Limiting Litigation Costs - Don't Overlook Your Legal Counsel's Contribution to the Problem

Gavel on Cash.jpgOne 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.

Closing Thoughts

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. 

Michigan Continues to Stand Out in Creating Favorable Business Environment By Moving Closer to Creating Specialized Business Courts

Business Professionals.jpgOn September 11, 2012, Michigan took one step closer to implementing a court system specializing in handling business and commercial cases.

Specifically, the Michigan Senate Judiciary Committee unanimously approved legislation that would create a business court system that would exclusively determine disputes if all or part of the claim included a business or commercial dispute where the amount in controversy exceeded $25,000.

Business disputes would further include: 

  • An action in which all of the parties are business enterprises.
  • An action in which at least one of the parties is a business enterprise and the other parties are its or their present or former owners, managers, shareholders, members, directors, officers, agents, employees, suppliers, or competitors, and the claims arise out of those relationships.

According to a well-respected business lawyer, Doug Toering, who has been closely following the legislation, there are likely to be minor amendments added to the bill to address procedural issues (i.e., the mechanics for moving cases in or out of the business court if a claim is added or dismissed in a multiple claim lawsuit), which will need to be approved by the full Michigan Senate and then signed into law by Gov. Snyder before it will go into affect. 

Michigan Business Courts and Employment Related Lawsuits. 

With respect to employment claims, the proposed legislation specifically excludes from its coverage the following:

  • Employment discrimination claims;
  • Civil rights claims, including actions brought under Michigan's  Elliott-Larsen Civil Rights Act and the Persons with Disabilities Civil Rights Act; and 
  • Wrongful discharge claims, except for actions involving corporate officers or directors.

But not everything arising in the employee/employer relationship would be excluded from the coverage of Michigan's proposed business court. Claims arising out of noncompete or trade secret misappropriation claims would likely fall under the business court's jurisdiction, even though such claims commonly arise in the context of the employment relationship.  

Benefits of a Michigan Business Court System. 

In theory, business courts make a lot of sense for Michigan businesses. Consider these three benefits: 

  • First, it is anticipated that the creation of a business court will have only a minor fiscal impact because the court would be run by current judges who would be assigned to the business court.
  • Second, the proposed Michigan business court system would assign business and commercial cases to specific judges who are experienced in business and commercial law issues and statutes specific to such claims, e.g., the Uniform Commercial Code, noncompete agreements, compliance with corporate or limited liability company statutes, as well as issues unique to such business entities, e.g., governance, powers, duties, and management. 
  • Third, by having judges specifically assigned to deal exclusively with business and commercial claims, business court judges would presumably continue to develop that judge's expertise and insight into such issues, leading to more consistent and well-reasoned business decisions. 

Judicial Campaign Donations, Business Courts and Public Perception.

One concern, however, is the perceived influence money may have in determining business disputes. By limiting the number of judges who hear business disputes, an unintended consequence is that it is easier for donors to funnel money in the form of campaign contributions who are likely to regularly appear before these judges.

For both the public and those businesses that lack the financial resources to make matching contributions there is the risk of eroding the public trust and diminishing the value of the judicial process when it comes to business disputes. 

Take for example billionaire Matty Moroun and his very public and very expensive efforts to win the legal and public opinion battle to prevent the building of a second bridge from Metro Detroit to Canada in order to protect his current monopoly. In this regard, the Detroit Free Press recently reported that Matty Moroun, his wife, his son, and his son's wife, gave the maximum amount of money allowed under Michigan law in June to the re-election campaigns of Republican-nominated justices. Additionally, several employees of one of Mr. Moroun's company gave over half of the maximum amount allowed under Michigan law.

For those not familar with what is at stake for Mr. Moroun's bridge empire, it is worth your time to read a great write up from Businessweek: Matty Moroun: Detroit's Border Baron, which estimated that tolls from the bridge owned by Mr. Moroun's company takes in approximately $156,000 per day. 

The issue of money and judicial integrity made major headlines in 2009, when the U.S. Supreme Court heard Caperton v. Massey. That case specifically addressed the issue of the role money played in a judicial election. This case arose out of a West Virginia trial where Hugh Caperton won a $50 million jury verdict against Massey Coal.

Massey appealed that verdict to the West Virginia Supreme Court. While the case was pending to be heard by this court Massey, through its CEO Don Blankenship, gave a $3 million campaign contribution in support of Brent Benjamin in his race for state Supreme Court Justice. Benjamin won the race, and refused to recuse himself from the Caperton case where he ended up casting the deciding vote in a 3-2 ruling to overturn the $50 million verdict against Massey. 

