Articles Posted in Non-Law Firm Costs

This stunning estimate comes from eLawForum; even more dramatic, the article notes that $210 billion is one-third of the after-tax profits of the Fortune 500. The article in Met. Corp. Counsel, Vol. 16, Feb. 2008 at 28, explains that the estimate includes defense costs – certainly outside counsel but possibly also the costs of inside counsel and clients – as well as liability costs – settlements and judgments. The data set includes total litigation costs for more than 20,000 cases in twenty practice areas so the $210 billion figure must be an extrapolation.

What the right number is has not been decided. Others have estimated the size of the legal industry in the United States, pronouncing figures such as $200 billion (See my post of Nov. 27, 2007; but see my post of Jan. 18, 2008 and its rationale for $200 billion on outside counsel from only the Fortune 500.). According to the Economist, Dec. 17, 2005 at 57, “about $250 billion is spent on legal services world-wide, about two-thirds of it in America.” That means about $165 billion in the US for all legal services, but query whether that estimate includes the costs of inside lawyers (See my post of Jan. 10, 2006: the citation.).

Other estimates of the costs of US litigation vary widely (See my posts of July 16, 2005: “of the $260 billion spent in 1999 on litigation, over $20 billion was spent on support services that include processing, delivering and filing legal documents.”; April 27, 2006: plaintiff contingency lawyers estimated to receive upwards of $22 billion in 2003.).

A fascinating article by the President of eLawForum, John Henry, published in Met. Corp. Counsel, Vol. 16, Feb. 2008 at 28, draws on data from more than 20,000 cases. One conclusion is that US companies allow lawsuits to drag on too long, eating up costs. Earlier resolution would be much wiser (See my posts of Sept. 14, 2005: early case assessment (ECA) yields 20 percent cost savings; May 28, 2005: cycle time in federal civil court cases; Jan. 4, 2006: early case assessment spelled out; March 15, 2006: savings from ECA by DuPont; Jan. 15, 2006: Schering Plough and 80 percent known in 60 days; June 16, 2007: early case assessment and LexisNexis survey; July 27, 2007: alternative fee arrangements; Nov. 13, 2006: Eversheds pioneered ECA.).

Henry writes that “Fortune 500 corporations spend an average of three years to resolve litigation.” The accompanying chart shows a hockey-stick distribution of resolution times, with many cases resolved much faster but a few at the other end spiking up for years. It appears from the chart, however, that the median time to resolution might be closer to two years (See my two posts of Oct. 27, 2005 on data from Fulbright & Jaworski about “roughly half a year”; Dec. 10, 2005: cycle time reduction; and May 16, 2006: FMC reduces cycle time to less than 12 months.).

“Delaying resolution [of a lawsuit] spreads defense costs into next year’s budget. A case with a defense cost of $75,000 per year for three years actually looks better than a case resolved in one year with a $100,000 defense cost.” I don’t know which law departments John Henry, President of eLawForum , concluded this from, but that quote, published in Met. Corp. Counsel, Vol. 16, Feb. 2008 at 28, astounds me.

Senior management looks at the spending of a law department in a given year, but also over several years, because bulges in spending do not observe the calendar. Any general counsel who tried to game accounting by deliberately delaying payments into another year would soon be caught out. For example, a business unit that absorbs those costs would blow the whistle. More than that, the decision to game the system would be just plain wrong.

It is apparently common for a company accused of infringing another company’s trademark to survey shoppers in a mall, known as a “mall intercept.” A mall intercept commonly costs tens of thousands of dollars according to IP Law & Bus., Vol. 6, Feb. 2008 at 10. The article, however suggests a cost-saving strategy for law departments.

Have you or outside counsel find out about marketplace confusion between two brands by means of a preliminary survey on the Internet. Online market research sites, such as Vizu.com, can help post surveys and collect the responses for a fraction of the cost of a mall intercept. For other exotic ways to blow through your budget (See my post of Dec. 12, 2007: mock juries; Feb. 2, 2008: expert witnesses and references cited; and Feb. 20, 2006: extra expenditures on bone-crushing litigation.).

Practice areas have very different ratios of liability to defense cost, according to research by eLawForum. “In employment and asbestos litigation, the ratio is approximately one-to-one,” which means that for every dollar the defendant corporation pays in settlement [liability costs] it pays one dollar to a law firm representing it [defense costs]. Met. Corp. Counsel, Vol. 16, Feb. 2008 at 28, continues. “In commercial and environmental litigation, the ratio is three-to-one. In personal injury and product liability, four-to-one, and in medical malpractice as much as eight-to-one. For intellectual property, the ratio can be ten-to-one or more.”

Thus, patent lawsuits have much more at stake in terms of liability exposure relative to the outside-counsel costs of defense than any other kind of lawsuit. Legal fees rise as the amounts at issue rise, but the latter can soar immensely faster in some kinds of litigation.

Data on settlements and judgments is hard to come by (See my posts of May 30, 2005: a data lacunae; and Feb. 13, 2008: data from DuPont.).

