English law may be viewed as more neutral than today. You will not necessarily have a ban on anti-suit injunctions. A variety of things could happen that make the UK even more attractive.

Gaby Dosanjh-Pahil, SSE: I agree, but the ECJ point might be a disadvantage, because some will think of it as another recourse for them.

David Sugden, Edelman: Some businesses also want the protection, or perceived protection, of European law. What will help certainty is that, no matter what happens with Brexit, lots of UK law has been derived over time, through precedent, from EU law.

Claire Drury-Axford: Will [Brexit] create a vacuum in Europe? Will one member state seize that opportunity?

Natasha Harrison: France has just done that. They are opening an international court. However, it is difficult to reconcile a French court resolving English or New York law governed disputes and I don’t see our clients starting to write in French or Italian law.

Andy_Tyler_Photography_Legal_Business_Roundtable_08.02
“As a business we are waiting to see what Brexit deal comes out. There are 800 Indian companies in London and they have all stopped investment.” Abhijit Mukhopadhyay, Hinduja Group
Abhijit Mukhopadhyay: I agree. As a business, we prefer New York law over anything else. Until there is a change in the mindset of the courts, you just cannot compare France with England under any circumstances.

Alex Novarese: What is your take on an English-language court in France?

Mr Justice Knowles, Queen’s Bench Division: It does not concern me. Let me evidence that by referencing our proposal to the world’s commercial courts to create a standing international forum of commercial courts. We took the initiative last year to ensure the established players, like New York, Singapore, Australia and Hong Kong, gathered with us and the newcomers.

Alex Novarese: Was it 26 jurisdictions you had at the first meeting?

Mr Justice Knowles: Yes and we are likely to have more next time around, with activity in between. Our thinking was that we cannot leave this to a sense of competition between jurisdictions. If we can share best practice, everybody wins. You have said nice things about this jurisdiction. They do point to our having the confidence to show leadership. I do not see why the strengths you identified should be harmed by Brexit.

Touching on arbitration, our courts do not regard arbitration as a competitor. Twenty-five percent of the Commercial Court’s time is spent supporting the arbitration framework, where arbitration has a seat here.

If I may tie that back to the standing international forum, one of the things we learned was a number of countries under pressure in terms of their dispute resolution offering think: ‘Maybe handing it over to arbitration is the answer.’ Our respectful advice is that you cannot look at arbitration on its own. You need a strong court system to have success from arbitration.

Alex Novarese: How will the initiative develop?

Mr Justice Knowles: We agreed three overall objectives. The first was sharing of best practice. The second was an opportunity for those jurisdictions with a developed commercial court offering to help those from the developing world.

The third element was to ensure the commercial court community could play its part in the broader rule-of-law question. China is one of the standout examples. It is fascinating how strong a conversation you can have about the rule of law from a commercial starting point where the values you are looking for are stability and certainty.

[In Europe] we made no attempt to be comprehensive, but present were Germany, Holland and one of the Scandinavian countries. We will look to add France and one or two others this time.

Alex Novarese: Have many people had experiences of the Financial List?

Natasha Harrison: The beauty of the Financial List is that it de-risks litigation, because you will have an expert judge who understands a complex finance structure or knows what the LMA [Loan Market Association] is. We have had a couple of cases in the Financial List. There has been flex in the rules and a much more commercial approach. I was reminding Robin [Knowles J] earlier that we did the first summary judgment in the Financial List, which was a significant securitisation for one of our clients. Because I knew we were going to get a really good judge who would understand the issues, we went for it and it was a fantastic experience.

AAndy_Tyler_Photography_Legal_Business_Roundtable_08.02
“It is going to be a big task to decouple from EU regulation. It is in everything.” Gaby Dosanjh-Pahil, SSE

Gaby Dosanjh-Pahil: There are initiatives, such as the shorter trial scheme, which a lot of people are reluctant to go into, but I think they will work great if more and more people do them.

Natasha Harrison: The judges are open to being creative and bespoke.

