Companies pursue profits through plaintiff recovery lawsuits

Tactic can generate significant revenue, but pitfalls abound.

Any American with a job is familiar with one of the more unpleasant side effects of the economic slump’s aftermath: increased pressure from the boss. Facing bigger demands, extra responsibilities and fewer financial resources, employees at most companies are expected to do more with less while proving their worth.

Undoubtedly, in-house lawyers are confronting the same pressures. It is especially tricky to transform a corporate legal department from a cost center into a profit center. But some attorneys are rising to the challenge by exploring new litigation opportunities in which they play offense instead of defense.

Plaintiff recovery lawsuits are a growing approach among legal departments on a mission to generate revenue. For years, technology and pharmaceutical companies have favored these suits as a way to defend their intellectual property while making money from companies infringing on their patents. But inside counsel at companies in other industries are looking at how this aggressive litigation tactic can be a way to recoup money from insurers, suppliers and other companies with which they do business.

“It really runs counter to the standard in-house approach of risk aversion,” says Jason Kennedy, a shareholder at Segal McCambridge Singer & Mahoney. “It’s certainly a new frontier for a lot of inhouse departments to be pursuing.”

The cash-generating method has been successful for some companies, such as DuPont Co. and Ford Motor Co., which saw millions of dollars in earnings from recoveries over the past few years.

Victories in the plaintiff recovery arena also have an additional, nonfinancial benefit: street cred. “It gives the general counsel something more than just anecdotal to talk about with his senior management in terms of the contribution being made by the legal department,” says Rich Seleznov, managing director at Huron Legal.

Other corporate legal teams may be tempted to jump on the recoveries bandwagon in hopes of large payouts and a pat on the back for their departments. But experts say in-house lawyers must first be aware of the resources required for plaintiff recovery suits, as well as the risks involved.

Adding Up 

Law departments that have successfully implemented plaintiff recovery programs have taken a cue from companies that have excelled in the IP arena during the past decade.

Dykema Member Michael Stolarski previously worked in-house at Motorola as director of IP licensing. While in that position, he says the company generated billions of dollars by having lawyers dedicated to monetizing the company’s patent portfolios by getting revenues from infringers. Stolarski says it’s wise for other companies to be inspired by this strategy. “It’s good business sense, and companies that aren’t doing that should be,” he says.

Jerry Murphy, a partner at Crowell & Moring and member of its Plaintiff Recovery Group, says firms are seeing the potential. In the past three to five years, he has seen more companies create internal groups dedicated to searching for opportunities for plaintiff recovery actions.

In terms of earnings, successful suits can add up. According to the Wall Street Journal, DuPont earned between $16,000 and $185 million on each plaintiff recovery suit it filed last year. In sum, the company pulled in more than $450 million through 198 recovery suits in 2010. And in the first quarter of 2011, DuPont generated $3.6 million through recoveries.

“In a lot of these cases, there are tens of millions of dollars—sometimes hundreds of millions of dollars—at stake in the recovery action,” says Daniel Sasse, a Crowell & Moring partner and member of the firm’s Plaintiff Recovery Group.

Seleznov says that as a company gets more recoveries under its belt, the dollars can “offset a big piece of the overall legal budget.”

However, experts predict most budget-conscious companies that are new to this type of litigation will focus on smaller suits to preserve resources. “Most companies aren’t going to be looking for millions of dollars in recovery, but in areas where in the past it wasn’t a big deal to lose $20,000 here or there—that was the cost of doing business,” Kennedy says. “But now, companies want that money back.”

Ford, which also has made successful recoveries, told the Wall Street Journal that in the past two years, none of its recovery cases have been litigated. Experts say there are no statistics on the percentage of recovery cases that move on to litigation, so it isn’t clear whether Ford’s record is pure luck or a sign that defendants are quick to settle in such cases.

Taking a Gamble

There is always inherent risk in filing a lawsuit, and plaintiff recovery suits can present unique pitfalls to companies. The biggest danger is that such suits can destroy valuable relationships. After all, companies have reason to be hesitant to file a lawsuit against a major supplier or business partner that could possibly shut down their entire business. Nonetheless, some companies are adhering to the motto, “Desperate times call for desperate measures.”

“In the past, large companies didn’t really like to sue other large companies,” Seleznov says. “Maybe it’s a sign of our economic times, but it seems that the gentlemanly agreement has really begun to erode.” In any case, he notes, it’s in both parties’ best interest to avoid litigation. “If you can come up with a settlement and remove all the uncertainty of a jury decision or a judge’s ruling, both parties can be happy about that.”

Murphy says he has seen cases in which a recovery action has in some ways strengthened a business relationship. “Both sides have something the other wants, and they both have incentive to try to work it out,” he says, adding that sometimes, “instead of just a cash payment, there could be a business deal that would be cementing that relationship for years in the future.”

But if a company’s lawsuit catches a business partner off guard and stokes resentment, the outcome isn’t as rosy.

“If you engage in litigation or try to enforce arbitration agreements, you’re opening yourself up,” Kennedy says. “If you start initiating discovery on your opponent, they’re going to do it right back. What’s good for the goose is good for the gander.”

Additionally, executives and board members likely won’t be too pleased if they get unexpectedly deposed, which can distract from other important business missions and processes. “An in-house lawyer could find himself saying, ‘What seemed to be a good idea really wasn’t. I’ve got my CEO and CFO being deposed, and they want all these documents from us, and now I’m spending a ton of money, whereas I promised everyone we were going to make money,’” Kennedy says.

Handling Logistics

Experts suggest that legal departments make themselves aware of all the possible drawbacks to plaintiff recovery actions before deciding to embark on them. The first step in creating a recoveries focus center is to discuss the idea with management—especially the CFO, who should understand the financial incentives—and the board.

“It’s an obligation of management as much as it is the lawyers in the company to get together and coordinate this issue in some fashion,” Stolarski says. “Understand what the issues are. Pinpoint whether there are problems where the company isn’t realizing revenues.”

But recoveries actions could be a “tough sell” to a lot of companies, warns Kennedy. One way to get colleagues on board with the idea, aside from sharing DuPont’s and Ford’s success stories, is to outsource the project to outside law firms in order to preserve resources.

Seleznov says law firms increasingly are open to alternative fee arrangements for plaintiff recovery suits. “It’s common for these plaintiff cases to be handled in some form of contingency arrangement. Or, if not fully contingency, it would be with some deeply discounted rate,” he says.

However, Seleznov notes that outsourcing recovery efforts doesn’t mean the legal department takes a backseat in the matter. “They’ll still get updates and still be involved in progress,” he says, “but it may not take the internal resources that they would have to dedicate to a similarly sized defendant case.”

Sidebar: Crossing Borders

DuPont Co. has generated significant revenue from plaintiff recovery actions in the past few years, and it expects to win more cases as it expands its efforts abroad in China and Russia. In the past year, Ford Motor Co. also has expanded its recoveries program into Europe, China and India.

Crowell & Moring Partner Daniel Sasse says it is mostly American companies so far that have pursued international recovery efforts. “U.S. companies are used to rough-and-tumble litigation. They’re used to suing and it not being theend of a relationship,” he says. “When we talk with our Asian and European clients about doing this, they aren’t willing to pursue these suits nearly as often. They don’t view it as ‘business as usual.’”

However, Sasse says some foreign companies recently have expressed interest in plaintiff recovery suits, which could lead to interesting litigation within other countries. “We are just at the edge of starting to see that shift,” he says.

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