A HARD CASE

BY STEVEN ANDERSEN

August 2008

 

 

Controlling litigation cost is among the most vexing problems general counsel face.  A combination of soaring hourly rates, inefficient outside counsel and ineffective case oversight can send a law department’s budget out the window.

 

For decades now, companies have tried to meet the challenge by bringing the litigation function in-house, only to find that the sword cuts both ways.  Substantial overhead, reduced flexibility and, in the worst scenario, losing cases can make the cost-saving measure more costly than anticipated.

            So what’s a general counsel to do when no matter which end of the rainbow you chase, you never get closer to the pot of gold?

            “It’s very hard to quantify,” says Michael C. Ross, a former general counsel of Safeway Inc.  “You can’t run a laboratory experiment—there are too many moving parts.”

            Neither can you make generalizations.  There are too many variables—industry, size of company, economic climate—to ever definitively say whether insourcing litigation is the right move.

            What in-house counsel can do, however, is approach the problem pragmatically.  We asked industry experts, consultants and general counsel who have wrestled with this conundrum for years to share their experience so that the legal officer who is considering bringing litigation in-house can ask the right questions, avoid common mistakes and find the right ration of cost to performance.

 

THE DO-IT-YOURSELFER

 

Rebecca J. Wing, general counsel of the commodity futures brokerage PFGBest, has just three lawyers in her department:  one transactional attorney, one lawyer who primarily handles collecting on judgments and Wing.  Still, the department handles up to 70 cases per year.

            “My view on litigation is that if it’s a small case, we handle it exclusively in-house,” Wing says.

            For her, that means a case under $100,000, usually involving retail customer complaints.

            “We’re an investment-related company,” she says.  “If anybody loses money, they aren’t happy.”

            Wing’s ability to handle the caseload in addition to her other responsibilities as GC owes to a unique skill set:  She is the rare lawyer equally versed in transactional law and litigation.

            A boutique litigator for 10 years before moving in-house, Wing says in-house counsel are better positioned to handle the early stages of a complaint and see if the matter can be resolved.  Outside counsel, who are expert at winning cases, may be less inclined to settle and often choose strategies that focus on the final victory rather than overall cost of the matter.

            Having litigators in-house can pay dividends on other fronts as well.  A good litigator can look at a contract and tell you where they would attack it, for example.  And their intimate knowledge of a company can streamline the costly discovery phase.

            “You save money when you know what evidence you have, you know where that evidence is, or you know what evidence to ask for,” she says.  “Then you can move the case quickly.”

            That kind of knowledge is particularly valuable in the routine customer suits PFGBest faces.  But even in large cases where she retains outside counsel, Wing plays a major role.

            “I’m usually the senior trial attorney.  I might not do all the direct or cross, but I am running the case.”

            Despite her prominent role in most of the company’s litigation, Wing says it’s not wise for in-house counsel to handle all types of cases.  She sends out specialty work, anything involving patents or bankruptcy-related claims, for example.  And there are strategic considerations as well.

            “I don’t think you should ever bring all litigation in-house,” she says.  “You want to retain those firms that could do the most damage against you.  You want them to be conflicted out so they can never come against you.”

            Wing says the biggest challenge general counsel face when bringing litigation in-house is finding lawyers who have the right temperament.

            “The problem with most litigators is that their personalities are very intense, which doesn’t usually mix well with corporate America ,” she cautions.  “You want a litigator who can be intense when he or she needs to be, but can also be laid back.  If the other employees are afraid to approach him, it doesn’t do much good.  Skillwise I can train them, I’ve trained associates.  Personality?  Either they have it or they don’t.  They have to fit in the corporate culture.”

 

THE HEADHUNTER

 

Aaron Williams couldn’t agree more that personality is paramount when hiring in-house litigators.

            “It’s one thing to tolerate a jerk in a law firm who is an amazing trial attorney for your cases,” he says.  “It’s quite another thing when that person permanently works in the office next to yours.”