Tom Spender, Lloyds Banking Group: I see parallels with the incumbent UK banks and the challengers and digital innovations coming along, which is leading to healthy change. [Knowles J] talked about Brexit being a spur to healthy competition and innovation. That is very true for the court system. Looking at the user experience – which encompasses issues like technology, disclosure, specialist courts, costs and access – is a very useful spur to innovation. If Brexit leads to a greater concern with the user experience in UK courts then that could be a silver lining.

Alex Novarese: Has the market test mechanism in the List been used?

Mr Justice Knowles: Not yet.

Alex Novarese: You must want to give it a spin, though.

Natasha Harrison: We are desperate to.

“There is serious concern about the quality of judges filling federal court positions after Trump. That is an opportunity for London.” Ken Beale, Boies Schiller Flexner
“There is serious concern about the quality of judges filling federal court positions after Trump. That is an opportunity for London.”
Ken Beale, Boies Schiller Flexner
Mr Justice Knowles: There have been nibbles. There is a great deal of interest from other jurisdictions. Some of its value is it puts on the table courts being ready to approach things in a business-like way.

Natasha Harrison: With the test case protocol, you can take an academic question where a dispute has not crystallised. That is incredibly valuable.

Alex Novarese: Is it a model to replicate? Unusually, I have not heard that much whingeing from litigators. Is it something you could do in other sectors?

Mr Justice Knowles: That is a real possibility. There are many things that we have been able to pilot and develop in the Commercial Court that have rolled out across the system. Those include things we regard as second nature now.

Alex Novarese: Presumably the court is more efficient as well.

Mr Justice Knowles: There might be something in that. We are being careful. That is why the Financial List deliberately aimed at the most significant cases. We have had about three-dozen cases so far in the first two years, which is in line with expectations.

James Wood, The In-House Lawyer: Hannah, you raised the question of the extent to which Brexit will impact dispute resolution clauses. Presumably you and the other businesses in the room can give concrete answers to that, because you will have been asked by the business: ‘To what extent should we rely on London courts?’

Hannah Ogilvie, GE Capital: The discussion has mostly been focused on enforcement or confidentiality. Often, the trade-off with arbitration is that you have the cloak of confidentiality, which may be more important than getting a more certain judgment given the consistency of the English courts. I have not come across anything that suggests that English court judgments would not be enforced in the same way as now.

James Wood: But if it is a question of whether businesses trust the courts, the answer you give the business is going to be largely a self-fulfilling prophecy.

Hannah Ogilvie: Brexit has created a perception of us being very inward looking. Perhaps Brexit creates a lot of opportunities, as we have discussed, but equally, if individuals do not want to be located in this jurisdiction, that may create opportunities elsewhere that rival our offering, perhaps not in lawyer circles but for commercial operations considering start-ups or innovations.

Ken Beale: I have not heard much of a concern that this is going to have a material impact on the enforceability of English judgments.

Matt Getz, Boies Schiller Flexner: It is one of this government’s stated aims to ensure enforceability stays as easy after Brexit – that we replicate Brussels regulation, or Lugano if necessary. That seems one of the easier ways to continue the same system. The panic might arise if, come early 2019, it looks like that is not going to happen.

“The UK delivers certainty, trust and sophistication that European jurisdictions cannot match.” Natasha Harrison, Boies Schiller Flexner
“The UK delivers certainty, trust and sophistication that European jurisdictions cannot match.”
Natasha Harrison, Boies Schiller Flexner
Alex Novarese: Does Brexit have any impact on practitioners in terms of litigation tactics or risk strategies?

Gaby Dosanjh-Pahil: One of the questions I have had as we have been talking is whether there will be more issues around jurisdiction.

Abhijit Mukhopadhyay: We have started putting in a clause that if, because of Brexit, the commercial stuff suddenly goes away, the parties will sit together and decide whether to continue with the agreement.

