Building A Litigation Risk Profile, Which Could Save Your Company Money
Nick Brestoff, Corporate Counsel
January 29, 2016
In this article, we’ll build a litigation risk profile using data in the federal litigation database, called the Public Access to Court Electronic Records (PACER). I’ll do this in two steps, but I’ll refer to each step as a litigation risk profile. In the first litigation risk profile, any company can see and appreciate how its federal litigation burden, and its mix of litigation, changes over time. When we take the second step, you’ll see how a company can estimate its total litigation cost per year, and can understand its total litigation cost as a percentage of its profits or losses.
Corporate legal departments could use such business-oriented metrics as part of the due diligence process of a merger or acquisition, and it could even use them to avoid litigation.
While I don’t mean to spotlight any one company, a real company example might bring this to life for you. I chose Xerox. I did so for one reason: the unique spelling of its name.
In PACER, other company names are subject to some ambiguity. For example, in PACER, there are no cases involving “IBM” because IBM is an acronym for International Business Machines. When plaintiffs file lawsuits, they use the real name of the company, not its acronym.
In PACER, even spaces matter. It tracks cases involving J.P. Morgan, where there is no space between the J. and the P. However, PACER also tracks cases involving J. P. Morgan, where now there is a space between the initials. The reason this happens is that PACER tracks the way the plaintiff spells a party’s name. The name Xerox doesn’t suffer from these problems, and that’s why I chose it.
I’m going to build a litigation risk profile step by step. PACER can be used to monitor company-specific litigation activity, but only for litigation in federal court. It reports the total number of records, meaning all in which a party is identified with case numbers, whether as a plaintiff, a defendant or in some other capacity. I’ll refer to these records as “cases.”
Here’s the PACER data for Xerox:
The average is 69 cases, and the first five years were below average, except for 2010. The most recent five years were above average, except for 2011. The overall litigation trend is up. What’s more, the average for the most recent five years is about 89 cases per year. According to this PACER information, the average for the first five years is only about 49.
So Xerox’s litigation experience in the last five years is nearly double what it was in the first five. Now there’s a puzzle. Perhaps if we drilled into the case mix, we could understand more.
The table below is a partial view of Xerox’s litigation mix, where seven types of cases account for 76% of the total:
Notice that we can almost immediately see certain trends. First, Xerox had to deal with asbestos cases only in 2007. Second, Xerox was involved in breach of contract cases, civil rights (jobs), and ERISA in each of the most recent 10 years, but also had to deal with patent litigation matters in nine out of those 10 years and with civil rights (other) in eight. It was involved in more breach of contract cases than any other type, and by a wide margin.
But this doesn’t tell the whole story. According to PACER, Xerox was a plaintiff in 154 cases, a defendant in only 60 cases and in other capacities in the rest. Patent and ERISA cases were in second and third place, respectively, and civil rights (jobs) cases were in fourth place. In the latter category, Xerox was only a defendant. So it was a defendant in breach of contract the same number of times it was a defendant in civil rights (jobs) cases.
In addition to the uses already mentioned—preventing litigation and merger and acquisition transactions—this data has implications for in-house staffing and training decisions and for selecting the outside law firms that Xerox should be using for their specific strengths and locale.
Of course, this table could be expanded to cover more ground, and to show all of the types of cases Xerox experienced in the same 10-year period. For that reason, it should be considered only as an example of the caseload data which can be assembled. But from here, we can move on to more business-relevant information. Of course, Xerox is a publicly traded company and a member of the Fortune 500. Therefore, we can readily find its net profit for each year.
Before we do that, however, we should estimate the average cost of litigation per case. Of course, Xerox will know these costs for itself, but we can estimate them. In my book on preventing litigation, I started with the last 10 years’ worth of cost data for all parties (not just Xerox) which Towers Watson (TW) had compiled for 2001-2010, where “cost” was defined to mean losses (as in payouts to third parties), defense costs (investigation and defense attorney fees), and administrative expenses. TW compiled this cost information primarily from insurance industry sources.
I used the TW costs for commercial tort litigation only, as opposed to personal torts, because personal torts consisted largely of automobile accidents. Because the cost data came from insurance companies, both state and federal litigation was involved.
Then I had to select the federal and state court litigation which typified commercial tort litigation, which meant leaving out FOIA requests and habeas corpus cases and the like, because they were not cases where businesses faced claims for damages.
The next problem is that PACER’s data reflects only federal court litigation. So I accessed the data available from the National Center for State Courts (NCSC). The NCSC data was not consistent with the PACER data because, obviously, the types of cases in each of the 50 states which might be characterized as a commercial tort may be the same as, or different from, the types of cases filed in federal court.
For this reason when I made my initial calculation, I knew that I would have to back off by some amount to adjust for this and other differences.
My initial data was, however, stunning. TW’s 10-year total of commercial tort litigation costs was $1.6 trillion. My caseload figure for the same time frame, and for both federal and state court litigation involving commercial tort litigation, was just under 4 million cases. The per-case actual number was $408,000 per case.
In nine out of the 10 years, the per-case figure was higher than $350,000, which is about 15% less than the calculated result. I made that adjustment primarily because the federal and state court caseload databases were not in synch with each other and to err on the low side. For this part of the litigation risk profile, I used the $350,000 per case figure.
Now, while each company will likely have a cost-per-case figure which is internal and accurate, I can at least show how to get some business-relevant information by using the $350,000 estimate. I will show these calculations for Xerox, with the caveats that the figures are estimates based only on the federal court litigation, and that I have no knowledge of Xerox’s actual percase or per-year cost of litigation.
In addition to those caveats, I will show only data that is too old to have any market-relevance. The source for the net profit data is Xerox’s 2014 annual report. With all of those caveats, the table is below:
This table, when combined with the table giving the mix of litigation, completes the litigation risk profile (LRP) we set out to build. It shows that litigation can be a material cost issue for any enterprise large enough to employ in-house counsel in a legal department. In addition, in conjunction with one of about 70 industry sectors which make up the Fortune 500, an LRP may show whether a company within a particular sector has some litigation cost advantage or disadvantage compared to other companies in that sector.
Thus, an LRP provides a data-driven business justification for wanting to prevent litigation. After all, for very large companies like AIG, litigation costs can rise to the $2 billion mark. One of the stated goals of the Association of Corporate Counsel (ACC) is to find ways to bring the “litigation spend” down by 25 percent, which is not a small number. In 2015, when AIG cut its litigation cost of about $2 billion per year by about $200 million, which is a lot of money but only a 10 percent change, it won an ACC Value Champion award. In 2011, Xerox’s (estimated) caseload went down from 83 in 2010 to 50, and the litigation cost went down by about $11.5 million. Xerox’s caseload went back up in each of the next four years, and the data says nothing about why it fluctuated. But I note that the context can emphasize or de-emphasize the value of less litigation.
In 2011, net profits doubled, increasing from $591 million in 2010 to just over $1.2 billion. So the reduced litigation cost was, as a percentage of net profits, magnified. A decrease in net profits would have had the opposite effect. Context matters. A reduction in litigation cost should be understood as a stand-alone figure.
Time will tell whether new high-tech approaches will help companies avoid litigation rather than manage it. In the meantime, legal departments should consider building LRPs. They will likely show that when litigation can be avoided, big savings may result.
Nick Brestoff was a litigator in California for 38 years. He is the principal author of Preventing Litigation: An Early Warning System to Get Big Value Out of Big Data (Business Expert Press, 2015), and is the founder and CEO of Intraspexion Inc.
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