            Williams, the president of the national attorney search firm Aaron Consulting, says that the personality factor is not the only thing companies tend to underestimate when they bring litigators inside.  He rattles off a laundry list that includes selection, retention, motivation, client chemistry, and salary and benefits costs.

            “Not to mention that you have to have space on your property for these attorneys, their support staff and their technology—there’s cost tied to that, too,” he adds.

            The net result is that many companies spend a lot of time and effort insourcing litigation, only to find they still don’t put a dent in the budget.  So they react by shedding the capacity they’ve just acquired, adding another layer of expense to the process.  Williams calls it the rubber band effect.

            A better strategy to reduce litigation cost, Williams suggests, is to hire the kind of lawyers he describes as “rock-solid traffic cops.”  Companies should go after lawyers who understand how bills get ramped up and know how to squeeze savings from outside counsel.

            “They know how to write that first letter to defend the company and are very good at controlling law firms and making sane attempts to prevent litigation from reoccurring,” he says.

            It’s futile to attempt to have internal trial counsel for every case in every venue, he insists.  Companies are generally better off hiring lawyers for strategic litigation management.  They may not go into the courtroom very often, but they mesh better with the corporate culture and in-house pay scale.

            “In essence,” Williams concludes, “they know when to pass and when to punt.”

 

THE TEAMBUILDER

 

For David Young, the secret to managing litigation cost is the effective collaboration of his in-house litigators and his stable of outside firms.

            As general solicitor and national environmental counsel for Union Pacific Railroad Co., Young wears two hats:  In one role he oversees all litigation for his company’s southern region; in the other he manages the company’s environmental legal issues.  For both functions he uses a mix of in-house and outside counsel.

            During the past decade, Young has winnowed the number of outside firms he uses, keeping only the ones which are flexible and most willing to work as a team, both with his inside litigators, and with each other.

            “It’s an ongoing process of evaluation,” he says.  I’m a big believer in long-term relationships with outside counsel.  If you have the right group of outside counsel, you can sit down and have an open dialogue with them about the best way to staff a particular set of problems.”

            Internally, Young has six litigators.  Five primarily handle Union Pacific’s regular, repeating tort docket, and the other one focuses on environmental litigation.  Three factors usually determine when and how Young teams his litigators with outside counsel.

            “The first is geography,” he explains.  “I’m spread out over a large area, so I may need someone local to run the case.  Second is when I need particular expertise, although in that situation I frequently pair my outside counsel with one of my in-house lawyers.  The third thing is cases that have a huge volume of documents we’re not staffed to handle.”

            For the team to be a winner, Young says it has to have the right players.

            “If you’re going to bring litigation in-house you need to make sure you hire trial lawyers who can actually go down to the courthouse, people who have tried a bunch of these cases and can do it efficiently,” he advises.  “Then you need to be realistic about what support you’ll need, like paralegals and clerical support.  One of the big mistakes companies make when they bring litigation in-house is that they don’t evaluate the ancillary costs that go along with trying a case.”

 

THE CONSULTANT

 

Ancillary costs can escalate by orders of magnitude when a case moves from the run-of-the-mill variety into the bet-the-company category.

            “I’m assuming that routine litigation is not driving the cost at most companies,” says Stewart Weltman, a law department consultant.  “The implicit driver to the litigation cost explosion is the ‘cover-your-butt’ mentality.  General counsel hire the biggest and best firm possible so they won’t be held accountable if something goes wrong.  If you bring that dynamic in-house it’s going to be worse.”

            In high-stakes litigation, the lead attorney needs to be able to wrangle top executives.  It not only takes a strong personality to manage big egos, it takes a certain distance.

            “You have to be able to say, ‘Hey, you may bet the smartest guy in the room, but I’m going to tell you how to do this deposition because I know better,’” Weltman says.  “Is somebody in-house going to be able to do that?  How do you take control of a client who is your direct boss?”