Will London remain the hub? As a business we are waiting to see what kind of deals come out. In the past six to seven months, many companies have stopped investing in London. There are 800 Indian companies operating in London and they have all stopped fresh investment. I would love London to remain the hub of global activities, but if the business moves to other jurisdictions, companies will opt for their laws rather than English law.

Alex Novarese: Let us assume a messy Brexit, how much would that impact existing clauses?

Natasha Harrison: If they are written to English law and subject to the jurisdiction of the English courts, they will stand, and likewise if they are written to arbitration. The challenge will come if I get a judgment from our lovely Financial List and want to enforce it in Germany.

Alex Novarese: I was thinking of act-of-God-type clauses or material adverse-change clauses.

Gaby Dosanjh-Pahil: It would probably come down to the drafting. You would have to revamp all your contracts if there was a messy Brexit. What would happen in cartel-type cases?

Claire Drury-Axford: And what is going to happen if, from a financial services perspective, under your permissioning you can no longer provide the service but you are mid-contract? That is going to be the real challenge.

Natasha Harrison: What are corporates and financial services companies doing? Are you all reviewing your contracts to see where you are at risk?

Claire Drury-Axford: There is a lot of waiting to see how it plays out. We are sat there thinking about what our permissions will look like and whether that means moving jurisdiction. A number of the banks have expressed wishes to other European jurisdictions. Dublin is going to do very well. But who will then supply the service? It is not necessarily going to be the same entity. That is concerning.

Mr Justice Knowles: We can look at this within the four corners of Europe. If we are not careful, that is where we rest our perspective. I was in China a couple of weeks ago. The gist of their message was: ‘What are you worried about? The world needs English law and dispute resolution.’ One thing that worries me on the legal side is the danger we lose our confidence. If we do not, we will be in a place where we can show leadership on ways of solving these problems.

DAndy_Tyler_Photography_Legal_Business_Roundtable_08.02
“If Brexit leads to a greater concern with the user experience in UK courts then that could be a silver lining.” Tom Spender, Lloyds Bank
Abhijit Mukhopadhyay: As a business we see immigration becoming a hot issue. We have our global headquarters here. When we ask youngsters: ‘Why don’t you come here?’ they say: ‘No, we’re not interested.’ They would rather go to Australia, New Zealand or even Singapore. The perception is now very negative.

Gaby Dosanjh-Pahil: It is going to be a big task to decouple from EU regulation. It is in everything.

Matt Getz: There are areas where we might be more regulated. Take data protection. So far, the UK, subject to one regulator, has not followed data protection in the same way as everywhere else in the EU. After Brexit, any company in the UK that deals with people in the EU will have to ensure they are in line with EU data protection rules.

David Sugden: Hannah, you mentioned using arbitration for confidentiality. The world has changed so much. I saw a case where everyone on our side assumed there was a cloak of confidentiality in arbitration, but the result was leaked to the media two days before it was announced. If you do not prepare for that kind of stuff, you are way behind the curve. In the US, the OJ Simpson trial 20-odd years ago was the first real case that was definitely dictated to by factors outside the courtroom. That was exceptional. Now, in the UK, almost every day you see factors being played out in the court of public opinion.

Alex Novarese: Because of the internet?

David Sugden: You have public courts, so you can attend court far more often now than you could previously. You can use media to maximise your case. You have accessibility to a president that you previously did not have. He can move stock prices overnight.

Claire Drury-Axford: I was a criminal practitioner in various different roles before moving in-house. I was involved in the Michael Stone retrial – an awful murder case. One of the arguments we ran against the retrial was: ‘This man can’t have a fair trial because it’s been played out in the press.’ The Court of Appeal said: ‘Of course, he can. He can have it in Nottingham.’ They thought it was far enough from Maidstone. Perhaps that many years ago the impact was more limited, but now, with everything played out to the nth degree, debates on social media that are picked up by radio stations and fake news, it is really problematic for businesses. Look at the Standard Chartered case. After the filings started, the share price did not pick up until they had settled. The hysteria had a much greater impact than the actual case.

