REDUCING THE RISK OF LITIGATION AND LITIGATION COSTS IN THE UNITED STATES ” Lawsuit, n. a machine which you go into as a pig and come out as a sausage.’ Ambrose Bierce (1842 — c 1914) Litigation is like coming down with the common cold. There are things we can do to lower the risks: we can take vitamins, wash our hands and stay out of drafts, but we can’t altogether eliminate the prospect of catching one anyway, although if this should happen, we hope that because of our actions, it will be less severe. To reduce the risks of litigation or the costs of litigation when it occurs involves establishing constructive relations with your client, assessing its transactional partners and paying close attention to the manner in which risks are allocated in the contractual relationships it is considering. 1. The Mindset: Limiting Tangible Risks Managing litigation risks, like managing other kinds of risks, entails making a dispassionate assessment of reality.
This may seem obvious, but, in practice, cajoling a client into facing the risks of a transaction can be the most formidable challenge to the practitioner. Deals are achieved by accentuating the positive and de-emphasizing the negative. In the worst situation, a lawyer can be perceived of as a gadfly; a Cassandra that can place a damper on the enthusiasm for a deal. This kind of relationship can be a source of substantial attorney-client tension. For the lawyer, therefore, evaluating the personality of the client is a significant first step toward evaluating tangible risks. A client who is likely to lie to counsel or conceal material information creates for itself the highest level of litigation risk.
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In the American system, which adorns the lawyer with the mantel of a gladiator, the attorney is under tremendous pressure to kowtow to the client, which often entails shying away from addressing the weaknesses of a course of action, especially where the outcome, at least in the short term, is expected to be very profitable. To limit litigation risk it is therefore critical for the client to perceive counsel as being not merely a tool to get things done, but as an objective and dispassionate advocate for reason and prudence. In sum, the more honest counsel can be with the client and vice versa the more likely it is that an effective strategy for limiting litigation risk can be devised. Such a plan necessarily will entail balancing the prospect of short-term financial gains of a course of action against the risks of long-term litigation costs.
It is important that in making a risk assessment at the outset of a transaction, general counsel adopts the litigator’s perspective, which assumes that at the beginning of any deal, litigation adversaries are almost always friends or friendly business associates who have the utmost confidence in one another’s integrity. And yet how fragile these relationships are, regardless of their lengthy history and depth. Where important terms of a transaction are intentionally left ambiguous because it is believed that, in the end result, the parties will do the morally correct thing, this is the kind of transaction which presents significant litigation risk. The litigation perspective is necessarily more cynical than the corporate attorney’s perspective which is defined by a much narrower time frame. Corporate attorneys are often left to viewing a snapshot of the business relationship at a point in time; the litigator, on the other hand, is compelled to viewing the relationship as one would view a motion picture, with a beginning, where the parties have high expectations, a middle, where there are signs of disillusionment and an increasing sense of injustice, and an end, where personal and professional relationships are torn asunder by mistrust. Accordingly, assessing litigation risk requires an appreciation for the changing currents of times and circumstances.
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Contracts, after all, are only balance sheets of risks, which are allocated in accordance with how the parties perceive them at the time that the contract is entered into. To the extent that counsel can prevail upon the client to take the long view of its business associations, the greater the prospect that risks will be more easily identified and provided for. Counsel must always keep in mind that personalities in an organization can change, that personal relationships do not stay static and that whether a business relationship can survive often has less to do with personal loyalties than with bottom line profits. In the contemporary world in which we live — business is business.
2. The Environmental Risk of Litigation Assuming that there exists a constructive relationship between client and counsel such that there is a near perfect flow of material information between them, the next source of risk is the litigation environment in which the transaction is taking place. The American market has a breadth and depth unique in the world. Political and economic stability prevail, creating predictability in economic relations that makes for a generally positive business climate. One important real or imagined source of unpredictability is the extent to which a business is vulnerable to litigation and therefore is exposed to an unanticipated level of litigation-related costs. While the American market has a world-wide reputation for imposing high levels of litigation costs on market participants, there has not been a decisive study showing conclusively that lawsuits are far more prevalent in the United States than elsewhere.
