Articles Posted in Non-Law Firm Costs

A recent article has much to say about non-practicing entities (NPEs). I have cherry picked from it and quoted several paragraphs.

“Some 20 of the 300 or so known NPEs appear to account for roughly half of all NPE-related litigations, according to intelligence from Patent Freedom (www.patentfreedom.com). In 2008 alone, some 900 operating companies were sued by NPEs.” The article does not mention the number of cases filed (See my post of Sept. 13, 2011: 550 cases in 2010 but no reference to the number of defendants.).

“Some estimates put the amount of capital flowing into NPE models over the past eight years to be between $6 billion and $8 billion. And clearly one aggregator, Intellectual Ventures, has raised massive amounts (reportedly US$5 billion). Others, such as Altitude Capital, Acacia, Techquity and Fortress Investments, are said to have tens of millions of dollars at the ready for patent buys.”

“In 2010 alone, NPEs filed 550 [patent suits] at a total cost of $7 billion to the defendant companies, according to defensive patent aggregator RPX Corp.” The quote comes from Intellectual Prop., Fall 2011 at 25. Does that mean last year the defendants in those suits paid $7 billion in settlements or damages? Does the figure include amounts they paid law firms and vendors during the defense of those cases?

In the back of my mind, data produced by an obviously-interested party – RPX undoubtedly wants companies to worry about NPE litigation (trolls) and to turn to RPX as a savior – needs to pass a tougher legitimacy test than data produced by a more objective researcher. I searched the RPX website and found no mention of the metric, let alone its calculation.

A survey of US legal departments about electronic data discovery (EDD), conducted by ALM Legal Intelligence for T. Wade Welch & Associates, produced findings in a supplement to the September issue of Corporate Counsel. In a previous post I picked at the sample size, but nevertheless I want to point out the cost-saving strategies listed in a sidebar (at 5). I have quoted the strategies and how many of the 41 respondents selected it, then added a comment or two.

Established records retention policies (16) – you don’t have to discover it if you no longer store it, and see my post collection below

Tracked outside firms’ work and billing (13) – nothing new here

“For matters valued under $500,000, 71% of in-house counsel said they try to do as much EDD [electronic data discovery] as possible in-house.” This quote comes from research by ALM Legal Intelligence sponsored by T. Wade Welch & Associates, published in a supplement to the September issue of Corporate Counsel. ALM based this finding on 41 survey responses (35 in-house lawyers and 6 other roles, including 13 general counsel.).

Data is always welcome in the world of law department costs and operations, but you have to wonder if, based on this sample, this finding has much worth. Approximately half the law departments represented were in companies with less than $500 million in revenue, so their number of law suits, let alone the number of lawsuits that have significant value or burden of EDD, must be few.

The small, and possibly very unrepresentative, sample also diluted the value of the finding, but so does the finding itself. If 25 in-house lawyers (71% of 35) state that they try to do as much EDD within the company as possible, isn’t that likely what most people would say, because the “as possible” has such lack of objectivity? Perhaps one or two might say, “We have almost everything done externally.” Perhaps, but most people would say we do what we can inside and use external providers for the rest. By contrast, if the finding were that for smaller cases, “we do it all or virtually all inside,” that would be much more potent.

Having just put up two posts – yesterday and today – with 29 costs that some legal departments bear (or might bear), I wanted to compile my most recent writings on internal legal department budgets. Internal budgets figure in other posts, but not necessarily specific expenses (See my post of Jan. 2, 2009: advantages of zero-based budgets; Jan. 4, 2009: multiple cost centers for some departments; Jan. 21, 2009: JDS Uniphase elaborate operating plan; March 29, 2009: five steps toward realistic internal budgets; May 6, 2009: “budget” compared to “forecast”; Aug. 10, 2009: operating costs of law departments compared to law firms; Aug. 11, 2009: four methods of budgeting; Feb. 19, 2010: DuPont’s double budgets; and Sept. 30, 2010: interplay between benchmarks and budgets.).

