“The State of Canadian Judicial Statistics: Trends in Canadian Civil Justice,” a report by three authors at The Fraser Institute [info@fraserinstitute.ca] presents data on the average annual (inflation adjusted) growth of civil legal spending by business over the 20 year period. The annual increase was 0.9% (pg 3). Making up that aggregate figure were declines in 1974-80 of -0.1% and in 1987-94 of -3.4% and increases in 1980-87 of 7.0% (pg. 5).

The authors calculated that business accounted for 35% of the CDN$11 billion spent in 1993 on civil legal services (pg. 4).

This report admirably collects and analyzes data. For example, it calculates the average cost per trial in Ontario and British Columbia courts – CDN$14,400 and CDN$18,000, respectively in 1993/94. They extensively discuss alternative dispute resolution in terms of comparative economics.

When the accountants for Adecco, a $20 billion temp agency, said they were not prepared to sign the company’s accounts for 2003 because there were material weaknesses, they triggered a $120 million accounting and legal review. [Economist, May 21, 2005 at pg. 72]

At one point, “there were three sets of lawyers employed to cover the accountants’ backs, checking that their work would not lead to lawsuits after the fact. The bills of 15 different law firms, pricing their services at rates of up to $800 an hour, were paid by Adecco. According to a senior executive, the firms were “charging like raging bulls. It was a fee fest.”

Two observations: SOX legal compliance can cost dearly. Second, should a law department, whose budget is busted by such an unforeseeable expense, create a separate general ledger account for the charges?

A June 2005 conference entitled “Corporate Counsel Asia,” sponsored by the Malayan Law Journal, has a session by Suflan Shamsuddin, the General Counsel of Shell Malaysia. Shamsuddin will describe the set of “strategic initiatives for implementation” by that Law Department in 2004. The brochure describes them as:
• Revamping of litigation management processes
• Review of external counsel panelship
• Risk management mapping and review
• Review and remediation of litigation files
• Knowledge Management initiatives relating to:
o Regulatory monitoring and updating
o Precedent database
o Legal awareness programs
o Competence matrix for lawyers
o SMART KPIs [Key Performance Indicators] [See my post on April 8, 2005 criticizing SMART objectives for lawyers]

Assuming the Law Department to have not more than 20-30 lawyers, this strikes me as an overly ambitious management agenda. Each initiative, done well, could take months of effort. Point two is that “risk management mapping” sounds innovative, but we have to await the conference transcript.

For a presentation on February 10, 2004, three lawyers from the Watson firm presented on “Working Effectively with External Counsel.” Following three advantages to law departments of beauty parades – quick, efficient, and “you get an impression – they list as cons a full dozen.

The bullet points do not elaborate on the points against beauty contests, so I will interpret: (1) “orchestrated” – other firms fake their impression management; (2) “sometimes designed to conceal rather than explain” – other firms lie; (3) “who prepares them?” – marketing staff concoct them; (4) “’boiler plate’ material” – shallow, hot air, and worn thin; (5) “Rarely able to fully assess expertise” – hire us, don’t ogle them; and (6) “over developed propaganda” – their marketers lie.

The criticisms keep on coming: (7) “who is actually doing the work?” – their experts will bait and switch; (8) “who is available here to do the work?” – geographic bait and switch; (9) “suitcase lawyers” – yet another bait and switch?; (10) “what actually happens in practice” – firms lie; (11) “reliance on local counsel” – law firm bait and switch; and (12) “too price focused” – grabbing filthy lucre influences other firms instead of our pure professionalism

Law departments can hire local firms in different countries, they can hire a large firm with foreign offices, or they can turn to a law firm that belongs to an association that has international members. A report three years ago by one of the largest of such associations, Lex Mundi, listed eleven other groups – not surprisingly, all of whom lagged Lex Mundi among a group of international law departments in name recognition.