David Sugden: Previously, social media was the champion of democracy. Now, there is definitely a growing distrust of social media as a perpetuator of fake news.

Matt Getz: On a lighter note, social media can make it a lot easier to find out more about potential opponents in litigation. Investigative firms all have groups of people who are expert at going through Facebook, Twitter, Instagram and Snapchat.

Mr Justice Knowles: Does this not mean that it is more important than ever that there is a reliable piece of the jigsaw? Imagine you could not even count on the absolute core that there would be an expert decision on the case.

Alex Novarese: Is there not a problem that the legal profession is very good at talking to itself but not to policymakers? The English legal profession is a world leader, but does a singularly bad job at lobbying.

Mr Justice Knowles: That is part of the opportunity. The judiciary is a little more open to listening than it was. And the profession – having been forced to in some areas by things like Brexit – is more prepared to realise that it has to explain itself to the government.

I wish there was a greater connection between the law and the public. If the public understood the law more, the law would feel more equipped both to assess how the public felt about all this change and to recognise that within that change we have something that, for all its faults, is very reassuring.

Alex Novarese: The legal industry is bigger than the accountancy market, yet the highly-consolidated accountancy sector is a very powerful lobby, although it cannot go more than two weeks without being in some scandal.

Natasha Harrison: There are different bodies. You have the Financial Markets Law Committee…

Alex Novarese: These are all technical committees. I had someone from the Ministry of Justice ring me up once and boast about how none of them knew or cared anything about commercial law.

Natasha Harrison: The committees?

Alex Novarese: No, he thought he was some right-hand man to [former justice secretary Michael] Gove for the ten minutes Gove was in there. Lawyers should think bigger. We have a massively under-funded court system.

Natasha Harrison: You would lobby, for example, for maintaining reciprocal enforcement of judgments post Brexit.

Alex Novarese: Yes, and investing in the courts. Why is the government always trying to charge more for using the commercial courts when they generate plenty of tax already?

Simon Cuerden, Deloitte: I am not sure how much we do genuinely lobby. The Big Four are much more acutely aware of a red-top headline than lawyers.

Alex Novarese: Are we not in a ludicrous situation where the commercial courts are generating hundreds of millions of pounds of earnings, but that message does not get through at all? There is a point where you cut £1 in spending and take out £10 of tax. Linklaters generated £500m of tax last year globally on revenue of £1.5bn. What did Facebook pay?

Mr Justice Knowles: It is billions [contributed by the legal profession] and it helps anchor the insurance sector, the finance sector and the technology sector.

Claire Drury-Axford: But the headline would be about the fat-cat lawyers.

Alex Novarese: But nobody bothers to change that headline. Other industries do not sit around talking themselves down.

Mr Justice Knowles: Here is a world-class asset. The rest of the world keeps telling us about it. It would be nice to hear that.

Matt Getz: There is a larger narrative. We are not in manufacturing, which is seen as good, honest business. That is a long-term narrative that we just have to accept.

Natasha Harrison: Alex’s point is that we should be more proactive and should be educating and lobbying. You are right that we are not a coherent body. The judiciary is doing a great job getting out there, you get the odd committee lobbying, but we do not do it in a coherent or necessarily persuasive way.

Alex Novarese: Yes, equivalent industries that Britain punches above its weight in – pharma, bits of the entertainment industry and accountancy – get a lot more influence with policymakers.

Claire Drury-Axford: The difference between the Bar councils in the UK and the US is huge.

Mr Justice Knowles: If ever there was a time for it, it is now. The time really is now. I may not be able to say it, but Alex, your spur to exertion is very timely.

Alex Novarese: Are there final things that people want to address?

Simon Cuerden: Do you think other jurisdictions might try to take advantage of the cost of disclosure in the English courts?

Natasha Harrison: Ah, but we have a working group, which has come up with new proposals.