One overly simplistic statistical correlation equates the number of lawyers that are in active practice as a percentage of the entire population. In the United States, there are over 912, 000 lawyers in a population of about 280 million, roughly 3. 0 lawyers per thousand people. By comparison, Canada has only 71, 000 lawyers nationwide in a population of about 28 million or roughly 2. 6 lawyers per thousand people, almost 30% less. It is impossible to know what these statistics mean, except that it would appear that Americans need relatively more legal advice than Canadians do.
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At the same time, it is impossible to control for many variables that could statistically impact on such a comparison. It could be that Canada and the U. S. count their lawyers differently (what does it mean, for example, to ‘actively’ practice law); it could be that most lawyers in the U. S. are not engaged in litigation; it may also be that Americans need lawyers more than Canadians to navigate a more difficult legal terrain.
As such, there could be a higher level of pro se litigation in Canada than in the U. S. accounting for a good deal of this discrepancy. Because no carefully crafted cross-country analysis of litigation risk has been done, our perceptions are based principally on anecdotal evidence, drawn from the popular literature which depicts the American people as a highly litigious group, facilitated in their thirst for easy money by attorneys working on contingency.
It has also been said that litigiousness in the U. S. may also reflect contemporary American culture, which has de-emphasized in commercial relationships moral concepts such as loyalty and honor. Consequently, litigation in the United States is less frequently about right or wrong, and more likely to be concerned about re-rationalizing the risks of business relationships that have proven to be unprofitable for one or both partners. Litigation in America, in short, has become merely another cost of doing business. Of all the unique characteristics of American legal culture, litigation apparently driven by contingency fee arrangements is particularly disturbing to foreign lawyers.
Attorneys working with the expectation of obtaining an award of damages at the end of the day are frequently perceived of as being more likely to initiate frivolous litigation, increasing litigation risk. There is no question that in certain litigation areas, such as personal injury, products liability and class actions, that contingency arrangements drive the legal market. In commercial litigation, however, where contract damages are capped and there is no component of pain and suffering, litigators are far more reluctant to work on contingency. It cannot be denied, however, that where the purpose of the litigation is to harass, and the quality of legal work is not a high priority, a party may be able to retain a young and eager lawyer on contingency. For the most part, however, I would say that most contingency — fee based lawyers are more discriminating than is popularly believed and are more likely to take on a client only when the prospects of victory are significant. Time is, after all, money even to lawyers on contingency who must in each case weigh the prospects of a substantial recovery or settlement against the value of the time needed to achieve it.
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On balance, therefore, it is unclear that contingency fee arrangements promote a greater percentage of truly frivolous litigation in the U. S. than elsewhere, although such arrangements may make it more likely that a party with a bona fide cause of action will resort to litigation. For counsel trying to assess the risks of attracting contingency-based litigation the rule of thumb is that the risk of litigation is less where the dispute is complex factually and legally, and where damages are limited, and enhanced in disputes that are predominantly factual, where motion practice and discovery are likely to be minimal and where damages are not capped. In the latter category are disputes relating to most kinds of personal injury and work place discrimination.
One way of addressing the environmental risk of litigation is to include in any contractual framework choice of law and choice of forum provisions. In virtually all American jurisdictions, such provisions are enforceable and therefore provide an opportunity for the parties consensually to avoid the American forum or cause to be applied more advantageous legal rules. It is relatively rare that these provisions are heavily negotiated, because the principals view litigation at the time of contracting as a remote possibility, but counsel should be wary about conceding such provisions without considering their impact and consulting with local counsel regarding the legal rules the courts of a certain jurisdiction are likely to apply to certain disputes. In making this assessment, counsel should be conscious of the fact that state rather than Federal law is likely to be applied in commercial relations, subject to the qualification that international treaties are binding on state courts.
