Articles on Non-Law Firm Costs

Some figures on the average budgets of IP departments, and questions

In Exec.Counsel, June/July 2012 at 31, author Mark Klapow of Crowell & Moring discusses intellectual property. At one point he refers to how much companies spend on their internal IP groups. “The average annual budget for the intellectual property departments for large companies, which are typically the most dedicated to steering new ideas through the patent process, is over $6 million.”

 

Klapow does not reference that figure but if it applies to the costs of the in-house lawyers, patent agents, and others in the IP department, it seems quite high.  Perhaps “the budget” includes both inside and outside costs for IP, which would make it more plausible.  Also, if “large companies” were defined, we could assess the $6 million figure better, not to mention if he had given a median instead of an average.

Some findings about the costs of patent troll litigation

A pair of professors at Boston University’s School of Law have calculated a price tag for the direct costs stemming from patent troll activity: about $29 billion. The $29 billion figure excludes a host of indirect costs to the defendants’ business, “such as diversion of resources, delays in new products, and loss of market share,” the study states.

James Bessen co-authored the study with Michael Meurer, “The Direct Costs from NPE Disputes.”. In 2011, companies defended 5,842 suits initiated by NPEs, up from 4,445 in 2010, and 1,401 in 2005.

The professors analyzed a database of NPE-related lawsuits developed by RPX Corporation, which specializes in patent risk solutions, as well as a survey of defendant companies about their costs.

Annual revenues for the median company being sued totaled just $10.8 million, and 82 percent of the defendants earned less than $100 million in revenue. “Small and medium-sized companies account for 37 percent of the accrued direct costs,” the authors write. “Moreover, compared to revenues, the direct costs of NPE-patent assertions are relatively larger for small companies.”

The authors determined that the average legal costs per defense “range from $420,000 for small/medium companies to $1.52 million for large companies.”  When companies paid to settle, the average settlement costs reached $1.33 million for small/ medium companies and $7.27 million for large companies.  “Legal costs are about a third as large as settlement costs, or about one quarter of total litigation costs,” the authors write (See my post of Jan. 20, 2009: settlement costs in relation to costs of outside counsel.).

LegalBase picked as a global legal outsourcing 100 rising star

The International Association of Outsourcing Professionals ranks what it defines as the global outsourcing 100 leaders.  Listed in Fortune, July 23, 2012 at 55, a few of them have some involvement with legal outsourcing.  I noted on a quick glance Donnelley Global Outsourcing and SPI Global.

 

More interesting was the “rising star” LegalBase www.legalbaselaw.  Its website explains that in 2008, Ali Tyebkhan co-founded the Sri Lankan company.   Many countries house legal offshoring facilities, but this was only the second time I have mentioned Sri Lanka (See my post of Dec. 28, 2010: lists 11 countries.).  LegalBase unabashedly holds itself out as a law firm, providing legal services through its model of on-the-ground lawyers admitted to practice in various jurisdictions supported by offshore employees.

Standards and audits for e-discovery vendors as complied with by doeLEGAL

doeLEGAL supports not only its ASCENT matter management product for legal departments but also its discovery-document processing capabilities.  As to the latter, the company announced late last year that it had passed a Standards for Attestation Engagements 16 (SSAE 16) Type II audit completed during the first nine months of 2011.  According to the press release, SSAE 16 “is the most widely recognized audit of its kind ensuring doeLEGAL’s controls, processes and procedures adhere to industry best practices. The SSAE 16 replaced the SAS70 as the new standard.”  The website for the AICPA explains that the SSAE 16 audit examines “a service organization’s controls and processes.”

Also commendable and noteworthy to this blogger, who tries to keep up with matter management software and installations in law departments, is that doeLEGAL announced last year that it had installed ASCENT at Angelo Gordon, BASF, and Constellation Energy.  If every provider of law department software announced new clients, the law departments of the land would understand better which packages are being selected by which kinds of departments.

A methodology, albeit with much data missing, to estimate judgments paid by corporations in the United States

Amounts initially awarded by juries do not reflect any reductions or offsets subsequently granted by judges or appellate courts, but they do represent data points regarding corporate legal costs. So, let’s start with data for the top 100 verdicts in United States as published in Corp. Counsel, May 2012 at 22. If you exclude the bizarrely high 2011 wrongful-death figure of $150 billion, for the past two years the 100 largest verdicts amounted to approximately $10 billion a year.

If plotted on a graph highest to lowest, the underlying data for each of these verdicts would allow us to estimate the sum of all jury verdicts during those two years. The downward trend line would eventually intersect the bottom horizontal axis and the area below that line would approximate the total awards. Let’s suppose For example, it to be $32 billion annually in jury awards.

Data somewhere would allow us to deflate that gross amount to a smaller amount after appeals and reductions (or post-trial settlements). Pretend that reduction was one-quarter, leaving us with a rough-cut $24 billion for judgments paid in the United States. If we further reduce that figure for an unknown amount attributed to corporations paying judgments, as compared to individuals, we draw even closer. Ninety percent paid by companies might be plausible, so that leaves something like $21 billion in corporate judgments paid.

During those same years, payments by U.S. companies to law firms presumably ranged between $60 and $80 billion (See my post of Feb. 26, 2008: estimates total US law department expenditures.). Does it dismay anyone to realize that judgments paid equal something on the order of 25-30 percent of legal fees? More fittingly, if litigation accounts for about 60 percent of legal fees, thus accounting for $36-48 billion a year, court-ordered awards would bulk as high as two-thirds to one-half more.

