Articles Posted in Outside Counsel

“In 2005, the typical litigation costs for patent infringement suits with less than $1 million at risk was $650,000; with $1 million to $25 million at risk was $2 million; and with $25 million or more at risk was $4.5 million.” This quote regarding the costs to plaintiffs who allege infringement of a patent comes from Vincent Napoleon, general counsel of Digene, in InsideCounsel, July 2006, at 14 and has no citation.

As these figures stand, who would bring an infringement action if only a paltry million dollars or so were at stake? Even more, because Napoleon volunteers that “patent holders in infringement suits have about a 50 percent win rate.” Whereas, for huge stakes, the litigation costs do not rise commensurately.

There are some earlier figures for patent litigation. An article in the Chicago Daily Law Bulletin (August 26, 2003) by Richard P. Beem updated AIPLA findings: $797,000 through discovery and $1,499,000 through trial. That marked a 25 percent increase over five years in the cost of tried patent cases. (See my posts about patent litigation costs on March 6, 10, 29, and May 1, 2005.).

A company has just been sued or wants to bring suit or has decided on a transaction. It presents two law firms, each capable of handling the matter, with the facts as they are known and asks for one of them to state how much they will charge to represent the company. That firm submits a budget, with a twist.

The twist is that the second firm will review that estimate and can choose to take on the case for the amount. Knowing that possibility, the first firm – the budget-submitting firm – will estimate costs as leanly and accurately as possible. Too fat a budget, and the other firm will snatch the matter; a lean budget and the other firm will pass, which leaves the company contented with the cost.

A variation on this technique lowers the risk of collusion if two firms do this more than a few times. Every now and then, invite a third firm to take part or randomly assign the roles among the three.

Rob Vosper, Executive Editor of InsideCounsel, writes in the July 2006 issue, at page 10, that in-house counsel pay law firms’ bills, but the “firms run the show.” As incredibly, he then asserts that “firms know that most in-house lawyers believe it’s more disruptive to replace a firm than to live with poor service.”

Rob, with all due respect, I disagree completely, for three reasons: law firm unease over client loyalty, law department’s axes, and overstated transitional costs.

Law firm partners worry about their hold on clients and do not take for granted that the manna will fall forever. With convergence, turnover of general counsel, cost control mandates, conflicts of interest, virulent marketing by competitors, in-house evaluation systems, and changes in clients’ businesses, uneasy lie the heads.

This technique does not sound promising to me but it might be worth considering under certain circumstances. If inside lawyers always had to obtain a written sign-off of their superior before they retained outside counsel, it would certainly make them think a bit more before triggering the cost.

My reaction to this idea is that it is belittling to the person who wants to hire outside counsel. If they do not have the judgment of when they should seek approval and when proceed on their own, the problem is more serious than outside counsel cost control.

Based on a survey of attorneys in 369 federal civil cases, a recent article examines the time the litigants spend seeking discovery. Shepard, G. “An empirical study of the effects of pretrial discovery,” International Review of Law and Economics, Vol. 19, at 245-263 (1999). The author shows that defendants increase their discovery efforts “tit-for-tat” in response to heightened discovery requests by the plaintiff. Plaintiffs, however, did not follow this counterpunch strategy and did not increase their requests for discovery in response to increased requests from defendants. This material comes from Kathryne Spier, Chapter 4: Litigation, to appear in A. Mitchell Polinsky & Steven Shavell, editors, The Handbook Of Law & Economics, at 30.

A famous paper, “The Market for ‘Lemons’” by the economist George Akerlof, makes the point that where there is asymmetric information (See my post of Dec. 23, 2005 on asymmetry of information and outside counsel.), such as what a car seller knows and potential car buyers don’t, it can hobble the market. The risk is adverse selection.

Since buyers can’t know the real condition of a used car, they offer less, which keeps off the market sellers of cars in good condition, and perpetuates the downward spiral of quality and price. Adverse selection operates where people with health problems seek insurance, while healthier people decline the ever-costlier coverage. “Adverse selection might work in with any market in which quality was difficult to assess,” Warsh, Knowledge and the Wealth of Nations: A Story of Economic Discovery (Norton 2006 at 172).

Poor quality law firms might drive clients away from even good firms, except for what economists call signaling and screening. One way for law firms to work their way out of this predicament is through signaling behavior (See my post of May 1, 2006 about plaintiff’s firms that signal their quality by adhering to a standard contingency fee.). Plush offices in posh locations, fancy brochures, and waves of ads serve as signals. A second way is screening mechanisms, by which valuable information is provided to buyers, such as lists of the “100 best lawyers.” Articles selected for publication and speaking slots at conferences also signal.

Every requirement of a law department to some degree changes how its law firms operate. Monthly billing on each matter, to mention one trivial example, influences a firm’s timekeeping, accounting, and billing.

More significantly, aggressive law departments can demand significant changes in the operations of their law firms. In various postings I have alluded to the topic of how far law departments might go to intervene materially in their firms’ management – to the point of altering professional judgments and even affecting profits.

“Use associates with lower billing rates in lower-cost cities” (See my post of June 15, 2006.);

I have run across a number of them, and welcome other examples:

(1) bolster your IT support (See my post of Oct. 22, 2005 about managers from both sides meeting.),

(2) provide access to documents (See my post of Oct. 31, 2005 about JennerNet.),

A slide from a presentation by Henry Walker, Chief Litigation Counsel for BellSouth teases with the bullet “Monthly High Expense Case Reviews.” It is likely that the largest portion of a law department’s outside counsel spend goes to its so-called “major cases” (See my post of Nov. 15, 2005 on the definition of major litigation.), but not necessarily every month.

Major cases likely have potentially large liabilities, but may have a low burn rate at times or peaks and valleys. For a law department to look to its spending on the month-to-month gushers makes sense.

Periodically, inside and outside counsel need to revise the budget for a matter, and the law department should then revise its matter management system to show the new budget figure. Unless there is an audit trail or the revised budget does not over-write the original budget, it will be impossible for the law department to calculate the original or subsequent accuracy of the law firm’s budgets.

Another approach is to calculate the difference between actual spend and budgeted spend each time the budget changes. That cumulative figure could be stored and analyzed. The best law firms would have the least total discrepancy between their budgets and their actuals (See my meta-post on budget entries, Nov. 7, 2005.).