Wondering about dramatic data on litigation costs in relation to profits

A recent report entitled Litigation Cost Survey of Major Companies, presented at the Searle Center on Law, Regulation, and Economic Growth (Northwestern Univ. School of Law, May 10-11, 2010), presents time series data on litigation costs for 37 Fortune 200 US companies. The authors found that “companies spent, on average, 16 to 24 cents on US litigation for each dollar of profit earned in 2008.” I find that 20 percent of profits hard to accept.

At the median, US law departments spend about one-third of a percent of their revenue on outside counsel, two-thirds of that being for litigation. That is, they spend roughly two tenths of a cent of every $1 of revenue on litigation fees and disbursements.

If typical corporate profit rates run at something like ten percent of revenue, then multiply the two tenths of a percent by ten and that leaves about two cents for every $1 of profit. The Searle report found litigation expenses to be approximately ten times higher!

The authors comments that “increases in hourly rates do not appear to be driving the increase in litigation costs, as the available data show relatively little change in outside legal fees over time.” True, the research was conducted on behalf of a group which argues litigation costs are too high for business and wants to reform the civil litigation process in the United States. Still, my metrics and theirs are hard to square.

Perhaps some of the explanation comes from the choice of the report to use averages and not medians? A few huge companies may have suffered enormous costs, but the median department may have fared considerably better. Or, the sample of companies lists toward litigation-besieged companies? Incidentally, depending on the year, U.S. litigation costs were between four and nine times higher than non‐U.S. costs (as a percent of revenue).

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