Wildly varying estimates of litigation liability (Merck): relation to budgets and outside fees

An article on analysts’ estimates of Merck’s exposure from its Vioxx litigation (BusinessWeek, Dec. 5, 2005 at 40) explains why those figures have varied from $5 billion to $30 billion or more, and why they careen up or down depending on isolated events (e.g., FDA advisory panel votes, a court decision). (See my post of March 12, 2005 about Merck reserving $675 million and July 25, 2005 about the effect of the litigation on Merck’s share price.)

Three points occur to me from this article. The first is that setting contingent liability reserves for tsunami-sized litigation – as has been faced by such companies at Altria, Ford Motor, Firestone, Halliburton, Microsoft, Wyeth, and Research in Motion – must cause hair loss for some law department managers. Second, the wide swings in estimates for liability probably have matching swings for the budgets that litigation managers must scratch their heads to project. And a third point: companies don’t talk about controlling outside counsel costs, or the costs of all the small fish vendors swarming around the law firms, when risk numbers of this magnitude stare them in the face.

PS. The same issue (BusinessWeek, Dec. 5, 2005 at 80) reported that MasterCard, about to go public but “embroiled in dozens of lawsuits that could cost millions in legal fees and tens of billions in damages,” has stated in SEC filings that “it plans to spend $650 million of the IPO proceeds on legal fees.” Huge legal fees for huge stakes.