For years, legal departments have sought innovative ways to control the cost of litigation. The strategies run the gamut from using technology to automate processes, to bringing more work in-house, to negotiating fee reductions with preferred providers. But despite these efforts, companies continue to spend more than ever defending lawsuits. Data from a July 2013 study conducted by Michigan-based consulting firm Alix Partners shows that most companies are still struggling to control litigation spending.
In Alix Partners’ survey of general counsel at U.S. companies with annual revenues of $250 million or more, 51 percent of companies reported an increase in spending on litigation in the past year. More than one-third of legal executives say their companies have been involved in more commercial disputes than in years past, and 10 percent reported involvement in bet-the-company litigation in the past year.
Louis Dudney, managing director at Alix Partners and an author of the study, attributes the rising spending to a hangover from the financial crisis.
“Litigation and the threats associated with commercial disputes remain a critical issue facing companies and their executives today,” Dudney says. “While a number of these cases are the product of stricter regulations and the lingering effects of the financial crisis, companies have also been exposed to litigation arising from product liability and intellectual property issues as well as disputes that arise during M&A and other transactions. No matter their origin, commercial disputes can have far-reaching implications for companies and their long-term business objectives.”
But whatever the cause of companies’ rising litigation spending, general counsel and legal departments are looking for new ways to keep a lid on costs without sacrificing the quality of representation, especially in high-stakes matters.
One key feature of any strategy to control litigation spending is to avoid a cookie-cutter approach. Different types of matters require different types of representation and different fees. While a fixed flat-fee arrangement may be a tenable approach to a low-stakes discrimination suit filed by a single plaintiff, a large intellectual property dispute that puts the company’s core product at risk requires a different fee structure and strategy.
“A lot of in-house counsel have a habit of simply going to the same firm that they’re comfortable with,” says Ted Colquett, a partner at Wilson & Berryhill, who has lectured on the topic of litigation cost control. “You have to match the firm with the task.”
For instance, if a dispute arises in a particular venue that the company’s usual firm is not familiar with, a company can achieve savings by hiring a local firm that will not have to expend time and money familiarizing itself with the local rules or basic questions of state law peculiar to that venue. Likewise, hiring a firm with experience similar to the case the company is facing will cut down on time spent getting up to speed on the relevant legal issues.
Companies need to ensure that counsel they hire match their firm’s activities to the desired outcomes in the case. If the company’s goal is an early settlement, extensive discovery may not be necessary to achieve that goal.
“Deconstruct the tasks that go into the litigation,” Colquett says. “Many attorneys have a boilerplate approach and think they need a certain amount of information before they can talk about resolution. But you need to ask whether each of those tasks ultimately serves the company’s desired outcome.”
Alternative Fee Structures
During the past several years, companies have put significant emphasis on reducing litigation spending by negotiating alternative billing arrangements with their outside lawyers. While flat-fee arrangements were once all the rage, they have now yielded to a more nuanced approach to alternative fee arrangements.
“Flat fees spur a race to the bottom and can lead to disastrous results,” Colquett says. “Firms working on a flat fee have no incentive to do anything other the least amount of work possible.”
Today companies are turning to more detailed budgets and setting flat fees for certain tasks. For instance, companies are budgeting for stages of the case handling initial disclosures, conducting document review, negotiating a settlement or conducting a trial—rather than setting a single fee for a whole matter. Many companies are saving money by using sub-budgets with built-in bonuses that compensate the outside firm based on the stage at which the matter is resolved.
Turning the Tables
When a corporation is going to be going on the offensive and filing a lawsuit rather than defending one, the analysis changes. While defendants often benefit from slowing down the litigation process and avoiding the day of reckoning, plaintiffs’ main goal is to resolve the case quickly and get paid the money it thinks it is owed.
“Defendants rationally may seek to turn lawsuits into wars of attrition and may eschew all processes that could lead to an early negotiated resolution,” says Stephen Weisbrod, a partner at Weisbrod Matteis & Copley. “Very few plaintiffs benefit from lengthening the litigation process, and most plaintiffs would be quite content to settle early on reasonable terms.”
Weisbrod advises that fees for plaintiff-side representation should be structured to reward both speed and success, and he suggests that companies take a page from a plaintiffs’ lawyer’s handbook to better align the companies’ interests with their counsels’ compensation. Companies going on the offensive can negotiate contingent fee arrangements in which counsel are paid a percentage of what they recover in the case. Other plaintiff-side cases, particularly those where a lot of money is at stake, may call for a blended approach with some hourly compensation plus a contingent bonus component hinging on a successful outcome. These arrangements incentivize counsel to resolve the case as quickly as possible and reduce the out-of-pocket expenses they incur.
“Some companies simply lack the resources needed to pay competent counsel to handle a complex plaintiff-side case,” Weisbrod points out. “In such situations, alternative fee arrangements may be the only means of recovering a loss.”