October 10, 2014

The High Cost of Litigation

The High Cost of Litigation

In today’s world, litigation has become a practically unavoidable fact of life. AIG’s lawsuit against the U.S. government, claiming that the terms of the tax payer-funded bailout that saved the company’s butt in 2008 were too draconian, is just the latest headline-grabber. Coca-Cola, Infosys, Actavis and Sirius XM are just a few of the legions of other companies out there currently or recently embroiled in legal battle. And that’s not to mention the government entities and individuals also taking up time and space on the court docket.

Both individuals and business entities are facing litigation with ever-increasing frequency. Invariably, this becomes an expensive proposition, whether you are a plaintiff or a defendant. In some cases, exorbitantly so.

An article by John B. Henry, president of eLaw Forum, in The Metropolitan Corporate Counsel estimated that the costs of litigation for Fortune 500 companies exceeded $210 billion in 2006 – at a time when total Fortune 500 profits approximated $610 billion. That’s one in three pre-litigation dollars! The costs of litigation are also increasing at a rate in excess of 8% per year – well above inflation rates. Litigation has actually become a business itself; companies will invest in the outcomes of plaintiffs’ litigation to support attorneys’ fees and experts’ fees. Clearly, this is an indication that litigation has become part of the business operation, not just a recourse of last resort. In some instances, personal and business litigation has become a significant strategy, similar to the way advertising or meals are viewed. Some countries have a loser pay the full litigation costs; in the USA most litigation costs are borne by each party, right, wrong or indifferent. Knowing you might pay your opponents’ lawyer if you lose might lead to shorter and less expensive litigation.

The question is: why is it so expensive to have relatively straightforward disputes resolved through our courts? There are many reasons, some of which are at the heart of the ongoing debate about tort reform. Here are a few that seem obvious to me right off the bat:

  1. Lawyers have become more sophisticated in their ability to perform legal research in their attempt to find case law and legal precedent for almost any position they want to take. The more legal research that’s done, the more time it takes. The more time it takes, the bigger the bills.

  2. Lawyers worry about malpractice, too. The number of legal malpractice cases that get filed every year is increasing. Lawyers need to worry about whether their client is going to sue them after the case is over, or after the transaction is over, even when no litigation is involved. In order to minimize the likelihood of being sued, and to make sure that they have good documentation in case they do get sued, lawyers do just what doctors do – practice defensive law. Going back 10 or 15 years, it was almost unheard of to challenge an expert in court before trial. Whatever expert testimony was going to be coming would be discussed in court, based on the reports of the experts, and if there was a battle of the experts – so be it. Today, many lawyers believe it’s necessary to challenge the admissibility of expert opinion in advance. The vast majority of these challenges are unsuccessful, whether they’re coming from the defense or the plaintiff. Nonetheless, many lawyers believe that if they don’t assert a challenge at the right time, and their client loses the case, the client will come back to bite them.

  3. We’ve all heard of “Big Data.” Well, there’s legal Big Data also. When one party litigant makes a discovery request – telling the other party they want all information regarding a particular subject – today they ask for everything in electronic format. As forensic accountants, we often get the equivalent of hundreds of thousands, if not millions, of pages of documents in digital format. Once the lawyers and forensic accountants have this information, an analysis must be done! Big Data allows litigation to drill down and get information that was not economically feasible as recently as 10 or 15 years ago. Many times, this makes for very efficient use of significant quantities of data. Other times, it requires sifting through many, many haystacks in order to find out if there even is a needle sitting out there somewhere. This all takes time. Time is still money.

  4. Our interactions have become more complicated, especially, in business. We make complicated merger and acquisition deals. We hire people and have complicated compensation arrangements, often including “a piece of the action.” We get more creative with the tax structure of compensation and ownership. Misunderstandings about the specifics of these arrangements inevitably occur. Even looking back at a legal agreement, it can be unclear what was really intended. We frequently find clients needing assistance in understanding compensation agreements as they relate to specific types of profit or monetization transactions. The unraveling takes time, and yes again, time is money.

Litigation is not going to go away – the best we can do is try to make sure we approach it as a business matter. Economic wrongs should be righted. That’s what our courts are for. But somehow we need to figure out the proper balance between cost and due process.

David Glusman contributed to this post.