Articles Posted in Non-Law Firm Costs

Here’s a real corker. The NY Times, March 4, 2007 at BU 2, opened this one up. UST, which makes smokeless tobacco products as well as wine, disclosed in a regulatory filing that it provided its general counsel, Richard A. Kohlberger, a $4,764 allowance “specifically for buying wine.”

New disclosure rules on perks – anything above $10,000 must be made public – prompted the formerly named United States Tobacco to tell shareholders about the allowance. The award gives new meaning to fully-loaded costs. Ignoring that tasteless pun, it may prove fascinating to see what other kinds of product discounts, gifts in kind, or targeted allowances companies bestow on their general counsel.

Meanwhile, at UST, In vino veritas.

Charles Volkert III, executive director of Robert Half Legal, cites in InsideCounsel, Feb. 2007 at 56, an example of a huge company that “hired 40 contract professionals for six months to review” discovery documents in concert with a law firm. Compared to what the firm would have charged, that decision saved the company more than $2 million. Volkert mentions later that on average “companies save 30 percent to 50 percent by using contract attorneys and paralegals instead of sending the same work to a law firm.”

I put those three statements through some rough math. Six months of work for 40 professionals is around 1,000 weeks of work, say 40,000 hours. I gave 10,000 hours to attorneys and 30,000 to paralegals. Using $200 as a rock-bottom associate hourly rate, Volkert’s average saving from a contract lawyer amounts to $60-$100 an hour; if law firm paralegals are at $90, then the savings from contract paralegals come to $45-63 an hour. Multiply the 10,000 attorney hours by $80 (close to the mid-range saving, which equals $.8 million) and the 30,000 paralegal hours by $50 ($1.5 million).

All those assumptions yield a savings of $2.3 million, which gives me more reason to believe the estimated savings of $2 million (See my post of Nov. 26, 2006 on contract employees and references cited.).

In the words of George Socha, a consultant who works with e-discovery systems, “Pfizer was the first company to hire a lawyer to build such a system from the ground up,” Corp. Counsel, Vol. 13, Dec. 2006 at 80. That’s a distinction!

And, note that the lawyer — Laura Kibbe, initially came to the attention of Pfizer through a secondment. Kaye Scholer loaned Kibbe to the pharmaceutical company in 2004 and it hired her in January 2005 (See my post of Sept. 21, 2005 on reserving the right to hire secondees.).

The third point is that Kibbe’s team “includes two other lawyers, two paralegals, two project managers, one technology manager, a senior operations manager, and various administrative assistants.” At nearly a dozen people, the discovery team is larger than most law departments and extraordinarily focused (See my post of Sept. 10, 2005 on specialist roles in law departments.).

In the summer of 2006, the Association of the Bar of the City of New York’s Committee on Professional and Judicial Ethics weighed in with a formal opinion on the ethics of overseas legal outsourcing. LegalEase Solutions distributed a summary of that opinion, http://www.nycbar.org/ which found the use of lawyers in India and other countries perfectly appropriate so long as a US lawyer adequately supervises the work.

Second, the law firm that uses offshore assistance has an obligation under certain circumstances to notify the client, obligations that do not limit law department lawyers at all: “[T]he hiring attorney does have a duty to disclose the outsourcing when non-lawyers will play a significant role in the matter, when client confidences are to be shared, when the client expects that only the law firm and its personnel will be working on the matter, or when non-lawyers are to be billed to clients on a basis other than cost.”

Having just written about surcharges on contract attorneys (See my post of Feb. 16, 2007 on up to 200% add-ons.), I paid attention to one other sentence. “In fact, absent a specific agreement with the client, a New York attorney should charge no more than the direct cost of the outsourcing and a reasonable allocation of direct overhead expenses from the outsourcing.”

When the expenses of a vendor such as a litigation support group or an expert witness are significant (greater than $5,000 perhaps), it is often advantageous for law firms and for law departments to have the vendor directly bill the law department.