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In cases involving trademarks and copyrights that involve Federal statutes, ancillary state law claims may also be involved. Provisions providing alternative dispute resolution mechanisms may discourage or encourage litigation depending on circumstances, but, in general, can lower litigation costs. In considering forum selection and choice of law provisions and the prospects of alternative dispute resolution, counsel should not discount the possibility that while such provisions may ultimately be enforceable, it may not prevent a party from challenging their validity on the basis of unreasonableness, unfairness, overreaching or fraud. What the corporate client often fails to appreciate is the lesson that just because a party may have a weak or non-existent case does not necessarily preclude it from commencing an action. The purpose of this kind of litigation is not necessarily to win on the merits but to create costs that will be so burdensome that a favorable settlement can be extracted. Again, the point is not whether a party is right or wrong but whether the economics of the dispute make it worth the fight.
The second lesson is that litigation is sometimes unavoidable and should therefore be considered a cost of doing business in the United States. Under this approach, the challenge to counsel is how to determine the relative costs and benefits of initiating, defending or settling a litigation. There is no easy way of doing this since the kinds of disputes are potentially innumerable and the range of complexity impossible to gage. Nevertheless, there are some worthwhile approaches. For one thing, counsel can make a cost assessment based on experience with past litigation. For example, if a corporate client has been involved in trade secrets litigation, and is currently considering a transaction involving the licensing of a trade secret, the costs of the past litigation may provide a bench mark for the costs of any similar future litigation.
Still another method of determining potential future costs is to outsource litigation services to local counsel under a fee arrangement that allows the client to budget for litigation costs on a long-term basis. The point of accepting litigation costs as an ordinary cost of doing business is to reduce uncertainty and at the same time retain a higher level of resources to respond to litigation initiated for the sole purpose of extracting favorable settlement terms. Although the client may in the short term possibly be paying local counsel for doing little work, over the long term, such fixed fee arrangements should result in lower and predictable costs when litigation does raise its ugly head. Related to the strategy of allocating litigation costs is determining a priori the circumstances under which the client is prepared to engage in a litigation for the purpose of discouraging other litigation’s.
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Indeed, it has been said by litigators interviewed by the writer that the best way of lowering litigation risk is to be prepared to litigate to the full certain cases that could have substantial deterrence value. For example, one way of discouraging leaks of confidential information is to sue aggressively individuals who have been found responsible for such leaks. Such litigation is often uneconomical, costing the litigant in absolute terms far more than what it could ever realistically expect to recover in compensatory damages, nevertheless, such actions have a deterrent value that more than makes up for their short term costs. In the area of products liability, certain manufacturers have cleverly built reputations for litigation toughness that they believe have markedly discouraged litigation over the long run. 3. Sources of Litigation Risk Related to the foregoing discussion that has focussed on attorney-client and national and / or state forum environmental factors for assessing litigation risk are at least four other categories of risks.
A. Business Partner Risk The reliability of your client’s trading or joint venture partner may be a significant source of risk. The partner may have a long litigation history involving actions for not meeting contractual obligations, including payment of debts or picking fights with business partners. As previously suggested, for some corporations, litigation is a device to run up costs such that re-negotiating contractual arrangements may seem more economical than abiding by them. It is important to keep in mind that filings with the Security and Exchange Commission and other Government authorities are unlikely to tell the whole story of a potential partner, and that a better indicator may be the number of reported cases involving the potential partner as a plaintiff or defendant.
Outside of engaging in a credit check and / or requesting the partner for all documents relating to certain types of litigation as part of a due diligence inquiry, there is no sure-fire easy and cost effective method of accurately determining the number and nature of a potential partner’s litigation’s. B. Situational Risk Situational factors can also be a source of risk. Entering into a contract for the sale of timber when the international commodity price tumbles can precipitate efficient breach; a situation where the trading partner finds it in its better interest to breach a contract, and risk litigation and possibly an adverse judgment, than bear the economic costs entailed in abiding by the contract. Essentially, any change in circumstances that causes there to be a lopsided allocation of costs may provide the conditions for efficient breach. While counsel cannot be expected to be a soothsayer in anticipating all possible contingencies, certain contracts lend themselves to provisions that can re-establish a risk of cost balance.