Mr Justice Knowles: I have the pleasure of being on it. You only have to look ten, 20 or 30 years back to find a convincing body of opinion that one of the reasons for choosing English litigation was disclosure. Obviously, since then, IT has produced challenges on scales we have never seen. We are also at that moment when technology has not done its second thing, which is to help us cost-effectively solve the problem it generated. We have some very clunky and expensive predictive coding, all of which will improve over time, like with brick mobile phones becoming iPhones. The crucial thing is not to lose our nerve and throw disclosure out, and also not to say that we cannot do anything about it and expect clients to wait. Hence this work on disclosure to produce a pilot across the business and property courts.

EAndy_Tyler_Photography_Legal_Business_Roundtable_08.02
“If we leave it unreformed, we could strangle disclosure altogether.” Mr Justice Knowles, Queen’s Bench Division
Alex Novarese: This is having different channels for different cases, is it not?

Mr Justice Knowles: It is. It gives an opportunity to come at disclosure in a thoughtful way.

Alex Novarese: I thought it was a no-brainer, but some litigators sent us angry emails.

Mr Justice Knowles: I hope the new model gives us all an opportunity to make disclosure work better. Alex, you have had negative views expressed to you and so have I. There are also very positive views, but what is not to like about this new rule? It enables people to propose what they think works for the case and there will be an independent decision from a participating judge.

Alex Novarese: It is surely worth a try. We cannot just keep having more and more documents turn up.

Mr Justice Knowles: We cannot. If we left it, in the end it could strangle disclosure altogether.

Hannah Ogilvie: One footnote from me. There is a lot of politics informing what is happening with the US judiciary and differing opinions about the appointments that are being made, noting those judicial appointments will have an impact over a very long period of time. Perhaps that could work in favour of the London courts (when considering a choice between London or New York jurisdiction clauses), depending on the outlook of those negotiating contracts.

Ken Beale: In the aftermath of Brexit there was a sense in the US that it might be a great opportunity for New York courts to steal business from England. Then Trump happened and you have seen what has happened with judicial nominations. There is a serious concern about the quality and ideology of the judges filling federal court positions, where the high-ticket-value disputes are heard. That is a potential opportunity [for London].

Alex Novarese: Do people think the talent is still going to the Bench in this country?

Natasha Harrison: Yes. We have just had [South Square QC Antony] Zacaroli go up. He is absolutely outstanding. We have this conversation every year: ‘The conditions are terrible, the pensions are appalling, the pay is dreadful… Will we attract?’ We had Snowden a couple of years ago, as well as Justice Knowles, and Zacaroli is one of the leading practitioners of his generation. That is a huge coup.

Alex Novarese: Final thoughts on what London needs to do to stay relevant as a top-class disputes centre?

Gaby Dosanjh-Pahil: Continue the work on disclosure. Costs are always relevant. We need to work smarter and more innovatively.

Abhijit Mukhopadhyay: Get a good Brexit deal and London will remain as it is now.

Natasha Harrison: I like Robin’s mantra: confident but not arrogant. We have a lot to offer, but we must not be arrogant or complacent – we must constantly evolve.

Alex Novarese: Thank you, everybody, for your insights.

alex.novarese@legalease.co.uk

The panellists
Simon Cuerden Disputes and investigations partner, Deloitte
Gaby Dosanjh-Pahil Head of dispute resolution, SSE
Claire Drury-Axford Senior vice president – legal counsel, litigation, investigations and enforcement, Barclays
Sara Hall Managing director, Deutsche Bank
Mr Justice Knowles Queen’s Bench Division
Paul Laffan Head of anti-money laundering, UK, State Street
Abhijit Mukhopadhyay President and general counsel, Hinduja Group
Hannah Ogilvie Senior litigation counsel, Europe, GE Capital
Stuart Reid Legal counsel, Worldpay
Tom Spender General counsel – group litigation, regulatory and competition, Lloyds Banking Group
David Sugden Head of litigation and legal affairs, Edelman

