Litigation Budgeting Helps In-House Counsel Control Costs

Having spoken to a number of general counsel over the past few months, its easily apparrent that litigation costs are among the top concerns of in-house counsel. Not only the sheer cost of litigation, but also the unpredictability of costs is unsettling at best for general counsel. We did speak to a few general counsel who have actively kept their outside counsel on a budget. One in-house lawyer, a director of litigation for a Fortune 100 company, explained that he bid out legal work to law firms, and awarded the work to the firm with the best value. Moreover, he kept his outside counsel on budget.

This practice of budgeting litigation is certainly the way to go for general counsel. While you may never be comfortable with the high cost of litigation, with legal budgeting, you need not lose sleep over the final bill.

Litigation Budgeting: No Crystal Ball RequiredDavid J. LevyThe Corporate CounselorFebruary 15, 2006

Litigation may be simply one of the costs of doing business, but it's no secret that the difficulty in predicting those costs adds to the frustration in corporate legal departments. Concerns about costs and how to control or predict them weave their way throughout a survey of corporate litigation trends commissioned for the second consecutive year by Fulbright & Jaworski, and conducted by an independent research firm. (The 2005 survey was comprised of written responses from 354 in-house attorneys, including 50 in the United Kingdom. Most of the respondents held the title of General Counsel, Legal Director or a similar senior-level position in their respective legal departments.) This article discusses one of the most effective, yet surprisingly underutilized tools for managing litigation costs: the litigation budget from outside counsel.

A RECURRENT THEME: COSTS, COSTS, COSTS

Even when not directly addressed in the survey questions, the survey participants often injected the subject of litigation costs into their answers. For example, when asked for specific examples of their top litigation concerns, nearly one in five mentioned the costs of litigation as one of their top concerns rather than any specific type of litigation. In fact, costs were among the top two concerns mentioned across all eight industries that were represented in the survey. And litigation costs ate up the biggest chunk of the total corporate legal budget in the manufacturing, energy and insurance industries.

It is not surprising, then, that "cost efficiency" was ranked second only to "results" among the criteria used in measuring the success of legal departments, as well as that of individual attorneys in the department. Survey participants also expected more litigation and rising costs in the future. Participants, therefore, want future surveys to continue to inquire about ways that corporate legal departments are trying to manage and reduce litigation costs.
In fact, when asked for the one message they would like to deliver to their outside counsel, the most frequent answer involved "controlling costs." The verbatim answers ranged from the metaphorical ("Sharpen your pencil"), to the direct ("Cut your fees"), to the diplomatic ("Be very careful in your billing practices and keep legal fees as reasonable as possible"). Others emphasized the need to be updated regularly on costs ("Keep me informed of your day-to-day activities so that I am better able to estimate costs" and "Communicate with us, let us know how we are doing"). And when asked what one phrase they most hate hearing from their law firm, the answer often centered on cost surprises ("Sorry, we have gone over budget," "It cost more than we expected") and uncertainty ("Can't estimate the costs").
However phrased, the answer across industries, geographic regions and size of companies was clear: Litigation costs -- and especially the unpleasant surprises from them are an ongoing source of tension between clients and outside counsel.

E-DISCOVERY COSTS AND LIABILITIES

Adding to the dilemma of cost control is the fact that a growing component of litigation costs — and one that needs careful consideration in budgeting -- is electronic discovery. To be sure, the initial estimates from outside firms for document collection and management process may often sound reasonable (e.g., $2000 per gigabyte, or $200 per hour). But in a complex matter, that bill may quickly soar to six figures, or even seven, especially after adding per-page charges for putting documents into a database, converting them to appropriate file formats, producing them and other related charges. Indeed, in large cases, seven-figure e-discovery costs are not uncommon -- especially if the costs are not properly managed.

Thus, particularly in class actions, multi-district litigations, patent litigation cases and other complicated, document-intensive cases, clients need to closely examine their outside law firms' capabilities and experience in creating and managing the electronic discovery process. This includes the ability to most efficiently and effectively use document repositories and otherwise handle document production. If they do not have sufficient experience, they may not achieve the cost control or predictability that clients want.

Companies can also have a hand in reducing their e-discovery costs. Those corporations that have established an internal procedure for locating, organizing and producing documents without the need for outside help can save substantial amounts of money. This may be beyond the bandwidth of smaller legal departments, but it can be an important cost saver for companies with the legal infrastructure to do it.

However, even small companies can save money by taking a proactive approach in their normal business operations with written record retention policies and litigation hold policies designed for today's electronic data world. Hanging over the process of e-discovery, of course, is the threat of spoliation (intentional destruction of, or failure to preserve, evidence for pending or reasonably foreseeable litigation). Spoliation can have a major impact on the outcome of a case, since one of the possible sanctions is an instruction from the judge to infer that the "destroyed" documents in question would have been adverse to the party's case. Other sanctions, ranging from monetary fines to striking of all pleadings can also have disastrous consequences and cause a case to turn on how it was handled, as opposed to the underlying facts and laws.
The cost of not being well prepared at all times for litigation in the management of information has been demonstrated in several high-profile cases in recent years. The notorious labor/employment case, Zubulake v. UBS Warburg LLC, resulted in a $28 million jury award and a series of rulings by the judge outlining more clearly the duty-to-preserve responsibilities and actions that both in-house and outside counsel should take to meet them. Last year's finding of document/data destruction in Coleman v. Morgan Stanley was part of the reason for the approximately $1.5 billion damages award. In both cases, and others, the failure or inability of companies to produce all of the documents subpoenaed in a timely manner contributed significantly to the negative outcome of the case.