The US Supreme Court agreed 5-4, sending the case back to the West Virginia Supreme Court,and forcing Justice Benjamin to recuse himself from the case.

In both instances, there is the danger that the erosion of public trust - whether by individuals or companies - in the judiciary is significant. And those concerns may be magnified where you are whittling down the number of potential judges who are likely to hear your business case. 

Closing Thoughts on Michigan Business Courts

Does money actually influence a judicial decision? Without answering the question, the U.S. Supreme Court in the Capperton v. Massey decision reasoned that where a judge received $3 million in campaign contributions, "the probability of actual bias on the part of the judge or decision maker is too high to be constitutionally tolerable" and, as such due process required that judge to recuse himself.  

Going back to the question about money and influence, my personal belief - based on experience and a genuine belief in the principles of the rule of law, is mostly no. But the answer, however, matters less than what the public and those who are affected by such decisions believe to have taken place in any particular case. And that belief can be easily persuaded where headlines report high-powered billionaires or corporations flood a smaller field of business court judges with campaign contributions. 

For more information about this post, including how noncompete lawsuits and trade secret misappropriation claims will likely be affected by the creation of business courts, contact Jason Shinn.  

QWERTY Keyboard Lawyers - Inefficient and Less Value to Clients

QWERTY Keyboard.jpgA recent court appearance provides an example of what any company concerned about reducing unnecessary costs should be aware of when it comes to managing outside legal counsel.  

Specifically, I was in court last month in relation to a hearing on a motion in a sexual harassment / wrongful termination claim I'm defending. A fairly prominent attorney from a major Metro Detroit law firm was also sitting in the bleacher seats waiting for his case to be called.

When his case was called, he approached the podium with another attorney who he introduced as his partner. The attorney proceeded to explain that his motion was unopposed and that opposing counsel had actually agreed to the relief requested. 

Bluntly speaking, it made no sense for two attorneys - partners no less - to attend a hearing on a motion that a judge routinely grants. In fact, these types of motions are what newbie attorneys cut their teeth on when first practicing law, which makes sense: It gives a new lawyer the opportunity to get court room experience, at a lower cost to the client. 

This incident reminded me that being an attorney often has more in common with the QWERTY keyboard than creating meaningful value for clients.

The QWERTY Keyboard and Intended Inefficiency 

The modern keyboard, called QWERTY because of the placement of first six letters on the top row of the keyboard, was developed in the 1870s by Chistopher Sholes. An explanation for the nonsensical placement of the keys was to reduce the efficiency of typists who would otherwise cause the keys of early typewriters to jam.

In other words, the QWERTY keyboard was designed with the intention to be inefficient. One blogger,Darryl Rehr, has bluntly described the design as making "no sense. It is awkward, inefficient and confusing ..." It also makes no sense in light of the advancement in computers and word processors that are intended to improve efficiency not reduce it. 

The Inefficiency that is the Attorney's Billable Hour

Similar to the QWERTY keyboard, the "billable hour" is the dominant fixture for delivering legal services. Time, generally measured in increments of tenths of an hour, is often the measuring stick used to deliver legal services. So however long a particular task takes - researching a legal issue, a phone call, traveling to court, etc. - that is how much time a client will be charged for legal services.  

Going back to the above example, what value did the client receive in having two experienced lawyers, both partners at a major metro Detroit law firm, attend an unopposed motion that the opposing lawyer actually agreed to the relief requested? Like the QWERTY keyboard, this decision made no sense and was an inefficient use of the client's resources. 

Steps Companies can take to avoid QWERTY Keyboard Legal Services

The purpose of this post is not to embarrass or call out any of the attorneys referenced above. In fact, I've gotten to know the prominent attorney referenced above having had several cases on opposite sides of him and his law firm; He is a nice guy, sharp and professional.

But similar to early word processing that depended upon built in inefficiencies for success, this attorney's law firm, like many law firms, depend upon generating billable hours for their financial success. But that metric essentially defines a lawyer and the law firm by quantity of the work, not quality, which is no strategy for a law firm's long-term financial success. See John Grimley over at the International Business Development Blog who recently reported about law firms looking to survive need to recalibrate their focus on becoming lean and efficient providers of legal solutions.   