Direct billing means the law firm does not have to carry the expense until the law department pays the bill and it gives the law department more direct insight and control over a major expense. Direct billing may also enable a law department to obtain discounts or special services from the vendor. It also makes it easier to enforce rules that certain national vendors be used by law firms (See my post of July 31, 2006 on national vendors selected by a law department.). Direct billing also clearly distinguishes the costs of various unbundled activities.

If a law department does not have a matter management system for tracking external spending, it may have to rely on the company’s accounting system – or systems (See my post of Sept. 14, 2005 about the attorney-client privilege and transfers of invoice information to accounts payable.). The vexations start when there are more than one accounting package that tracks legal spending by different business units. Companies can proliferate SAP-type systems when they acquire other companies and keep the legacy software (See my post of Sept. 10, 2005 on myths of matter management systems, #9.).

One company I worked with had at least seven different sources of information about payments to law firms. If law departments in companies hobbled like that have to pull together total spending figures, they pull their hair out while they pull the numbers out. Law firms have different vendor numbers, the accounting coding schemes vary, personnel have different levels of carefulness and completeness – in the end, directional correctness is the best you can achieve.

A proposal by the European Commission for a single Europe-wide community patent enforced by a central court in Luxembourg has been bogged down for years, but the Fin. Times, Nov. 8, 2006 at 6 points out some reasons why the initiative has gotten a fresh impetus. One is that “Patent proceedings in the English courts are usually relatively quick, but costs typically range around £1-£1.5m” ($1.9 million to $2.9 million at today’s conversion rate.). Experts have estimated that the cost of a medium-sized case under the proposed system could come down by two-thirds, to around £350,000.

Law department patent lawyers would applaud the greater efficiency of a single European court for patents and its cost-saving features (See my posts of May 1, 2005 on comparable patent litigation costs in the US six years ago — approximately $1.5; March 29, 2005 about that figure rising two years later to $2 million; and Nov.30, 2005 for more patent-litigation cost data and references.). Isn’t it odd, by the way, that the cost estimates of patent litigation in the US and in England match each other so closely – near the mid-$2 million mark?

The litigation group of Schering-Plough has begun to conduct early case assessments of its major disputes. “Within the first 60 days our outside counsel is charged with giving us an early assessment of the case. The firms are charged with looking at documents, interviewing witnesses, examining pleadings, preparing a damages analysis, and other steps as necessary. According to PD Villareal, the pharma company’s VP of Litigation and Conflicts Management, in an interview in Met. Corp. Counsel, Feb. 2006 at 47, 51, “in 60 days… you will know 80 percent of what you will ever know about a case.”

Villareal, who came from General Electric, believes that “most of the time, that knowledge is enough to make rational and intelligent decisions about resolving a case.”

A bold claim, it seems to me, and especially so if it is made regarding lawsuits that are deemed major. Still, even if overstated, the rationale and goals of ECA are admirable.

On Dec. 3, 2003 Associate Attorney General Robert D. McCallum remarked that at the Department of Justice, for every civil case taken to trial, about one hundred others are resolved before they go to trial. Many of those settled cases relied on some form of alternative dispute resolution.

To evaluate the effectiveness of its use of ADR programs, the DOJ surveyed Assistant United States Attorneys after they had used ADR, “examining almost one thousand cases over a four-year period.”

The study “found that ADR achieved settlements about two-thirds of the time it was used. Even in those cases when a settlement did not occur, about half the time our lawyers reported ADR was beneficial for other reasons, such as improving the relations between the parties.”

The incoming general counsel of Daimler-Chrysler AG, Gerd Becht, intends to scrutinize the approximately 240 lawyers who will report to him from the United States and Germany. According to Corp. Counsel, Vol.14, Jan. 2007 at 49, “after Becht’s consolidation, the number [of lawyers] should drop to 200 by spring 2007.”

If I have done my sums correctly, Becht proposes to shrink the department’s lawyers by almost 20 percent. That will be an impressive feat of streamlining if it does not cause proportionate repercussions elsewhere: outside counsel cost increases or law department productivity decreases.