Corporate Litigation Costs More than Winning, Study Says

Litigation has become the great equalizer of the modern corporation. Regardless of size, industry or location, there are a sizeable number of disputes diverting the resources of businesses. Nearly 90 percent of U.S. corporations are engaged in some litigation, and the average company balances a docket of 37 U.S. lawsuits. For $1 billion-plus companies in the United States, the average number of cases being juggled has soared to 147.

Those are findings from the “2005 Litigation Trends Survey” by international law firm Fulbright and Jaworski LLP. The report notes that the median-sized U.S. company surveyed reported annual gross revenues of $484 million. Accepting the reality that litigation is a constant in their business lives, close to 90 percent of U.S. corporate counsel have no plans to reduce the number of outside lawyers that handle their cases. The ubiquity of litigation goes a long way toward explaining the concern corporate counsel have with controlling litigation expenses.

Indeed, respondents expressed more concern about what they perceived as the high costs of litigation than they did about winning or losing the underlying lawsuits.

Despite the certainty that litigation expenses will continually accrue, the inherent unpredictability of their pace or size makes budgeting for litigation a difficult task for many corporate counsel. Just under 40 percent of U.S. corporate counsel are unable to predetermine the costs of managing business disputes, reporting that they could not quantify their litigation budgets in relation to their overall legal budgets.

Many companies are acutely aware of the extent of their overall legal spending. Of the companies that did track spending (half of the respondents), their average legal budget was $20.1 million, of which $8 million was directed toward litigation. However, 10 percent of counsel reported that their legal spending accounts for 5 percent or more of their company’s overall gross revenues, which for a $1 billion business equals $50 million.

The concern about cost manifests itself across the survey, whether respondents were ranking their five leading litigation concerns or describing their ideal outside counsel. When asked what message they would most like to deliver to their outside lawyers, the No. 1 directive was “control costs.” That message took precedence over “win cases,” “get results” or other results-driven choices.

“A key value of such a broad survey of in-house counsel is that it gives the legal community an opportunity to step back from the trenches and tap into the mindset of corporate America, for whom litigation can play a key role in an overall business strategy,” said Stephen C. Dillard, head of Fulbright’s worldwide litigation practice. “Litigation can be a challenging and costly part of doing business. Litigation is also a risk-reward decision in which costs can be as important as outcomes. Given the emphasis that survey respondents placed on expenses, professional litigators need to work harder with their clients to anticipate, budget and control costs.”

Some of the survey’s findings seem to be ripped from recent headlines, including increased concerns about the burdens stemming from electronic discovery in light of events such as the Frank Quattrone trial and the Arthur Andersen Supreme Court decision. Electronic discovery was the No. 1 new litigation-related burden for companies with revenues greater than $100 million.

U.S. companies surveyed are mindful of the consequences of faulty record keeping: More than 80 percent now have records retention policies, and three-quarters have litigation hold policies.

“The advent of electronic discovery, coupled with more stringent record keeping requirements, has exponentially added to the burdens imposed by litigation,” said Robert D. Owen, a Fulbright litigation partner. “In light of the enormous risks involved with poor records retention, it comes as no surprise that electronic discovery is identified as the No. 1 new concern of this year’s respondents. I don’t believe it a coincidence that in-house counsel raised these concerns while simultaneously voicing their distress over rising litigation costs-in my view, the two are inseparably linked.”

For companies with gross revenues under $100 million, there was a different new worry, also straight from the front page-regulation and compliance. As many of the comments showed, the Sarbanes-Oxley Act, and its tougher requirements for securities filings, has had a large effect on smaller companies.

Despite the constant buzz about class actions, tort reform and corporate fraud, the top litigation concerns of corporate counsel are contracts and labor/employment claims. Largely ignoring size or industry differences, those two areas each account for roughly one-quarter to one-half of the litigation dockets of American corporations.

Fulbright & Jaworski’s “2005 Litigation Trends Survey” was conducted during June and July of 2005 by Greenwood Surveys, an independent research firm in Houston. Companies from 45 states were represented. For more information, visit www.fulbright.com.