So for companies defending any lawsuit - not just an employment related lawsuit - it is important to carefully scrutinize your law firm's billing practices and specifically address the misalignment created by hourly billing in order to reduce excessive lawyer fees. In this regard, here are a few points of consideration: 

  • How will a case be staffed? 

There are a number of legitimate reasons for staffing the defense of a lawsuit with more than one person. For instance, paralegals and associate attorneys will have a lower billable rate than a more senior-experienced attorney. And it is not necessary for a senior attorney to perform tasks requiring less or no analysis. So ask this question and make sure the staffing is reasonable in relation to the issues presented - not your company's bank account. 

And as invoices are provided, be sure to review them to confirm staffing makes sense. If it is not immediately apparent if this is true, follow up with the law firm. There may be a good explanation for it. Or, like the example above, you may be reminded of the saying that pigs get fat, hogs get slaughtered.  

  • What are your available billing options?

Billable hours are not inherently evil, but it does create an incentive that is contrary to the client's best interests. It is, therefore, important to have a certain level of trust in your attorney that work performed is necessary or has a likelihood of returning a measurable return on investment. My own measuring stick for this requirement is to make legal decisions as if I was spending my own money.

Also, billing on an hourly basis should not be the only option, so consider discussing other billing alternatives that align your interest with the attorney. 

  • What is the billable hour requirement at the law firm and how are bonuses determined?

The answers to these questions will probably give you the best insight as to what you can expect from a law firm and its attorneys. By way of reference, a common yearly billable hour requirement for Metro Detroit law firms is 2000, but I've had friends at law firms where that number shot up to 2,300 or dropped to 1800 with bonus incentives built around the minimal requirement.

In this regard, the billable hour is both the "carrot" and "stick" for the attorneys working on your matter: The carrot in that bonuses are doled out based on time billed in excess of a certain number and the stick that if a certain number of billable hours is not reached, then the attorney has not met the law firm's minimal billing requirements (never a good thing for job security and financial success).

In either event, you have attorneys - partners and associates alike - motivated to "survive" by hitting their hourly marks and to thrive by exceeding those marks. The hours needed to hit those marks must come from somewhere and the question is, how many hours will come from your matter? But lost in this equation, however, is an assessment of how many of those hours provide meaningful value to the client - as opposed to "garbage hours. Sending two attorneys for an unopposed motion is a prime example of garbage.  

For more information about billing arrangements that are more in line with business objectives and corresponding values, please see our commitments we promise to deliver to clients.  

March Madness and Employment Litigation - It's All About the Numbers ... and a Little Luck

Basketball.jpgEmployment discrimination claims and making bracket selections for March Madness a/k/a the men's Division 1 NCAA basketball tournament often share two decision-making approaches: Guessing and analysis.

For example, Survival of the Fittest: A New Model for NCAA Tournament Prediction discusses analyzing the tournament using a model based on network characteristics to "quantify traits that specifically apply to the tournament and the other teams in it, which form a network as they play each other over the course of the season." Sounds like a lot more work than simply going by who has the better mascot. 

But in contrast, Sheldon H. Jacobson, a professor of computer science at Illinois, notes that picking the higher-seeded team to beat a lower-seeded opponent usually works only in the first three rounds of the tournament, but after you get to the Elite Eight, seeding is irrelevant and "you might as well pick names out of a hat."

Guessing, Analysis, or a Little of both in Employment Discrimination Lawsuits

In representing individuals and employers in employment discrimination lawsuits, making settlement and litigation decisions often comes down to a mixture of guesswork and analysis. But proper analysis is the beginning point for taking the guess-work out of litigation.

The starting point for this process is reducing the claims to a range of potential outcomes. In this regard, a critical first step in this process is analyzing jury verdict results. Consider for example three randomly selected 2011 employment lawsuits and their results:  

  • Defense Verdict - Plaintiff awarded $0.00: In a gender discrimination and a hostile work environment involving a 40 year old female Plaintiff who was working in retail sued for lost wages, benefits, and damages for emotional distress. She asked the jury for in excess of $100,000. The Defendant employer contended that Plaintiff's complaints were promptly investigated when she complained to the appropriate supervisor, an immediate investigation was performed and disciplinary actions were taken. Defendants denied that plaintiff was terminated in retaliation for her complaint and contended that she was terminated for economic reasons.
  • Settlement of $130,000: A legally-blind 44 year old female employee claimed she was fired because of her handicap. The defendant employer denied the allegation and maintained that the plaintiff's firing was for nondiscriminatory reasons. 
  • Plaintiff verdict in the amount of 535,120.00: In a discrimination lawsuit, a white, 32 year old male teacher was terminated for making a racially-insensitive remark. The plaintiff argued that he was singled out for discipline when similar comments made by black employees were overlooked.

