In recent years, companies nationwide have seen the number of lawsuits and the costs associated with litigation skyrocket. So it should come as no surprise that in house legal departments have developed an eye toward managing the unmanageable: controlling and closely tracking their litigation expenses. Faced with the harsh reality that litigation costs can kill an otherwise healthy bottom line, corporations are installing chief litigation officers and managing counsel to efficiently manage outside counsel and overall litigation expenses.
"We defend the litigation for the businesses, and we are required to do that in a cost efficient manner which also manages the risk appropriately. So litigation budgeting for us means trying to identify the risk that's involved in a particular matter, and figuring out the best resources to manage that risk."
—Julie S. Mazza
As women continue to climb the corporate legal ladder, they are making their presence felt in this area as well. DuPont's Julie S. Mazza, 3M's Ann Marie Hanrahan, and Sony Computer Entertainment America's Jennifer Liu all serve ably in this capacity. Their experiences illustrate the point that managing litigation requires strategic planning, uncompromising oversight, and good communication skills in order to work successfully with a dozen or more outside firms that handle the nuts and bolts of litigation.
Doing the Math
For DuPont Corporate Counsel Julie S. Mazza, one of the keys to successful litigation is managing the numbers. With more than $27 billion in annual revenues, DuPont Company manufactures plastics, crop seeds, and agricultural chemicals, and has more than 200 subsidiaries and affiliates around the world.
Mazza, who chairs the committee that oversees the company's litigation budget, explains that the legal department is often viewed as a cost center, not a profit center, for the company. "We defend the litigation for the businesses, and we are required to do that in a cost efficient manner which also manages the risk appropriately," says Mazza. "So litigation budgeting for us means trying to identify the risk that's involved in a particular matter, and figuring out the best resources to manage that risk."
The DuPont legal department has nearly two dozen litigators, but the pace of the litigation work—averaging more than 3,000 cases a year—requires the department to contract with more than 40 outside law firms.
This commitment of resources, says Mazza, requires a major team effort in areas such as early case assessment, solid technology, and long range forecasts. The litigation budgeting process takes place throughout the year, starting in the summer when in house lawyers are asked to forecast what they will spend during the following year. While the lawyers are urged to look forward, Mazza points out that many cases are litigated over several years, making it a challenge to forecast for the life of the matter.
As confirmed by Mazza, forecasts are less of an obstacle when a law department has the proper technology. DuPont has built a case management system that assists attorneys in preparing budgets. "If, for example, they anticipate that they will spend $200,000 for initial investigation on the case, and $300,000 for trial, they can go down the list of fields and enter the potential costs," says Mazza, "and that is totaled up into a number for the whole case for the next year." Lawyers can also ask the system to tell them when they have spent 25 percent, 50 percent, or 75 percent of their budget, and how their predictions measure up," Mazza adds.
Mazza acknowledges that the introduction of this kind of process might typically be met with groans from the legal staff. "You know lawyers hate to think about dollars and budgeting, but they can go into the system and very easily estimate how much they think they are going to spend, and it helps them think through how they should defend the case."
For Ann Marie Hanrahan, an assistant general counsel at 3M who is responsible for managing a significant litigation budget, the process of planning and budgeting for litigation over the life of a case is as important as the courtroom work itself. For legal departments, says Hanrahan, there is always an incentive and pressure to do it more efficiently, and thus more cost-effectively.
"Our economy is such that people are very cost-conscious," remarks Hanrahan. "Where you've got a scarce resource such as money to spend on services or goods, there is always going to be an incentive to see if you can't do it for less, better, faster, cheaper, and on time," she explains. 3M, formerly known as Minnesota Mining and Manufacturing Co., now enjoys more than $18 billion in worldwide sales of products ranging from Scotch tape and Post-Its to components for automobiles, computer displays, and surgical products.
Hanrahan contends that an extensive review of the facts of each case—many of which are product liability matters—and the applicable law is pivotal to managing a litigation budget. This requirement means that both inside and outside counsel need to invest time upfront and scrutinize the pleadings to anticipate obstacles and to have alternative strategies at hand. One very expensive component of litigation is pre trial discovery. It is incumbent on both in house and outside counsel to appreciate its scope and to lay out the options for the client. "Clients are, more and more often, fairly sophisticated people themselves and can understand what the options are, and may choose to forgo certain steps depending on the gravity of the matter," Hanrahan explains.