The eleven, in descending order of recognition levels, were AM LF Association, Interlaw, Interlex, Meritas, Pacific Rim Advisory, State Capital, Multilaw, TAGLaw, US LF Group, Terralex, and World Law Group.

For major matters such as class action defenses, acquisitions of public companies, and significant SEC filings, the top lawyer – the chief legal officer – typically approves which law firm to hire.

But when a 2002 study commissioned by Lex Mundi (conducted by Altman Weil) reported that in an international group of law departments 92 percent of “chief legal officers or general counsel select or direct the selection process of outside counsel” my inner skeptic twitched.

In law departments with more than, say, 20 lawyers, the head litigator or IP lawyer or employment lawyer often hires firms without consulting the general counsel. For the largest portion of work done by outside counsel matters little to the top lawyer.

This is not to say that the general counsel avoids ultimate responsibility for retention decisions (instructing firms, as the British say). It is to say that most decisions pass by fairly routinely – especially since many firms have a stable of go-to firms or a list of approved counsel [See my post of April 18, 2005 on British panels.].

A 2002 study commissioned by Lex Mundi (conducted by Altman Weil) found among an international group of law departments that “one-third of all respondents maintain a list of approved outside counsel for work performed domestically.” Unsurprising, but to what end?

No one has compared legal spending as a percent of revenue across a group of law departments that have an approved counsel list to the same metrics for a comparable group that maintains no list. Until we know whether a list helps manage costs, we can only surmise.

I believe it is necessary for well-managed departments to identify firms that will be expected to handle certain kinds of matters, absent unusual circumstance. To be sufficient, however, the department needs to enforce the use of only approved counsel; it needs to review the list periodically; it needs to prune the list; and it still needs to deploy cost-control strategies with the approved firms.

A lawyer who reports to a business unit executive faces a presumption AGAINST being able to assert the privilege. This according to the May/June 2005 issue of Business Law Today (pg. 23), quoting from a 1998 case:”[t]here is a presumption that a lawyer in the legal department or working for the general counsel is most often giving legal advice…” [Rees Morrison: what about tax counsel reporting to the CFO?]

By contrast, paraphrasing the same decision, the article explaines that if the in-house counsel “also works under a business unit of the corporation or otherwise acts in some management role… then the opposite presumption arises – the communication was not for the purpose of obtaining legal advice.”

Jeopardizing the attorney-client privilege argues for having all practicing lawyers report up to the general counsel. Even so, does the risk darken the advantages of having lawyers dedicated to support particular business units? Is that “working under a business unit?” At the extreme, where inside lawyers want a seat at the table of management, does this pull the chair of privilege out from under them?

Benchmark surveys include the operational costs of law departments (mostly compensation, but also facilities, T&E, training, IT and other internal costs) and departments’ payments to vendors (mostly law firms). They rarely include other law-related payments, such as fines, judgments and settlements.

Legal departments do not provide the elusive data because they (1) do not track it; (2) do not convert all lawsuit resolutions into money – some involve licensing a patent, agreeing to new procedures, continuing a disputed arrangement and other non-cash solutions; (3) do not want to disclose sensitive, confidential settlements or patterns of settlement; (4) have insurance coverage for some expenditures; and (5) they react to the infrequency and size of the few payments they make by saying “this was an anomalous year”.

For all these reasons, benchmark total legal spending (TLS) is not total.

Would litigation costs drop if clients had to pour their own time and effort down the litigation drain? Stated differently, if clients can lob a law suit over the fence into the legal patch, and never think of it again, the company loses a governor on the accelerator of litigation costs.

Assume for major cases the business unit must assign a manager to attend hearings, work on discovery documents, report on costs and otherwise incur costs. [See my post on April 18, 2005 (6) about an assigned project manager.] The involvement should create more pressure to resolve the dispute promptly. Might not a business mindset prevail over a litigator’s quest? After all, a law suit is a problem for the entire company, not just for a responsible in-house counsel handling it.