Ken Beale Partner, Boies Schiller Flexner
Matt Getz Partner, Boies Schiller Flexner
Natasha Harrison London managing partner, Boies Schiller Flexner
Dominic Roughton Partner, Boies Schiller Flexner
Alex Novarese Editor-in-chief, The In-House Lawyer
James Wood Research editor, The In-House Lawyer

The global M&A market is booming. Bill Mordan, general counsel at FTSE 100 drug-maker Shire, would know. Shire’s board recently recommended a £46bn takeover offer from rival Japanese pharma giant Takeda. Continue reading “Big deals”

You may not have heard the term ‘gamification’, but the chances are you have experienced a form of it. Perhaps you’re an executive in a FTSE 500 company with a generous bonus triggered when your performance meets certain conditions. You could be a corporate client, flicking through the ranked lawyers in The Legal 500, preparing to draw up a shortlist for your next deal. In each case, you would be responding to an element of gameplay dynamics, subtly influencing your judgement, or motivating particular choices.
gameifaction-board-game

Gamification is a way of codifying these dynamics into a system designed to incentivise desired behaviours or, put simply, injecting game design into non-game fields to make them more fun.

As humans, we all enjoy games. But Yu-kai Chou, a gamification pioneer, loves them more than most. ‘I was a very heavy gamer. I would devote thousands of hours to master a game. But eventually you have to stop playing one game and move to another, and that’s when I felt extremely empty – I felt that all these thousands of hours were lost and there was nothing there,’ says Chou.

‘I started to think: is there a game that everyone is playing, but the more hours you spend on it, the better your real life is? That started me on this pretty obsessive journey of saying “Hey, there doesn’t have to be a divide between work and play, between the things you have to do and the things you want to do.”’

Chou became one of the earliest proponents of gamification back in the early 2000s. Now a specialist in the gamification space and a consultant to progressive corporates like Google, Lego and eBay, Chou has set out to design systems and solutions that can benefit business. All they need to do, he says, is unpack what makes games fun, then reproduce those elements where engagement is lacking.

What makes a good game?
Chou’s thinking isn’t restricted to computer games. A game might not even look like a game – a poster on the wall could be gamified. But rather than simply picking out game elements (like competition, points or badges) Chou believes it’s more instructive to understand why games appeal to us in the first place. He identified eight ‘core drives’ behind human behaviour and built a gamification framework around them, called Octalysis.

‘Some people call it behavioural engineering, but it is a more scientific methodology. The core drivers are the fundamentals of gamification because they are how the brain works. If there are none of the eight core drives there, then there is zero motivation – no behaviour happens.’

Chou’s ‘human-focused’ (as opposed to function-focused) design optimises game design by understanding that people have reasons why they don’t want to do something before considering solutions. His Octalysis framework therefore groups the drives, and offers a structured analysis of when and why they might be best employed.

‘White hat’ core drives – for example: meaning, accomplishment, empowerment, ownership – make people feel good, powerful and in control, but there’s no sense of urgency. Users intend to do something, but they tend to do more of a cost-benefit analysis first because they’re fully in charge.

‘Black hat’ core drives – for example: social pressure or avoiding a penalty – make people feel urgent, obsessed and addicted, but in the long run will leave a bad taste in their mouths.

‘White-hat core drives are more useful for long-term engagement – employee loyalty, committee management,’ notes Chou.

‘Black hat core drives are for more short-term activity – closing a deal or a three-week competition within the workforce. In that period, everyone is pumped and motivated, but if it was a year-long event, then people get burned out.’

Similarly, there are ‘extrinsic’ versus ‘intrinsic’ core drives. In the former, a desired behaviour has a reward attached, driving fast results as people pursue the prize. But once the reward is achieved, they lose motivation. In the latter, the activity itself is enjoyable, and therefore is its own reward. The results might take longer to arrive, but they are self-perpetuating. According to Chou, a good piece of game design will build several core drives into the system to create balance.