            At a certain scale, he says, outside counsel have to take over, and that’s where costs escalate.

            Weltman spent most of his career as a plaintiff’s attorney in complex litigation, where he witnessed first-hand the way defense counsel bled resources throughout the process of trying a case.  He says in-house counsel often failed to pick up on it because they didn’t have enough experience inside big cases.

            “Most lawyers go in-house before they reach the upper ranks at law firms,” he explains.  “This creates an imbalance when they have to manage senior litigators.”

            The solution, he says, is to bring in someone who has the experience of leading complex litigation to manage outside counsel.

            “Whether you hire them full time or on a consulting basis, you need somebody riding herd just on the cost issue,” he says.  “Their job is to ask the right questions.  If you don’t know what to ask, outside counsel usually get their way.  Say they want to do 10 depositions.  If you know which two you can cut out, that’s a 20 percent savings.  Over time, that adds up to a lot of money.”

 

OUTSOURCING E-DISCOVERY

 

Companies frequently underestimate the many aspects of bringing litigation in-house.  “Law firms are a kind of litigation machine,” says Mary Mack, technology counsel at the electronic discovery firm Fios Inc.

            “They have the support staff, docketing and case management processes, they’re well trained in preparing witnesses and the handling of experts—all the things that need to be considered when conducting litigation.  The enterprise that brings litigation in-house doesn’t just have to find litigators and litigation managers, it has to source all that infrastructure.”

            One major aspect of litigation most general counsel seem content to largely outsource is discovery.  A recent Fios survey found that just 18 percent of companies plan to conduct most of their electronic discovery in-house over the next three to five years, from preservation and collection through processing and review.

            According to Mack, as much as 95 percent of the entire discovery process is electronic in patent, antitrust and product liability cases.  The figure is closer to 25 percent in employment cases.  She says most companies initially think they want to bring the full e-discovery process in-house.

            “Then when they look at the IT resources and scalable architecture necessary to do everything, they change their minds,” she says.  “They usually settle on doing things that are nice, easy and repeatable in-house—things that don’t have a lot of anomalies to them.”

 

THE VETERAN

 

Companies that succeed in finding and hiring in-house litigators face a secondary challenge:  Keeping them.

            “You bring people in-house and you hope they stay, but you have to plan for the possibility that they might not,” says Michael Ross, who since retiring as GC of Safeway has served as an adjunct to the consulting firm Altman Weil.  “You might make a bad hire, or they might just leave.”

            Not only are you on the hook for severance and perhaps outplacement assistance, you also have to start your search all over, with all the time and fees that involves.

            Ross says small law departments are disproportionately vulnerable to the effects of turnover.  “If you’re very small, it’s a bigger risk,” he says.  “You bring in one or two litigators, that’s a big part of your law department.”

            Of course companies are also affected when their outside counsel suddenly leave, but at least they don’t have to absorb the expense of replacing them.

            “Theoretically you can say to the law firm, if the lawyer jumps to the competition, ‘Those are your problems, not mine.  You have to eat the cost,’” Ross says.  “It isn’t perfect.  You never really know if your being made whole for the time it takes somebody to get up to speed or if there’s a quality differential.”

            The point is, you’re not totally left holding the bag.

            Ross says there is a middle way for companies to add litigation capacity without as much risk.

            “Especially in a market like this, and depending on the relationships you have with your firms, you could work out a part-time or full-time secondment where you bring in a law firm lawyer at a cost that works for everybody, perhaps with the option of moving to a full-time job if things work out,” he adds.

            The firm trims excess capacity, the company gets a better rate and nobody loses a job.

            Ross is careful to point out that although pressure to reduce cost is stronger in a down economy, the need to better manage litigation expense is a much longer-term trend.

            “This started long before the economy turned,” he says.  “There’s pressure across the country in legal departments of all sizes in which management is saying, ‘We have to treat this like we treat everything we buy.’  The general trend toward reducing litigation cost is not tied to the economy.  It’s here to stay.”