For an actual claim, the sample of jury verdicts will be larger and usually limited to identical or similar claims. Depending upon the available sample size, this analysis may also be reduced by Michigan counties or geographic areas. 

In this very limited sampling, the average amount for resolving these claims was $221,706.00 (exclusive of costs and attorney fees). I would also want to put as much context behind the numbers used to reach this value. 

For example, a further investigation of the circumstances of the largest plaintiff's verdict may (hopefully) explain why that verdict result should not be relevant in analyzing a particular discrimination claim. Perhaps, there was direct evidence of discrimination, spoliation of evidence, or particularly egregious conduct on the part of the defendant employer. From here, a useful "value" of what a claim is worth can be fleshed out.

There is also a significant amount of additional analysis that goes into assessing claims or defenses. One example, I've begin to incorporate a decision tree analysis, also known as risk analysis, to further refine my evaluation of a particular claim or defense. I've found that decision tree analysis is useful for providing structure within which to assess litigation or settlement strategy, lay out options, and investigate possible outcomes from choosing those options. It also provides a solid foundation for offering reasons for the likely outcome on an issue. 

It is important to remember that even within this structure some "educated guessing" comes into play in terms of exercising experience and judgment. Both are needed to assess issues such as rulings on key evidence issues, anticipating how a jury will respond to various issues, credibility of witnesses, and the likelihood of disposing of a claim through a dispositive motion.   

Conclusion

Preferably a thorough case analysis done as early in the litigation process as possible will avoid the all too familiar disappointing feeling of looking over a decimated March Madness bracket (thanks MSU ... and Duke ... and Missouri).

But unlike the disappointment of losing your office pool, failing to engage in a meaningful analysis at the beginning of a claim or defense could mean the disappointment of pursuing a costly litigation strategy that is unlikely to overcome significant factual or legal challenges.

With this realization, however, the focus can be shifted to developing a settlement strategy that may more cost-effectively resolve the claim. Only by following an analytical framework along with mixing in an attorney's own professional judgment about an employment discrimination lawsuit can a clearer understanding about key issues and exposure be obtained. And maybe a little bit of luck. 

New Michigan Court Rules Give Jurors More Opportunity To Be Involved in Trials

Jury.jpgThe Michigan Supreme Court recently approved new rules for civil and criminal jury trials that will give jurors an opportunity to participate in trials.

Under these rules, jurors will be permitted to take notes, discuss the evidence throughout civil trials, and submit questions to the judge to ask witnesses. A PDF copy of the rules was made available by the Free Press.

These rules apply to all Michigan civil cases, including employment discrimination claims. Trial judges, however, retain discretion in deciding whether to allow most of the new practices.

Justice Markman provided an enlightening concurrence as to why these rules are necessary. Among those reasons:

[the rules] will more deeply engage, and maintain the attention of, jurors in the proceedings that they are to judge ... and they will render at least somewhat less true Robert Frost’s observation that 'a jury consists of twelve persons chosen to decide who has the better lawyer.'

From a trial attorney's perspective, I agree with Justice Markman that engaging jurors is an important consideration. And I think this increased engagement will have a critical impact on employment discrimination claims where resolving cases often come down to issues of credibility (but it is still important to heed Mr. Frost's observation and get a great attorney - if you followed the link, I couldn't resist).

Also, jurors asking a question will be much more critical of the answer, the mannerism of the person answering the question, and whether a satisfactory answer was given. Taken together, a juror may form an opinion of a critical witness that will shape the rest of the trial. 

Additionally, it is not uncommon for lawyers to present a particular theme or pursue a particular point of a case, but jurors, however, are focused on an entirely different issue. The insight from a juror's question could provide insight to key attorneys into this disconnect and (hopefully) allow the attorney to bridge the gap. 

Further, it is frustrating (and unnerving) to go through a jury trial with no real way to gauge how your case is being received from the perspective of the jurors. Juror questions, however, will likely illuminate, at least circumstantially, issues the jury is wrestling with or otherwise suggest where the trial might end up.

These new rules take effect on Sept. 1, 2011. It will be interesting to see how these rules affect trials. And dinner is on me for the first juror to end their question with "and I can handle the truth" as an homage to the classic line from Colonel Nathan R. Jessep and delivered by Jack Nicholson in A Few Good Men.