One of the core considerations any CEO or general counsel makes when the company is sued is to assess the anticipated cost of litigation versus settling resolving the claim. While settlement is often a distasteful consideration, especially where a claim borders on frivolous, no company can credibly take the position that it will take any and all cases to trial given the significant costs involved in litigation.
In that regard, Mr. Jon Kyle, a former Republican senator from Arizona and now a senior adviser to a prominent Washington, D.C law firm, penned an editorial for the Wall Street Journal (1/20/2014) discussing the problem litigation costs pose for U.S. companies.
... excessive litigation costs erode U.S. companies' ability to compete in world markets and make foreign companies reluctant to invest here ...
The primary culprit for excessive cost and delay is 'discovery'—the process of preserving, reviewing and disclosing vast amounts of corporate information. A 2010 survey of Fortune 200 companies by Lawyers for Civil Justice, the Civil Justice Reform Group and the U.S. Chamber Institute for Legal Reform found that in 2006-08 companies at the low end of the range were paying $620,000 per case, and those at the high end were paying almost $3 million per case in discovery costs.
I don't disagree with Mr. Kyle's assessment. In representing business clients over the years, discovery costs consistently made up the largest portion of the litigation budget. And this is true regardless of the claims. And since beginning my legal career in 2001, those discovery costs have steadily increased, in large part due to the sheer amount of information businesses create and retain.
But Mr. Kyle's assessment, however, ignores a dirty secret in the legal industry - there is an inherent incentive driving attorney compensation - often referred to as the billable hour - that drives up the cost of litigation defense. In other words, the very law firms that represent the companies "victimized" by the cost of litigation are often a significant contributor to the increased litigation costs that U.S. companies face.
I repeatedly saw the paradoxical results of inefficient legal services resulting in increased law firm profits while I was a member of a national trial counsel team for a manufacturer involved in national product liability litigation. Prior to the client implementing a national trial team approach, local counsel were largely left to plan discovery with little oversight. While most attorneys implemented reasonable litigation plans, others did not. In those situations, litigation costs soared with little value to the overall trial strategy. But in both situations, we were able to bring down discovery costs by designing and implementing a coordinated discovery plan.
More recently, I was legal counsel in a contract dispute between a company and its former executive. The details of the litigation are not particular sexy or complex: Party "A" enters into an executive employment with Party "B;" Party B pays under that contract for months; Party B decides it would like to pay less for same scope of work; Party A says thanks, but no thanks, I'll keep what we agreed to; and Party B stops paying claiming there is a disagreement as to what the contract actually provides.
Despite this garden-variety claim, the company (Party B) was represented by a large Detroit law firm. It staffed this case with three partners (not associate attorneys) and then proceeded to tag team the depositions with one of these partners and then another associate attorney. Additionally, the defendant law firm pushed for forensic inspections of laptops - one acquired years after the time-period relevant to the formation of the contract and the actual breach of the contract. In sum, the defense counsel took a scorched earth approach. However, it is hard to imagine any CEO signing off on such an approach given the questionable value and limited damages.
Attorney Patrick Lamb of the Valorem Law Group is a prominent thought leader on guarding against these sorts of self-induced out-of-control litigation costs. He recently commented on these perverse incentives when it comes to rewarding law firm inefficiency:
Another law firm has motivated its associates to spend more time rather than less getting their work done. Kaye Scholer is paying upwards of $20,000 in additional bonuses to those who exceed 2,200 hours per year.
Mr. Lamb succinctly paraphrases what this means to clients:
We haven’t figured out how to do work other than on an hourly basis, so we need lots more hours for the firm’s partners to take home their millions. So to squeeze out those hours from our clients, we’ll motivate our associates to spend more time on their matters. So even though our clients would benefit from a focus on efficiency and outcomes, that doesn’t help us–the partners–so we’ll just ignore that and keep doing what we’ve doing.
Is Mr. Kyle correct in his assessment about the cost of litigation being too high and it takes too long in the United States? Yes. But his assessment overlooks the fact that the very attorneys representing those most affected by these problems are often the chief contributors or, at least, complacent co-conspirators.
For this reason, it is critical for CEOs and in-house counsel to diligently monitor legal fees, as well as having meaningful budgets and discussions with defense counsel about the company's litigation strategy and this discussion needs to take place early in the litigation process.
For more information about business and employment lawsuits, contact attorney Jason Shinn. Mr. Shinn has been representing businesses and executives in defending and pursuing litigation since 2001. The bulk of this experience involves employment discrimination, breach of contracts, trade secret and noncompete litigation, and other commercial litigation matters.