Mazza adds that during this process, estimates should not be inflated, but realistic.
"Everyone is aware that discovery is such a costly component of any litigation that it is appropriate to have a dialogue with the in house person," says Hanrahan. She notes that in many cases, the in house lawyer may be a transactional lawyer with limited experience with litigation.
"In those circumstances, the responsibility might be [even greater] on the outside lawyer to educate the in-house client as to the array of options," she remarks.
"…all along the continuum, you have discovery phases, motion phases, proceedings toward trial, and it's just a matter of keeping all balls in the air."
—Ann Marie Hanrahan
Mazza acknowledges that this viewpoint may take some time for outside counsel to absorb, since they are not trained to do this in law school. "Lawyers are afraid of numbers, and afraid to deal with the unknown," she adds. "Attorneys ask, ‘How can you ask me to budget, given the vagaries of litigation?' but predicting what can happen with limited information is exactly the world of the business client, so they have to do the best they can," she elaborates.
While all agree that the budget should reflect the best informed judgment of counsel, an equally important component of a litigation budget is maintaining open lines of communication between the client and outside counsel.
"What in house counsel like least is to be surprised," says Hanrahan. "So if outside counsel sees something coming down the pike that looks like it's going to be a significant expense, or it has been incurred but the bill has not gone out, then it is an obvious and appropriate thing to pick up the phone and have a conversation with the in-house lawyer."
But outside counsel should not see unexpected costs as a threat to winning the case. "I don't know anyone in house who would compromise the interests of their client merely for the sake of a budget issue," she explains. But, she points out, "Nonetheless, predictability is very important, and in house lawyers must communicate with our management. And [management] may not be as sensitive to the nuances of litigation as the in house lawyers are, so anything that the outside lawyers can do to help our understanding of that is enormously helpful."
For Jennifer Liu, who has responsibility for a corporate litigation budget as the director of legal and business affairs at Sony Computer Entertainment America—the arm of the electronics and entertainment giant that makes and sells the popular Playstation consoles and computer games—communication with outside counsel can be a challenge.
Liu notes that some law firms don't seem to know how to communicate with their in house counterparts. "I am their primary client contact and they do not know how to speak to me," says Liu. "If I don't know the area of law, they are to educate me so I can make calls related to the law and the business, because they don't know the business and I do," Liu explains.
Hanrahan uses a similar approach when shaping the direction of individual cases. Instead of having the outside lawyer inform the in house lawyer or other client where the resources should be applied, Hanrahan stated that she peers closely and raises questions when she thinks the outlay is more than the case is worth. This scrutiny means she has to be frank when it comes to dollars.
"I have been known to just tell people what their budget is, which is not to disregard what they have told me they think they could spend, but it is really intended to fit that part of my overall budget into a broader framework," says Hanrahan.
Hanrahan explained that she means no disrespect to outside lawyers, especially since she was once one herself, but she knows that they have no inherent incentives to contain costs or try to be more efficient. She believes this situation breeds lawyers who overwork a case "in the same way a car dealer ignorant of your needs and budget would prefer to sell you a luxury car rather than the economy model. In house counsel need to make outside counsel sensitive to the client's needs and how the particular matter fits in."
Mazza agrees, and notes that while all good lawyers are trained to win for the client, "The client who is paying for all this needs to weigh in with what they want the goals to be. We have a fiduciary duty to help them keep the costs down." Budgets help outside counsel avoid unnecessary bloat, and provide a mechanism to measure the attorney's performance.
A Day in the Life
Mazza, Hanrahan, and Liu all say this oversight requires a tremendous amount of time. "You've got to be cognizant of incoming cases, and make sure those get assigned to appropriate counsel," says Hanrahan. "And all along the continuum, you have discovery phases, motion phases, proceedings toward trial, and it's just a matter of keeping all balls in the air," she remarks.
Mazza comments that her everyday tasks include negotiating rates and fees with outside lawyers and scrutinizing billing as well as maintaining an overview of each case and the overall budget.
