Litigation Reserves, Without Reservation

I was thinking about Merck setting reserves of $675 million to fight Vioxx lawsuits and comparing it to the difficulty of law firms that whine if asked for budgets.  Here is a company facing an unprecedented legal onslaught – at least for it and for this class of painkillers – and it makes a good faith estimate to project defense costs and settlement payments.  Or at least I believe those are the major components of a reserve estimate.  They are looking several years down the litigation road, across more than 575 lawsuits (as of late January), about 70 class-action suits [Fin. Times, Jan. 26, 2005], and proceedings in at least a dozen countries.  But they can set a budget – an accounting reserve – that satisfies our securities acts.  Why can’t law firms handle a bundle of current and projected cases and offer a fixed fee budget?

PS I welcome comments from informed readers about the steps a company goes through to set up litigation reserves, or why that discipline would not apply to a law firm bidding to handle a suite a cases over time at a fixed price.

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