Many posts address unusual expenditures and I listed them in the two previous posts (See my post of Oct. 11, 2008: legal budgets should not include purchases of fakes; Dec. 7, 2008: perhaps for reimbursement of flights on the corporate jet; Dec. 26, 2008 #2: charitable gift matches not included in law department budgets; Jan. 23, 2009: personal concierge and childcare at reduced rates; Jan. 15, 2009: local units provide support; Oct. 11, 2009: some tasks and costs handled by HR and not charged to legal; April 20, 2011: metapost on capitalized expenses; Jan. 12, 2011: Arizona to Nevada weekly commute; Sept. 12, 2010: what budget should include compliance expenditures; May 8, 2011: frustration of responsibility for costs but no control over internal investigations; Jan. 18, 2011: GlaxoSmithkline lawyer’s defense paid for; Dec. 23, 2008: administrators lack budgets, except some for facilities; Jan. 29, 2009: rental costs imputed; and Feb. 25, 2009: data of $17,000 per year per lawyer for facilities costs; Jan. 20, 2009: lawyers supervise staff outside the legal department; Sept. 12, 2010: speculations on SEC filing costs; May 4, 2009 #3: BEA termination packages; May 12, 2009: HP arrangements for those let go; and June 7, 2010: departing Schering-Plough GC got $12 million.).

The first 15 items of expense I covered in my post yesterday (See my post of Sept. 6, 2011: unusual expenses sometimes in legal department budgets.). Here are the final 14.

1. Independent investigations (See my post of May 8, 2011: frustration of responsibility for costs but no control.).

2. Insured costs or premiums for insurance (See my post of Oct. 31, 2007: various kinds of litigation insurance.).

First 15 of various expenditures irregularly (or rarely) included in legal department budgets

Budgets of legal departments include many costs as a matter of course, such as salaries, cash bonuses, retreats and conferences, Continuing Legal Education, subscriptions, and a range of other common out-of-pocket disbursements. Even with that broad commonality, many expenses hit the budget of general counsel only irregularly, if at all. This post covers 15 of them; a later post will complete the list of 29.

1. Aircraft fees (See my post of Dec. 7, 2008: perhaps for reimbursement of flights on the corporate jet.).

Law departments mostly know their own costs in disputes, and some even know how much time their members spend on different matters. Rarely, if ever, does a company, let alone a law department, know how much employees outside the law department invest in legal affairs. My most recent Morrison on Metrics column, for InsideCounsel, came out on Aug. 29, 2011, and recognizes this darkness. Here is the article’s URL.

“A combination of increasing automation, new business models, and offshoring has pushed down the average size of finance staff by 30% over the past six years – to 92 people per $1 billion of revenue.” The quote comes from CFO, Nov. 2010 at 48, and Hacket Group data, courtesy of Michel Janssen, chief research officer for Hackett. From my General Counsel Metrics benchmark survey, the median size of legal staff for 800 law departments last year came 9 people per $1 billion of revenue, 10 percent of the finance figure.

Then comes the stunning data on headcount reductions: “In the last 10 years, the average large global company has dropped about 30% of its finance, IT, public-relations, and HR staff.” Janssen estimates that productivity improvements account for twice as much of that slide as offshoring. Fortunately, law departments haven’t suffered anything like that precipitous drop.

Non-practicing entities (NPEs), which hold patents but make no products, have profited from suing practicing entities. Trolls versus companies, you can think of it. The Economist, Aug. 20, 2011 at 58, has a chart (from which I eyeballed the metrics that follow) based on PricewaterhouseCoopers data that shows median damages awarded NPEs and practicing entities during two time periods. During 1995-2001 trolls’ median was $5 million; the companies’ median was $6 million. During 2002-2009, trolls doubled to $13 million while companies dropped to $4 million.

One could speculate on all kinds of reasons for this dramatic shift in outcomes. Trolls might have gained experience and figured out which lawsuits to bring and how hard to contest them in court. Perhaps settlements dropped as more companies stood up to trolls, taking some bigger hits at trial. Maybe companies with infringement claims against each other went all the way to trial less as they resorted more to license agreements or other resolutions. My final observation is that I have seen figures widely disseminated about patent cases brought to trial costing $2 million and up just in legal fees. If so, and if the median recover after trial was about $4 million, that expensive crap shoot would not be favored.