Gaming the law
Most lawyers would not characterise their working day as saving the world. But some believe that gamification is about to hit legal services in a material way. In the past year alone, Chou has been invited to present at three of the five biggest legal conferences in the UK. And in the US, law firm consultant David Freeman has sensed a similar movement.

‘I did a small survey earlier this year and it’s happening. One firm was using it in teaching substantive legal skills, for another it was improving time entry, others used it for business development skills, another firm used it to try to identify emerging or overlooked opportunities.’

Freeman has worked with Chou to build a cloud-based system encouraging law firm fee-earners to cross-sell to clients the services of other practice areas within their firm – currently a largely untracked process. Lawyers can sign in and identify specific clients that they would like to give to other lawyers in the firm, or opportunities they would like to receive. They are prompted to go through steps in the process, and the system can send automatic reminders, as well as offer automated guidance and coaching. The system is gamified by allowing users to track their progress and rank themselves against other users, while the firm itself is able to view statistics and manage the process.

‘Lawyers are very difficult people to tell what to do. There are things that, if they are too game-y, lawyers can resist it right off the bat, so they still have to have a certain element of professionalism. There’s a real art form in that,’ says Freeman.

For some system designers that art could come in the form of another of Chou’s behavioural insights, that of ‘implicit’ gaming: if you have a group of people who might refuse to play a game, don’t tell them it’s a game. Implicit gamification could look, for example, like a customer management system, but with a live interface of game elements that nudge different behaviours, like performance tracking, scoring, or a leader board.

‘Even if lawyers resist a mandate from the firm to do it, there’s another part of them that likes to see how they are ranked against others – and if they’re not ranking well, they do not want to be embarrassed. As well as any extrinsic rewards the firm may offer there are intrinsic rewards like the feeling of mastery, of becoming a master of the art of cross-serving your clients,’ Freeman reckons.

Tactics
If gamification pits our unconscious against our conscious to trick us into having fun, the flip side is that a user’s performance could be used against them – which some find insidious. But argues legal services consultant and gamification practitioner Michael Bommarito, it’s the opposite.

‘There are many ways we can incentivise behaviour in an opaque way, which potentially can result in unfair decisions. One of the blessings and curses of games is that they make all of that open. Scores are open, peers are visible, and so there’s an element of public shaming that’s not always easy to deal with. That requires some kind of change management or cultural question and answer internally in an organisation,’ says Bommarito.

‘But we should be honest with ourselves – that kind of reward and shaming happens anyway. The only difference here is we are being open about that dynamic, and giving people the opportunity to see the reality and to improve.’

One of the flagship products developed by Bommarito’s consultancy, LexPredict, is LexSemble, a software platform used with inside and outside counsel. Fundamentally, LexSemble is a knowledge management system built upon data that has been crowdsourced from within an organisation, which is then used to provide insights and forecasts to the business. LexSemble does this by sorting the crowd-sourced data, such as opinions from within the business, and using it to create predictions and present conclusions. Over time, the accuracy of these predictions is fed back into the system, allowing it to adapt accordingly – for example, by learning which of an organisation’s experts has the most predictive value in a given area.

Through his work with LexPredict, Bommarito has found that law firms can be reticent when it comes to applying gamification – but that does not mean that there is not a form of Chou’s ‘implicit’ technique being employed. ‘We may not use the word during our consulting engagements, but it is what we are doing. If you really want to do it, you can hide it in plain sight,’ says Bommarito. ‘But everyone is better off if we are just transparent about what we’re doing. If it is rule-based, then let’s just write down the rules and score the rules and show the score.’

Gaming culture
Ultimately, the decisive factor for whether to go ahead with gamification is understanding your company culture – and gauging whether it is conducive to the approach.

The tagline on the website of French drinks manufacturer Pernod Ricard is ‘Créateurs de convivialité’, which directly translates to ‘creators of conviviality’. But conviviality and compliance training are not natural bedfellows, and so, after hearing of the success that their colleagues in marketing were having with a gamified training tool, general counsel Ian FitzSimons and the legal team at Pernod Ricard decided to give it a try.

