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As paraphrased in MOFO Tech, Spring/Summer 2012 at 18, an appellate judge made two intriguing statements, one about the relative costs of intellectual property cases – presumably patent cases – and the other about discovery’s wastefulness.

 

Federal Court of Appeals Chief Judge Randall R. Rader “noted that IP cases were nearly two-thirds more expensive than others.”  The article does not explain the judge’s data that supports his assertion and it would require extensive research to clarify and substantiate it. A judge would not know how much the parties spend during litigation, generally speaking, and would not have a representative sample of cases from which to derive the metrics underlying the remark.

 

Judge Rader also observes “less than 1 in 10,000 of all documents found in discovery ending up in a trial exhibit.”  The drastic shrinkage from the point of location of potentially discoverable documents, or even from the smaller set of documents formally produced, to those introduced into trial is not at all surprising. For one, it is a rare lawsuit that proceeds all the way to trial. Thus, documents might have been quite telling before that.

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Amounts initially awarded by juries do not reflect any reductions or offsets subsequently granted by judges or appellate courts, but they do represent data points regarding corporate legal costs. So, let’s start with data for the top 100 verdicts in United States as published in Corp. Counsel, May 2012 at 22. If you exclude the bizarrely high 2011 wrongful-death figure of $150 billion, for the past two years the 100 largest verdicts amounted to approximately $10 billion a year.

If plotted on a graph highest to lowest, the underlying data for each of these verdicts would allow us to estimate the sum of all jury verdicts during those two years. The downward trend line would eventually intersect the bottom horizontal axis and the area below that line would approximate the total awards. Let’s suppose For example, it to be $32 billion annually in jury awards.

Data somewhere would allow us to deflate that gross amount to a smaller amount after appeals and reductions (or post-trial settlements). Pretend that reduction was one-quarter, leaving us with a rough-cut $24 billion for judgments paid in the United States. If we further reduce that figure for an unknown amount attributed to corporations paying judgments, as compared to individuals, we draw even closer. Ninety percent paid by companies might be plausible, so that leaves something like $21 billion in corporate judgments paid.

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I tried something for the first time. I prepared a decent draft of an article to be published and circulated it for comments to about a half dozen people whose thoughts I would value. Academics do that all the time with works-in-process, but not only do I regrettably finish my articles just before the clock strikes midnight but also I did not know how people would react to my invitation.

In the event, several did, including Blane Erwin of Bridgeway, Jeff Hodge the consultant, Mark Poag of Datacert, and Rob Thomas of Serengeti. We exchanged ideas that improved my article. Since I can’t thank you in the article, I will thank you here.

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During the Iraqi “surge,” the “Army had one lawyer or paralegal for every 240 combatants, and these legal professionals have ever more say over battlefield decisions. That is leaving aside the judge advocates general (or JAGs), who offer guidance on the laws of war.” This amazing quote comes from the NY Times Book Rev., June 10, 2012 at 22.

Lawyers per thousand employees has some credibility as a benchmark metric, although it does not rank very high in usefulness. Lawyers per soldier stands unique.

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The Association of Corporate counsel (ACC) collected data in the spring of 2011 and recently made it available in its 2011 Census Report. Based only on promotional material available on ACC’s website, here are my initial thoughts. http://www.acc.com/legalresources/resource.cfm?show=1306363

The ACC collected date during April and May of 2011. The Report issued in March, so it took almost one year to massage and prepare the data.

Of the 4,161 companies represented in the Report, 3,652 were in the United States and 267 were in Canada. That 13-to-1 proportion is near the 10:1 last year in the world’s largest law department benchmark survey, that of General Counsel Metrics. Maybe that ratio matches GDP and population figures for the two countries.

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Tom Kilroy, the General Counsel of a UK company has another role: “For the past three months, I’ve occupied a line management rather than a legal role, as acting Chief Executive Officer of a publicly listed company with 4,200 employees, operating in over 100 countries and making hundreds of millions of dollars in annual sales.” He wrote a long piece on his blog, GC’s Eye View, May 20, 2012, about metrics. I have quoted it extensively below but also omitted large portions and interpolated a few responsive thoughts.

“After discussing metrics with a large number of senior legal colleagues over the past year, I’ve concluded that metrics are widely distrusted by the legal profession. The topic certainly polarizes opinions. The most common charge made against metrics is that they provide a reductivist view of an activity which involves complex interactions that aren’t really capable of or susceptible to numerical measurement, such as the giving of legal advice.” [two paragraphs omitted]

[Rees Morrison: To state a person’s weight could be “reductivist” but it is more a description of one aspect that says what it says, and doesn’t claim to encompass the whole of the person’s being.]