Liu notes that at Sony Computer Entertainment America, the department is overseeing approximately 20 cases, often intellectual property matters, at any one time. This number allows Liu and her staff to track the cases personally. "It's a lot of work," concedes Liu. "I try to read all pleadings for all cases I am responsible for, and I have a staff that is doing the same thing. I am very involved in the strategy of my cases."
Liu and her staff utilize a database they created that maintains a list of each case, the outside counsel assigned to the case, and the billing rate.
"We also keep a month-by-month tally of what expenditures are, what we are billed, and what we have paid—which is not always the same number," cautions Liu.
At DuPont, Mazza contends that the periodic internal process to review the budget is critical. Mazza gleans important information about strategy when the costs begin to come in, and she can see how actual costs compare against the projected figures.
Sometimes, explains Mazza, a review will reveal that a firm has allocated too much to partner time and not enough to paralegal time. She also feels it is imperative that billing remain current. "It helps in being able to address in real time any issues that need attention," says Mazza. DuPont's outside law firms are told to bill within 90 days from the time the work is performed.
The Sum Total
Liu conveys that she is in the enviable position of having no effective cap on litigation costs, and therefore her experience and judgment play a critical role in aggressively safeguarding the company's interest. Whatever it takes to defend Sony's interests, she says, the sky is the limit. "I happen to be lucky that I am in the position of being able to defend a case to whatever limits it requires, and depending on what the potential exposure is," says Liu. That said, she notes, "We approach cases very critically and with an eye to early and frequent assessment, so that we continually evaluate the case for appropriate settlement opportunities. We don't spend needlessly."
Liu's company isn't laissez-faire about billing, either. Some challenges, Liu notes, include not being informed when new timekeepers are put on litigation matters, and not being given the heads up when rates change.
To that end, Mazza believes it is essential to instill a culture that values cost management in the same way as quality management.
"We also keep a month by month tally of what expenditures are, what we are billed, and what we have paid—which is not always the same number."
Hanrahan conveys that being creative with billing, and not always relying on billable hours, may offer more predictability on cost. "I personally feel that billable hours, although not always, sometimes have the potential to discourage efficiency, particularly when combined with billable hour minimums, which I don't care for at all," she comments.
Other cost structures include flat fees for representation, sometimes by the case or year, subject to reassessment based on the amount and nature of the work.
Regardless of the details, Hanrahan states, "There also has to be very good trust between the outside lawyer and the in house client to make those things work. It is always sort of an experiment if it is not something you have tried before. Neither party can have it in mind to get the better part of the deal."
To ease billing misunderstandings and impasses, Liu advocates setting out very clearly in the retention letter what expenses the company will and will not pay. Liu indicates that getting this right involves taking time, gaining from lessons learned from the previous case, and brainstorming with staff about things they wished had gone differently in earlier cases.
Liu states that after dealing with a case where costs soared to unexpected heights, she asks, "What measures could I have taken to keep them from ballooning, and what kind of measures will I now require in the retention letter?"
"That may mean getting a weekly, monthly, or quarterly budget from your counsel that should be included in your retention letter," remarks Liu. She notes potential hidden costs include the non attorney staff time that law firms bill out for, sometimes including a charge for librarians and IT people. "I don't pay for librarians," Liu emphasizes.
"I would like to think that I fight cases intelligently. I'm not going to fight every single case just to fight it," comments Liu. "If the right thing to do is to settle a case, I will recommend doing that," she says. But, with her litigation budget, Liu concludes, "Sony will commit resources we need to prevail, because we believe we should prevail."
These three women are not only paving the way for other women who have their eyes set on becoming chief litigation officers and managing counsel, a position that is key to the every company's bottom line, but are also making an impact as leaders and role models in a field that has been historically dominated by men.
Best Practices for Managing Litigation Budgets
- Perform an early case assessment that anticipates the breadth and scope of discovery, and any issues that could be thorny.
- Develop and maintain an internal process that includes a periodic evaluation of actual cost versus budgeted costs.
- Invest in technology that provides a platform to budget.
- Ensure that outside lawyers understand what outcome the client considers a "victory."
- View the budget as a way of identifying and achieving goals.
- Become willing to experiment with alternative billing practices.
- Spell out in retention letters and guidelines what legal services and costs the client will pay for and what they will not find acceptable.
Elisabeth Frater, Esq. specializes in business litigation in Napa, California.
From the March/April 2005 issue of Diversity & The Bar®