Articles Posted in Non-Law Firm Costs

During a teleconference hosted by ACC’s Law Department Management, Litigation and Small Law Department committees, the general counsel of FMC Technologies, Jeff Carr, explained his company’s budget timetable. Carr said that the budget-forecasting process starts in May, but in August his department must submit what is effectively treated as the final budget for the coming year. Four or more months before the start of the budget year!

Most law departments cope with similar lead times for their budgets. No wonder metrics are vital to proficient law-department management.

During a teleconference hosted this month by ACC’s Law Department Management, Litigation and Small Law Department committees, a litigation lawyer for American Express Travel Related Services explained that they ask outside litigation counsel to estimate the range of the company’s exposure on a case. The purpose is not to set a reserve, but to stratify cases by their risk.

With exposure estimates, the in-house litigators can also review budgets more insightfully (See my post of Jan. 25, 2006 about Amex litigation budgets.). They can also keep outside counsel spending on a case in line with the company’s exposure risk.

“The brutal logic of risk dictates that it’s cheaper to pay for the aftermath of a single, relatively localized disaster than it is to prepare for the same disaster in every place at every time.” (Wired, Nov. 2005 at 34).

Logical, maybe, and financially correct, perhaps, but try to persuade a Chief Compliance Officer. I read the provocative quote, included it here to stimulate thought, but basically shrug it off. These days, legal stumbles don’t remain sequestered as localized disasters. Cancers, they spread and grow.

An IP blog, hosted by William Heinze, cites a presentation by Peter Detkin, Managing Director, Intellectual Ventures, who defined “trolls” as “non-practicing entities in technology.” Detkin said, according to the Jan. 5, 2006 post, that “’Trolls’ are only about 2 percent of patent litigation.”

An article in Fast Company, Jan/Feb. 2006 at 79 profiles what some might consider a troll, Forgent Networks, whose primary asset is a patent for software involved in JPEG image compression. Since 2002, Forgent’s 20 employees have collected $105 million in licensing fees from 50 companies. Lawyers working on a contingency basis have retained 50 percent or so of the settlement funds.

An article, NY Times, Jan. 13, 2006, mentioned one method for law department’s to spend less: hire an outside service provider for legal research. Specifically, the article referred to LRN, and quoted Peter Kreindler, general counsel at Honeywell who “thought the company’s spending on legal services had fallen by at least 25 percent as a result of using LRN.”

Caution! Kreindler must have meant that Honeywell’s spending on legal research enjoyed that drop, not all its spending on law firms and other law-related vendors. It is doubtful that researching the law commands more than 5-10 percent of a law department’s typical law firm bills, so using a third-party legal-research firm, even at much lower hourly rates (probable) and even if the researchers know the area of law better (possible), can hardly cause such a dramatic shift in costs.

William Heinze’s blog, I/P Updates, has a full discussion (Jan. 10, 2006)

of the upcoming Ocean Tomo Intellectual Capital Equity Live Patent Auction (See my post of Nov. 28, 2005 about another IP auction service.)

Ocean Tomo seeks to increase liquidity for patent holders, and as part of that goal, it plans to conduct patent auctions and has developed a patent rating system (the Intellectual Property Quotient or “IPQ”) “for objectively scoring and rating patent quality based on a proven statistical methodology.”

Bayer successfully brought an infringement and invalidation suit against an inventor, proved inequitable conduct on the inventor’s part, and applied for reimbursement of approximately $4.5 million in attorneys’ fees, $1 million in expenses, and $.68 million in expert witness fees.

A bill auditor, hired as an expert by the inventor, recommended that the court consider only about $1.8 million of the fees, the remainder being “entries which were cryptic, concerned internal conferences, clerical work, delegable tasks, internal memorandum or apparently duplicative work” – altogether accounting for forty percent of the time entries.

If that auditor’s critique was even close to being correct, the law department should be chastened. Its law firm abused it. In the event, the judge allowed one-third of the fees and expenses applied for, and to the absence of documentation none of the expert witness fees due

I’d like to test this proposition. Assume a corporate generalist six years out of law school. If hired as a full-time lawyer, that lawyer costs the company approximately $150-$170 per hour fully-loaded (See my post of Oct.18, 2005 on calculating a fully-loaded cost per lawyer hour.) The lawyer with the same amount of experience who is at a regional law firm, one of say 20 to 50 lawyers not on the coasts, would cost the company $180-$220 per hour.

The identical lawyer, hired instead as a temp by the company – but not through a temporary service agency, might cost $70-90 per hour with no benefits. (See my post of July 14, 2005 about retaining former lawyers of the department.) The same lawyer with the same qualifications if hired through a temporary service agency might cost $80 to $100 per hour. Finally, the same lawyer but an Indian law school graduate might bill at $15 to $35 per hour. (See my post of Jan. 6, 2006 about the Indian legal offshore market.)

Am I right? Quite a range of choices and costs!

A law department is the beneficiary of many shared corporate services, yet never gets billed for them. The largest item would be a rental equivalent, at market rates. Reception areas and receptionists, security personnel, shuttle buses, mail room, IT infrastructure spending, the company holiday party, a subsidized cafeteria, snow removal from parking places, company library, severance costs, corporate training programs, corporate sponsorship fees

Chasing down every subsidy would be impossible, and unlikely even in the aggregate to raise the fully-loaded cost per lawyer hour more than 10 or 15 dollars – perhaps. No one has produced a study of such costs, absorbed by a company and not part of the law department’s budget. What matters is that law firms have to pay for them.

Some numbers cry out for scrutiny. One, pertaining to e-mail, jolted me in the sidebar of an article on electronic discovery, published in September 2005 by Corporate Counsel and in a December advertisement from an electronic discovery vendor.

“$4.6 billion. The amount in dollars that U.S. companies will spend internally in 2005 to analyze e-mails.”

A press release from MetaLINCS, dated Aug. 22, 2005, , states, “Email has become the #1 source of evidence in investigations, comprising more than half of all case evidence, according to Kahn Consulting. This year alone, companies will spend over $4.6 billion in expenses related to email analysis. Analysis is the most critical aspect of the E-Discovery process…” No one from the PR firm for MetaLINCS has responded to my telephone call and e-mail asking for support of this statement.