A puzzle of metrics regarding DuPont’s legal spend now fits together. ACC Docket, Vol. 26, Jan./Feb. 2008 at 72, shows a chart prepared by DuPont that has three columns for each of the years 2002 through 2006. The columns depict DuPont spending on “settlements and judgments,” “outside costs,” and “recoveries.” The left axis, however, has no scale of dollars, so all you can tell from the height of the columns are relative ratios.

Ah, but hold on! Others have reported (Inside Litigation, Winter 2006 at 8) that DuPont’s legal department obtained recoveries of $108 million in 2004 and an additional $100 million plus by the fall of 2005. DuPont’s recovery efforts have been much publicized (See my posts of Feb. 6, 2006; Dec. 10, 2007: recoveries of class action settlements; and June 15, 2006 and references cited.). So, the column on recoveries for 2004 stands at $108 million.

Another piece of the puzzle comes from Corp. Counsel, Vol.15, Jan. 2008, at 111, which states that DuPont’s “legal team has an annual global legal budget of around $230 million.” If DuPont has a typical distribution of 60 percent of that spend going to outside counsel, it spends in the vicinity of $140 million a year. Applying the recovery numbers together with this outside cost estimate to the columns of the chart, it is clear that the axis on the left is marked in multiples of $50 million.

Having written post after post on total legal spending by companies and having tried to cover all the permutations of what can go into such figures, I began to wonder about total legal spending and the revenue of companies. Wondering some more, I formulated a number of reasons why that spend drops as revenue rises (See my post of Dec. 3, 2007 for early thoughts.).

My article on that topic appeared in Legal Times, Jan. 28, 2008 (go to the bottom for the PDF version). I welcome reader’s thoughts on the reasons.

A consultant’s article in Of Counsel, Vol. 27, Jan. 2008 at 8, argues that for several reasons law firms are facing a decline in litigation. Large firms are not referring cases, tort reform is reducing litigiousness, and “there seems to be unwillingness on the part of in-house counsel to go to trial on any but the most important matters.” That final observation has a whiff of the querulous, as if it is downright unfair that litigation managers in-house lack courage or intelligence. Real lawyers go to trial!

The consultant offers no qualitative support for his perception, such as fewer trials in the past year or two or any gauge of what trials are for “important matters.” Even taking the charge as true – a decline in the absolute number of major trials – sound and sensible reasons, not a failure of nerves or brains, better explain the alleged dropoff. The cost of a trial can reach seven figures (See my post of March 29, 2005 about patent lawsuits at $2 million for everything through trial; and May 20, 2005 on the acceleration of spending just before trials start.). Worse, the risks of a jury verdict can easily exceed that enormous amount. Law firms like trials because their coffers overflow; law departments dislike them because they are coffins, not coffers.

Law departments sometimes need to retain experts to testify on their behalf or to serve as fact experts. Fees of experts in major matters can reach into the hundreds of thousands of dollars.

I ran across a service that helps locate experts, Bench and Bar Experts, which inspired me to pull together the posts that I have written that concern experts ((See my post of May 17, 2006 on the expert witness industry and amounts paid them; April 23, 2007 on 16 resources to help find experts; Oct. 19, 2005 on patent expert witnesses and its reference to Exponent; March 20, 2007 on some superstar expert witnesses; May 21, 2006 on some questionable metrics about spending; March 20, 2007 on suspect data about disqualification motions; Jan. 20, 2006 and a fee audit’s findings; Jan. 10, 2006 and a bill auditor’s challenge to fees; and May 23, 2007 #2 on expert witnesses in international arbitrations.).

The received wisdom puts a typical in-house lawyer in the $200 per hour range, with all costs to the company accounted for. That may be a representative figure, but what if we look more closely at a high-ranking lawyer (See my post of July 25, 2007 for some data on general counsel rates.). Assume that senior lawyer makes $250,000 in base salary, a cash bonus of $75,000 (30% of base) and also bears a benefits load of 30 percent. That lawyer’s total comp and benefits cost reaches $400,000. At a presumed 1,850 chargeable hours (See my post of Sept. 25, 2005 on 1,850 as a normal assumption for in-house chargeable hours.), each hour costs $216 dollars.

That lawyer also should be allocated some of the overhead of the department’s expenses. Say the lawyer is one of 50, where the inside budget is then $25 million ($500,000 per lawyer). Since that inside budget is something like 25 percent non-compensation expenses, then the lawyer’s full-boat costs should add in another quarter to the $400,000, another $100,000, which pushes the rate up $54 an hour (See my post of July 27, 2007 on fully-loaded costs.).

Finally, the lawyers in a department who are direct reports to the general counsel probably have administrative responsibilities, so assume we shave 50 hours off the chargeable-hours assumption. [I suspect that is too small a number.] Then the fully-loaded cost per hour of our hypothetical senior lawyer ($500,000 divided by 1800 hours) reaches $278 an hour.