Part I: Who Me? Litigation Budgets, Irrational Overspending

Part I: Who Me? Litigation Budgets, Irrational Overspending

See if these sound familiar: “rising eDiscovery costs,” “failure to preserve” and “increased spend.” Like a litigation playlist on loop, they have been repeated again and again over the last decade.

In an attempt to tackle discovery proportionality and curtail costs to the needs of the case, amendments have been proposed to the FRCP. But are they enough? What if procedural reform pushed the boundaries and instituted a more direct means of limiting costs through a court-enforced litigation budget for each party?

The Litigation Budget” by Jay Tidmarsh both examines reasons why litigants overspend and presents arguments for why and how a mandated budget system could be implemented in the United States. It’s a thought-provoking piece that asks whether indirect means of controlling costs is working for the U.S. legal system or if cost control will ever be enough.

Some of the most brutally honest commentary arrives in the discussion on existing and ongoing efforts of reform to reduce costs. A tip of the hat is given to the discovery proportionality amendments, which attempt to address wasteful litigation, while at the same time call the enforcement process ambiguous and open-ended and limited to just the discovery phase.

“… parties and courts often have insufficient information to determine accurately whether a particular line of discovery is worth its cost; they are unlikely to know what the cost of the proposed discovery will be, how the evidence proposed to be discovered will affect the value of the case, or what other social benefits and costs flow from the plaintiff’s success or failure.”

Tidmarsh argues from the perspective of what benefits society as a whole, not just the parties involved. The piece is also educational for corporations that want to be savvier about spending, in particular as they seek to define decision points and risk analysis in the life cycle of their litigation cases.

“Many litigants consider only the benefits they garner and the costs they incur, they consider neither the benefits of the lawsuit that they do not capture nor the costs that their behavior imposes on others.”

A question to consider: When parties make decisions on litigating, are they truly considering all the factors that could benefit them from a net private gain? The benefits in litigation to a party are varied, only starting with the recovery provided in a judgment or settlement.  Tidmarsh offers, “Perhaps a lawsuit scares off potential competitors or allows a public-interest organization to influence policy or generate contributions.”

Other reasons include overspending to discourage other litigants from filing suit and to create leverage to increase settlement values. Some of these rational strategies, such as overwhelming a party with document dumps or refusing to respond to discovery quests, don’t benefit the system as a whole.

Another valid question to consider is whether a party is making irrational decisions to spend on litigation. Tidmarsh describes one aspect of irrational spending, where parties are non-neutral, favoring or avoiding risk. Imperfect information, rational initial decisions that lead to costly outcomes or spending excessively for the principle of the thing, all fall under irrational overspending. Or even worse, the old gambler’s mentality of trying to win back lost money, where parties continue to put money into the litigation in order to recover the initial sunk costs.

Tidmarsh presents the final reason for irrational spending as the issue of agency costs.

 “In a range of situations, an attorney who is interested in maximizing her fee may not advance the interests of her client to obtain the best result in the litigation.”

Tidmarsh further states that one key factor in irrational agency costs is that the “principal is unable to monitor the agent’s performance sufficiently.” The traditional billing system provides little incentive to curtail attorney costs.

Recent surveys from Altman Weil (2014 Chief Legal Officer Survey and 2015 Law Firms in Transition) highlight a variety of ways corporate clients are starting to push back against this aspect of irrational spending. Greater insight into budgets and forecasting is certainly a growing concern for corporate legal with interest in improved project management and tools that facilitate budget tracking.

In order to provide an incentive to “agents” and align goals, in-house legal departments have experimented with fee arrangements that move away from the traditional hourly billing. In fact, cost-conscious legal departments are also moving work in-house, performing rate comparison, using RFPs and even requiring bidding for their litigation business to reduce costs and increase value from firm attorneys.

Part of monitoring performance against the litigation budget requires constant communication across the attorney-client relationship.

  • Even if a litigant like a corporation has an organized plan of attack and a well-defined budget threshold, are the plans clearly communicated and monitored across the entire team of inside and outside counsel, corporate and board members?
  • Do all participants know what the goals are and what the ultimate costs and risks they’re willing to pay to win?
  • Does the litigation team re-evaluate that threshold as each stage of a litigation is crossed because the value of the outcome and probability of a win may change?

The irrationality of agency costs is one argument for court control of budgets, but it is an issue corporate legal may guard against now with the proper forethought, tools and communication.

In part two tomorrow, we will follow along as Tidmarsh explores evaluating the cost of a case.

Author: Lindsay Stevens, Vice President of Technology, LLM, Inc. 


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