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A Google search for “list of US publicly traded companies” turned up a link that referred to a Bloomberg directory with “over 33,000 companies.” The web site of Credit Risk Monitors claims to identify 20,899 public companies in the United States.

Credit Risk Monitors also lists about 56,000 non-US companies that are publicly traded and breaks them into broad sectors, within which are industries. Credit Risk claims the total worldwide group of publicly traded firms (U.S. and other countries) generated a total of $49 trillion of revenue. At five in-house lawyers for every billion dollars, a middle-of-the road metric for U.S. companies, those 49,000 billions project to 245,000 in-house counsel. If the U.S. median of three lawyers per law department even approximately holds, the quarter million lawyers means 80,000 law departments in publicly traded companies.

I don’t know the ratio, but for every public company with a law department, one can imagine several privately held companies with more than $100 million of revenue and at least one in-house attorney. If 80,000 global public companies with legal departments is approximately right, then is it plausible to add on two, three or four times as many for the privately held departments? Now, about government agencies, not-for-profits, partnerships…

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This blog has often referred to the fully loaded cost per hour of corporate attorneys. It has also from post to post provided data on the effective hourly rate of law-firm partners and associates. More recent data came as to the latter from Law Practice, July/August 2012 at 46, which provides metrics from the Lexis Firm Insight website. Those metrics say that “median effective hourly rate for partners has declined from $394 in 2009 to $378 in 2011.” The median effective hourly rate for associates has declined from $243 in 2009 to $235 in 2011. Thus, over two years, a drop in outside counsel rates of nearly five percent in nominal dollars.

If it is roughly true that for every partner hour charged there is an associate hour (See my post of Feb. 4, 2007: partner time to other timekeepers’ time.), then in 2011 the combination of those two levels would result in close to a $307 hourly effective rate for outside counsel. Compare that figure to $191 per fully loaded attorney hour for 212 law departments in the United States from the latest data in the General Counsel Metrics benchmark survey. The gap is sizeable, $307 an hour is 60% higher than $191 an hour.

What is even more interesting to me is that the same source suggests that 1,600 chargeable hours is typical pace for lawyers at private law firms. If the law-department fully loaded cost were calculated not on 1,800 hours but on the lower 1,600 of law firms, the internal cost would rise 11% to $212. The difference between that higher cost per hour inside and the $307 external cost, is approximately 45% (See my post of Feb. 17, 2008: 1,850 assumed internal chargeable hours may be too high.).

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An article in Law Practice, July/August 2012 at 40, describes “15 proven profitability techniques” for today’s law firms. Two of them raised my eyebrows and should do the same for general counsel.

Under the technique “unbundle operating costs from case related expenses,” the author writes that “clients should be asked to prepay anticipated major cost items, such as expert witness fees, deposition expenses, extensive travel and other case-related costs.” Law departments generally accept being billed directly for some major disbursements, notably expert witness fees, but to be asked to pay for travel expenses, and especially to pay them in advance, should meet stiff resistance (See my post of April 18, 2005: e-billing vendors paid directly by law departments; July 31, 2006: national vendors selected by a law department; Feb. 11, 2007: direct billings to the law department by vendors; Feb. 14, 2007: data on disbursements paid firms or charged through directly; Nov. 29, 2009: direct billings by law firms for disbursements should be considered outside costs; March 12, 2012: benchmark metrics influence by direct payments to vendors.).

Under the technique “New systems, methods and technology” comes this contentious recommendation “Bill appropriately for form documents. You must be paid for development efforts, and it is both reasonable and proper to charge based on what the document is worth to the client, not for the few minutes it takes you to pull it from the computer.” To the contrary, law departments do not subscribe to value billing along these lines. You should not pay for the development time of a form document, whether or not it is available to the firm in software. Others have paid for the firm’s learning curve. Now, the form is an expected enabler, not a profit center.

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In Law Practice, July/August 2012 at 14, a law firm consultant describes a “client scorecard.” With it, your law firms might rate you on five categories: “level of cooperation”; “how enjoyable your work is”; how profitable your work is; your relative ability to pay the firm’s fees; and one category one about referrals that is irrelevant to law departments.

Just because your department buys legal services does not mean you can act miserably and niggardly toward the law firms you retain. The evaluations go to this. The first two boil down to “nice to work with.” The next two go to economics. Since companies that sustain a law department can pay legal fees, “ability to pay” has little meaning. Thus, these five categories really boil down to whether your lawyers are for likable, your work is interesting, and your services needed make the firm money. A sensible assessment by firms and a sensible objective for your department.