By Joshua Stein
One of the most difficult aspects of working in-house as litigation counsel is demonstrating value to the company. Put another way, that means making it clear you are more than a cost center. Effective in-house litigation counsel can easily add value to the bottom line. Showing that value, on the other hand, is not that easy. This article illustrates one method of tracking and reporting on the value added by in-house litigation. In short, that method involves tracking the delta between the expected loss from new litigation and the actual loss (or even gain, from, for example, a counterclaim). That delta can and should represent a type of “profit” provided by in-house litigators. It can also help legal departments that are not already doing a version of such calculations assess the value that outside counsel provides.
The first step, measuring the expected loss from new litigation can be complicated to do right. Generally, an in-house litigator has a long to-do list when a new lawsuit comes in: update stakeholders, initiate a legal hold, secure outside counsel, if necessary, and begin reviewing the merits of the case in earnest. The latter step represents an opportunity to start quantifying the potential risk involved in losing the case outright, as well as the potential costs involved in litigating that case to “completion” (i.e. through trial and appeal). Once those numbers are estimated (and it is important to accept that this may be more art than science), they can be multiplied against the likelihood of losing and of litigating the case to the end, respectively (also more art than science).
By way of example, take a class action lawsuit involving a consumer-facing product.
The class action lawsuit alleges that one million buyers of the product, which cost $100, were deprived of the use of that product because it did not work as intended. At most, the case could cost $100,000,000, because (in this hypothetical world) there are no statutory, punitive, or other damages available. Disregard for a moment the potential costs for remedial measures required by the court in an injunction for example, though those could be a factor in some cases.
Next, assume that a typical consumer class action lawsuit with top-tier “big law” representation can cost $10,000,000.
That represents a potential loss of $110,000,000. Now, at this stage, it can be hard, to say the least, to ascertain the risk of both a total loss and litigation to the very end. It can be a good idea this point to meet briefly with a key member of the business side or two to find out the truth about failure rates with the product and, if possible, use the opportunity from interviewing different potential outside counsel firms, to get input on how a case like this one might play out.
Finally, it is time to make a best guess. In this example, let’s say that we think there’s a 50 percent chance of total loss and a 50 percent chance of litigation through appeal. That means you’re starting with an estimated $55,000,000 loss.
Mindful that such estimates may be updated as more facts come in and as the relevant legal and strategic issues become clearer, that should serve as a helpful starting point.
Most legal departments will track estimated budgets, but not all departments will include in that budget such potential numbers (at least not beyond the costs associated with outside counsel spend). Yet tracking such expenditures along with the predicted potential loss in the litigation itself can be extremely useful for measuring how well the litigation team is performing, and show that it is saving the company significant money by way of that performance.
Let’s go back to the example. Imagine that out of several options, the selected outside counsel firm develops a novel legal theory based on the statute of limitations or some other bar to recovery and that theory ultimately results in an early and complete victory after a mere $1,000,000 of spending. That is an extreme outcome, but why shouldn’t a litigation team “book” that as a savings for the company? Put another way, the smart decision to hire this wily law firm resulted in $54,000,000 more money for the business than it might have had in the most likely outcome.
That is a number that, put together with similar metrics in all cases on an ongoing basis, provides insight into how successful the litigation team is in navigating the cases it confronts, and, in turn, how good outside counsel is at getting better-than-expected results. Ten such cases make a litigation team “worth” $540,000,000. Not too many litigation teams cost this much, and the ones that do have even more of an opportunity to accumulate eye-watering amounts of savings, especially if any cases result in a successful counterclaim.
The kinds of estimates proposed here will thus help demonstrate that litigation teams are not just drains on a company’s earnings. A good litigation team that consistently outperforms predictions will be worth its weight in gold (or, more precisely, deliver a lot more in savings than it costs).
Tracking the delta between expected and actual outcomes will also help litigation teams assess who best to hire for outside counsel purposes. Commonly, upon hearing proposals from various outside counsel options, litigation teams cannot help but ask for and compare fee estimates from those different options. But going with a low-cost option may end up costing that company much more if the results aren’t there. The larger the potential loss, the more it makes sense to consider all options, even expensive ones, if those options have a better chance of ending litigation more favorably and/or earlier. Putting potential firms through the ringer as to strategic options when it is time for them to pitch can only help litigation counsel zero in on a firm that might just do that. While busy outside counsel attorneys may be loath to give away their creative ideas for free at that point, the chance to land a big case should be worth it to them and will help you assess whether a possibly more expensive option could be the right one.
Now, it is fair to question whether (1) in-house litigators will be motivated to oversell the risk of litigation or (2) if such a measuring stick only serves to reward in-house litigators for getting it wrong in the first place.
But this makes accountability in the form of careful review by those a rung or two above the attorneys making these estimates all the more important. Making projections like the ones detailed above is inexact and, inevitably, uncertain. But developing them thoughtfully and having someone asking hard questions about the assumptions underlying them can make these educated guesses more useful than not.
And they can draw much-deserved recognition to in-house litigation as a generator of savings, rather than just another red line item on the earnings report.
Joshua Stein is a seasoned corporate adviser and litigator with deep roots in Silicon Valley, currently based in Boies Schiller Flexner’s San Francisco office. He previously served as Director of Litigation and Operations at Clipboard Health, and before that served as in-house litigation counsel for Twitter, Inc., where he spearheaded the work in Twitter’s successful cert petition to the U.S. Supreme Court in Taamneh v. Twitter. A dual citizen of the U.S. and Ecuador, Stein is fluent in Spanish and has experience representing clients in cross-border matters. He joined Boies Schiller as partner in 2023.
Reprinted with permission from the February 5, 2024 issue of Corporate Counsel. © 2024 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.