The good news is that the survey findings showed that companies are getting the message. Three-quarters of the companies in the survey had litigation hold policies in place, and 45 percent of those had revised their policies in the past year. The same was true with written records retention policies where 82 percent of the total sample had policies and 62 percent of those companies had revised their policies in the past year. The high level of revisions probably indicates an appreciation that electronic discovery is a rapidly changing area of the law and requires close monitoring.

Litigation hold policies, however, do not help to control costs. Indeed, the Catch-22 is that the preservation of vast amounts of data for litigation is more likely to increase not only the litigation costs, but also their unpredictability.

BUDGETING: SOLUTION, NOT PROBLEM

Despite the obvious cost concerns, the Litigation Trends Survey showed that efforts to predict and manage litigation costs are sketchy, at best, in the corporate world. Surprisingly, just 37 percent of the companies in the survey require a budget from their outside law firms for all their litigation matters; and only another 11 percent require budgets more than half of the time. (Tracking time-to-resolution for litigation matters is another practice that is apparently far from universal. Although 22 percent of the sample said they always track time-to-resolution, more than half never do it.)

It is certainly true that unforeseen events occur over the course of a matter, and no one has perfect vision when looking out 12 to 24 months, or more, into the future. Still, experienced litigators -- and in-house attorneys -- can draw on their collective experiences in projecting what tasks will need to be performed and estimating how many attorney hours will be required for each task, what the expenses for each task will be, and how long each "phase" of the case will last — if only they would take the time to really focus on it. Working together, outside and in-house counsel can therefore formulate budgets and make the relevant assumptions with reasonable accuracy, as long as they are methodical in going through each stage of litigation and the steps they entail.

Counsel should be able to estimate, for example, the attorneys who will be needed, their levels (partner, senior associate, associate), and their respective rates. Counsel should also be able to estimate the approximate volume of documents that will be involved, the number of fact witnesses and expert witnesses who will need to be interviewed and deposed, the number of deposition hours required, when they will begin taking depositions, when they will file non-dispositive and/or dispositive motions, and so on throughout the duration of the matter. It is simply a matter of using past experience and methodical analysis to break the case down into its parts, then estimate the costs and relevant time period for each part.

For example, in a breach of contract case, counsel might estimate that a partner and associate will interview a key employee/fact witness for eight hours, then later prepare the witness for her deposition for six hours and then have the partner present the witness for deposition for six hours. By simply multiplying the hourly rates of the partner and associate by the number of projected hours they will spend interviewing, then preparing, then presenting the witness -- counsel can calculate the budget for this aspect of the case.

SIMPLE TOOLS HELP

Regardless of all the various software products being marketed for litigation budgeting, they are only as good as the information that is input into them. Simple Excel spreadsheets that break a budget down into key tasks and phases of a case work perfectly well. For example, using the ABA task codes can be an excellent way of focusing on all the steps in the litigation process. And by using the formulas in Excel, counsel can easily modify the budget by adjusting one or move variables (e.g., attorney's hourly rate, or estimate time spent on a task), which will then adjust the other variables and figures, as necessary.

Some budgeting tools incorporate deadlines and the ability to look at previous work in analyzing costs and budgeting future items. Of course, people will inevitably record some functions differently, which may put certain tasks over-budget and others under; and the inherent unpredictability of litigation can always cause events to be delayed, pushed up, short-circuited or extended. But just because budgets are not perfect, that is no reason not to use them. If nothing else, they force counsel to think hard about the time and resources committed to a case.
Indeed, it's very much like doing a family budget. When expenses approach budget limits, it's time for lower-cost alternatives, such as sending an associate -- instead of a partner -- to a meeting or deposition (when appropriate). Time-and-expense tracking and promptly notifying the client when costs begin to bump up against the budget is the way to reduce those unpleasant surprises that can harm counsel-client relationships.

Any relationship, however, is a two-way street, making it important for in-house and outside counsel to agree on their expectations of what constitutes a "fair" budget. Will the budget become a de facto, maximum-fee arrangement? What happens if outside counsel is too far under or over budget? How will that be handled internally, and how will it be handled with outside counsel? No one can predict the future with complete accuracy, but they can establish guidelines of fairness and protocols for what to do when estimates are significantly off the mark.
Finally, a modest proposal to corporate legal departments: Offer to pay for outside counsel's time spent preparing a budget. Have that time included in the budget and offer to work with outside counsel in preparing a thorough, carefully considered budget. That will help make the point that budgeting is important to the client, as is continuous communication about any needed ad-justments to it as the matter progresses.

If both outside counsel and client approach litigation budgeting in a methodical way, drawing on their respective personal and institutional experiences, then litigation budgeting shouldn't require any clairvoyance or pain medication. And in-house attorneys responsible for their own legal department's budget will finally be able to sleep at night.

David Levy is a partner in the litigation, international, and intellectual property and technology departments at Fulbright & Jaworski. He is also the co-chair of the firm's firm's Asia Pacific Practice Group. Levy focuses his domestic and international trial practice on complex litigation matters that range from class actions to patent infringement cases.