The team worked with an external company to design a ‘MOOC’ (Massive Open Online Course) to teach users about compliance, incorporating gamification elements such as competition, badges, and levelling up. A few years on, the MOOC is still in use, and about to re-launch to take account of developments in French compliance law.

The MOOC has improved engagement in compliance training at Pernod Ricard, but legal counsel in the company’s local markets are empowered to use their discretion to provide additional training using the method of their choosing (including traditional, face-to-face instruction) as well.

‘What we have to be careful about in any company is just too many online courses – whether it is with gamification or not – and suddenly every department is doing it. At some point, people are just overwhelmed at the amount of online training,’ says FitzSimons.

‘You have to keep this sort of thing relatively short and sweet. And you have to be selective about what level of training you want to target through gamification and what you are going to do via other means. Let’s face it, if you are talking about Millennials, the level of gamification is mildly interesting in comparison to the games they’re used to playing!’

FitzSimons adds that, in introducing gamification to Pernod Ricard’s compliance training, there have been lessons along the way.

‘We should have made it compulsory and I think we should have made more of a big show when we launched. Timing the launch is important, and how you launch – we made a film to go with it, but it has to be something that brings people in. The timing of the year can also be extremely important – within a company which is cyclical in its business, you have to think about things like that.’

Switching Off
Any process overlay runs the risk of creating alienation if it is not designed sensitively, particularly when progress is being tracked and monitored. In an echo of Chou’s white hat/black hat drives, Bommarito warns of potential adverse psychological effects, particularly in large organisations.

‘It can feel somewhat draconian or Orwellian. There’s a fine line between making your lawyers feel like they work in a call centre and making them feel like they have positive incentives and are part of a group with some social benefits,’ says Bommarito.

‘You want there to be positive incentives and positive reinforcement as much as possible, so these are goals that people strive for, and not things that they are penalised for. There is definitely communication challenges and framing challenges.’

Where it has been implemented properly, gamification has shown the potential to become a novel addition to the legal services toolkit: both as a way of overcoming reluctance to complete the boring routine elements of the in-house lawyer’s job, but also as a way to galvanise service providers. As Chou points out, and as forms a central part of the gamification ethos, understanding how to engage the brain is the foundation to driving human motivation – and ultimately securing a more productive legal team.

catherine.wycherley@legalease.co.uk

Gamification at Pernod Ricard
General counsel Ian FitzSimons describes the company’s online compliance training
‘We work with insurance companies who have panels of outside counsel firms. In the past, a panel of outside counsel firms might exist in a vacuum; they kind of know who their peers on a panel are, but they’re not measured in a way that is made public to them. We do work that changes that.

The panel might have a leaderboard, and all the firms on the panel might have a certain number of points. That could be at the resource level, like the associates or the partners working there, or it could be at the firm level. They might have a score or points assigned based on, let’s say, average time to respond to a call from a client.

The end result is a different experience for the insurance company when their outside counsel firms become aware that, let’s say, “Firm B tends to respond quicker than we do when the client reaches out.” They might start to think along the lines of “Is that something we’re ok with?” Maybe: “We are more thoughtful with our responses”, or maybe: “I need to have a chat with our associates to make sure they’re paying attention to email or phone calls.”

You can say: “This firm responds twice as fast. In a PR issue, or maybe a data breach like Equifax, which firm am I going to pick in an emergency? I’m probably going to pick the firm that’s going to help me get started on this most quickly.”

When you expose this information to the firms, it helps a little. But when you structure that information within a game or an incentive structure, all of a sudden, you start to improve behaviour in ways that are open and transparent.

There’s usually an incumbent owner of the work, and they generally dislike any change. But there are those challenger firms, the second or third firm, often with a younger partner who’s looking to earn a bigger book of business, and they might even be proponents of some of these changes, because they see that it’s an opportunity to overturn the incumbent.’