Articles Posted in Non-Law Firm Costs

Two more thoughts, after my rant on reserve setting and law firm budgets.  A transportation company law department I consulted with negotiated a deal with the Finance Department.  “If we can invest in a better matter management system, which thereby reduces our projected litigation expenses, and you can then release some of the reserve, will you let us spend a bit of it on license for the system?”  The deal was struck, the legal department gained a cost control tool, and the company lightened its litigation reserves.  Pretty neat!

The second thought, coming from a major insurance company, has a different twist.  There, the law department controls the litigation reserve, so that the department has more of an end-to-end oversight on legal costs.  I don’t know much more than that, but I have not heard of such an arrangement before.   

I was thinking about Merck setting reserves of $675 million to fight Vioxx lawsuits and comparing it to the difficulty of law firms that whine if asked for budgets.  Here is a company facing an unprecedented legal onslaught – at least for it and for this class of painkillers – and it makes a good faith estimate to project defense costs and settlement payments.  Or at least I believe those are the major components of a reserve estimate.  They are looking several years down the litigation road, across more than 575 lawsuits (as of late January), about 70 class-action suits [Fin. Times, Jan. 26, 2005], and proceedings in at least a dozen countries.  But they can set a budget – an accounting reserve – that satisfies our securities acts.  Why can’t law firms handle a bundle of current and projected cases and offer a fixed fee budget?

PS I welcome comments from informed readers about the steps a company goes through to set up litigation reserves, or why that discipline would not apply to a law firm bidding to handle a suite a cases over time at a fixed price.

Law departments ought to look at their litigation costs in terms of potential liability (or actual once a case closes).  Knowing that correlation might change defense strategy.

A recent Foley & Lardner web conference (July 2004) reported some data from the American Intellectual Property Law Association.  “The average cost of IP litigation increases exponentially depending on the amount at risk, i.e. (sic), cases in which over $25 million is stake, the average cost of litigation is approximately $6 million.”  Exponentially means to a power, so that if the amount at risk – damages sought – doubled, the litigation costs would rise four-fold.  I doubt that $50 million cases incur litigation costs of $24 million, so the Association probably means that the law firm costs rise linearly.  But I am being pedantic. 

Simply to offer some insights into the relationship between complexity (which has some relation to the amount at risk) and the cost of litigation gives us some value.  I have not seen data of this insight. 

All of this hubbub about offshoring has significance for law departments, despite the hype. A fair number of activities done by inhouse lawyers could be done in low-cost jurisdictions, assuming telecommunications, English, training, and some patience. If there is a US

paralegal, why not an Inian lawyer? If advertising review takes lots of time, why not a first pass in South Africa? if preparing NDAs sucks up time, why not someone in the Philipines doing the first draft. I think there will be major changes on the law firm side and the law department side from this development.