Little known about relationship between publicly disclosed settlements and those that are confidential

The settlements that reach the press, those covered by 8K filings or news releases, may well account for the largest part of corporate settlements paid (See my post of April 15, 2007: confidentiality of settlement amounts.). I presume this to be true since a single blockbuster settlement easily overshadows lots of small, nuisance payments. Shareholders must be informed about material payments and the resolution of significant litigation. On the other hand, many companies year after year have no settlements that rise to that level of financial significance or they have no legal requirement to disclose settlements.

It would be good to have some benchmarks around this topic. Perhaps general counsel would be willing to estimate the ratio over the past couple of years for their company of disclosed-to-confidential amounts (See my post of Sept. 22, 2006: 95 percent of settlements are in cash.). Also there are some settlement databases (See my post of March 13, 2006: verdict and settlement databases.).

I have tried to bring some visibility to the question of how much is paid in settlements by companies in the United States, but the bits of data are fragmented (See my post of May 30, 2005: lack of benchmark data about settlements; July 16, 2005: settlements as a percentage of total legal spend; Feb. 13, 2008: settlement ratios by practice area; July 16, 2005: settlements and judgments in relation to outside counsel spending; Jan. 20, 2009: settlement costs in relation to costs of outside counsel; and Oct. 27, 2010: data on settlements.).

The start of a network for procurement professionals who are interested in legal department spending

Dr. Silvia Hodges combines teaching at Fordham Law School with her work at CT TyMetrix. As an academic, she has researched and spoken about procurement practices related to law departments. In a recent e-mail to me she explained her efforts to bring together procurement professionals who want to understand better external spending on law firms. “We gathered the procurement people on May 2 at the Harvard Club [in New York City]. The group was composed of almost 20 procurement professionals of the largest US and international companies. Other meetings will follow in the next few months. They are definitely here to stay!”

If you or someone you know is interested in taking part, write Silvia directly for more information (See my post of March 1, 2008: procurement with 17 references; and Aug. 6, 2010: procurement with 7 references.).

Four surveys with data-based findings regarding alternative dispute resolution

Those who follow the field of alternative dispute resolution can find a trove of recent empirical research described in Alternatives, the newsletter of the International Institute for Conflict Prevention & Resolution, May, 2012 at 118. The issue summarizes four research programs and their findings regarding corporate legal practice and ADR.

Referred to are “a Cornell University/CPR Institute/Pepperdine University School of Law survey of the Fortune 1000; the 2011 RAND Report on Business-To-Business Arbitration in the United States [with 121 respondents]; The Deloitte Global Corporate Counsel Report 2011; and the 2010 International Arbitration Survey conducted at Queen Mary [the School of International Arbitration], University of London, in conjunction with White & Case [136 respondents to a survey and 67 interviews].”

Since my last metapost on arbitration, I have written several more posts (See my post of Feb. 4, 2008: regression analysis of customer arbitrations; Dec. 6, 2008: techniques favored by mediators; July 29, 2009: costs of commercial arbitration; Nov. 8, 2009: costs of arbitrators as compared to costs of the arbitration; Dec. 14, 2009: a clever rating system of arbitrators and mediators; June 2, 2010: data on forums for international arbitrations; Sept. 12, 2010: a resource to find neutral arbitrators and mediators; Feb. 11, 2011: group of in-house lawyers unite to reform international arbitration; Dec. 28, 2011 #4: infrequency of arbitrations among U.S. companies; and Dec. 30, 2011: 5 to 1 major lawsuits to major arbitrations.).

The broadest measure of legal-related spending by corporations – one-third for each portion?

Comprehensive legal spending by companies should include settlement, judgments, fines and awards. Data rarely appear on those outlays, but one source found that those “legal resolution costs” amount to about one quarter of internal and external legal costs. That ratio puts those costs at 20% of the total (See my post of Jan. 20, 2009: “for every $1 million spent internally and externally, the law department that conforms to this benchmark ratio spends $250,000 on legal resolution costs.”).

The broadest measure of legal spend should also include the whole array of costs paid for by a company that have a reasonable relationship to legal services (See my post of Sept. 6, 2011: 15 unusual expenses sometimes in legal department budgets; and Sept. 7, 2011: 14 more of those costs.). The total expenditures could rise even more if we included the all-in cost of clients who pitch in with legal-related work such as meeting with lawyers and preparation for depositions and assistance with document production.

Furthermore, a legal department may get support from the company, notably a bit of HR or Finance that might not be charged back to it. Then throw in expenses of workers compensation and claims management. All these costs that spread more broadly than the line items of the legal group we might term “peripheral legal costs.” What might all this amount to?

It should not dismay readers as a first order approximation that one-third of a typical U.S. company’s total expenditures on law-related activities goes to the internal expenses of the legal department, one-third to outside counsel and vendors paid by the legal department, and one-third to all the other peripheral legal costs paid for by a corporation.

An update on firms that invest in lawsuits of companies

The New York Times, May 1, 2012 at B3, ran a piece on litigation financing. It mentions BlackRobe Capital, Fulbrook Management, and Bentham Capital, all of which investment funds started in 2011. BlackRobe’s founder is John Coffey, formerly a litigation partner at Bernstein Litowitz. Further, the litigation finance team at Credit Suisse, one of the pioneers in the field, split off to form Parabellum Capital. As a side note from an online site, “parabellum” means “a type of semiautomatic pistol or machine-gun; also called Luger”.

The funds under management by two of the largest players, Burford Capital and Juridica Capital Management, have reached nearly a half billion dollars ($300 million and about $200 million, respectively.). The article rehearses the arguments against investments by third parties in litigation and the arguments in favor: it lets companies invest in an asset, a legal claim.