Handing Down Decisions on Legal Expenses
Carroll, Hal O., Risk Management
Hal O. Carroll is a practicing attorney and president of The Carroll Group, a litigation and management consulting firm in Ann Arbor, MI.
Legal expenses have long been been one of the most difficult business costs to control. Companies and governmental agencies are favorite targets of plaintiffs' lawyers, and their deep pockets arouse little sympathy from jurors. The freewheeling litigation system in the United States exacerbates the situation. One European-based multinational manufacturing company sells less than 25 percent of its products in the United States. Yet approximately 90 percent of its legal and insurance expenses are incurred there. Likewise, there are 30 times as many lawsuits per capita in the United States as in Japan.
The cost of legal defense significantly affects American competitiveness in the global market. It adds to product costs and contributes to the fear of exposure to catastrophic jury awards, thus distorting product development decisions. In a recent Conference Board survey, 47 percent of the companies contacted reported having discontinued at least one product line due to liability litigation concerns.
Attempts to address the problem include imposing caps on awards, limiting plaintiffs' lawyers contingent fees and changing liability rules. Although these are legitimate proposals, they would have little effect and would meet stiff opposition from a legal profession well represented in state and national legislatures. Even if the changes were successful, they would only reduce the need for legal services, not eliminate it. Lawsuits would still be filed and defended, and costs would not change dramatically.
Setting Expense Policy
Most litigation expense lies not in the judgments or settlements paid to the plaintiffs but in the cost of mounting a defense, especially legal fees paid to the company's attorneys. Frequently, the only control imposed on legal costs is the legal department's budget, a crude method that does little more than slow the increase. However, these are costs management can, and must, control. One way to accomplish that task is to have risk and senior managers adopt new policies and procedures relating to legal expenses.
Why should the initiative come from outside the litigation department? Unlike product development, the handling of litigation is not entirely within the corporation's control; the plaintiff's attorney and the trial court judge control much of what happens in a case. Also, lawyers, whether on staff or from outside firms, tend to focus on the immediate goal of getting current cases settled or tried. Litigation management, like crisis management, involves a comprehensive approach, which staff attorneys are not accustomed to taking.
Also, staff attorneys, as service purchasers, and outside attorneys, as suppliers, tend to settle into comfortable but costly business patterns. In addition, the intricacies and arcanities of law and litigation act as a barrier to any manager who tries to improve how legal services are managed. Finally, fear of being responsible for a large adverse judgment is inhibiting.
There are ways companies can lower and eventually control costs while preserving or improving the quality of their legal services. The following suggestions refer specifically to litigation, which usually requires the broadest range of services and has expenses that are hardest to control. However, the approach outlined here can be applied to all legal services.
Solicit bids and hire more than one firm. Insurers have solicited bids on legal costs for decades. But many companies that expect and get substantial discounts on the purchase of large quantities of equipment pay the full rate charged by expensive law firms. Yet law firms will often reduce their hourly rate by 30 percent or 40 percent in exchange for a minimum amount of work.
Soliciting bids introduces a welcome element of competition into the process, but it is only a beginning. …