In the situation involving timber, for example, the parties may agree to some kind of indexing of the contract price with the international market price to minimize the damage incurred by one party or the other when the market sharply rises or falls. In short, the theme is to build into the contractual relationship mechanisms for flexibility whereby each party can maintain the benefit of its bargain so as to minimize the need for one party or the other to terminate the contractual relationship. C. Poor or Ambiguous Drafting Risks Poor and ambiguous drafting can also heighten the risks of litigation. An example of poor drafting is where an asset purchase agreement does not spell out what is exactly being sold; or where the parties fail to provide for a choice of law or choice of forum provision which, if litigation occurred, would inevitably make it far more complicated and expensive. The writer has also been advised that many Canadian commercial contracts do not have adequate warranty provisions, creating sources of long-term disputes.
And yet building in ambiguities should not be rejected in every instance. For one thing, keeping certain terms unclear may facilitate the consummation of an otherwise advantageous agreement. What is important is that the client is cognizant of the potential risks the ambiguity may create and, accordingly, is able to allocate additional resources in anticipation of litigation if and when it occurs. To reiterate, the point is not necessarily to eliminate litigation risk, but to manage it through an allocation of resources designed to reduce over-all litigation costs. D. Transactional Risk While the foregoing discussion concerns general sources of litigation risk, it is impossible not to overlook the specific risks that attend particular transactions and structural risks relating to how foreign corporations do business in the United States.
(i) Hiring, Firing and Maintaining a Healthy Work Environment Because of the panoply of labor rights enjoyed by American employees and the generally adversarial tradition that attends the employer-employee relationship in the U. S. , engaging American employees automatically raises litigation risks. To reduce litigation risks entails incurring ongoing administrative costs in terms of devising and implementing long-term anti-discrimination policies. An example of such a policy is creating grievance and investigatory committees that can determine the validity of a claim of gender discrimination and take tangible enforcement measures against violators. Recent 1998 U.
S. Supreme Court decisions in the area of sexual harassment, Burlington Industries, Inc. v. Eller th, 118 S.
Ct. 2257 and Faraguer v. City of Boca Raton, 118 S. Ct. 2275, exemplify the new emphasis on compelling employers to take proactive measures to protect employee rights.
In cases involving harassment by supervisors which does not result in an adverse change of the employment status of the employee, an employer may avoid liability if it can show that it exercised ‘reasonable care to prevent and promptly correct the conduct and the employee ‘unreasonably failed’ to ‘take advantage of preventive or corrective opportunities provided by the employer or to avoid harm otherwise.’ To limit litigation risk in this area experts have advocated that employers (a) devise anti discrimination policies and widely disseminate information on the policies to employees (b) confirm that the policies include several avenues for employees to file complaints to avoid relying on supervisors who may be the source of the problem; and (c) thoroughly document investigations and implement a mechanism for resolving complaints quickly and preventing retaliation. In general, to limit risks of employment related litigation, it is necessary to assume long-term administrative costs associated with maintaining detailed histories of actions taken with respect to the hiring, firing and promotion of employees. Whether a business has been consistent in dealing with an employee up to his or her termination or demotion is subject to considerable scrutiny in any litigation. Employees that have received superlative reviews only to be suddenly reprimanded for incompetence a year away from retirement and then terminated presents a situation that is likely to raise eye brows. Likewise of concern is the situation where an employee’s job has been eliminated while at the same time a new position with identical responsibilities is opened up in a new division. Again, as a practical matter, the litigation risks attending labor relations cannot be eliminated entirely, but the risks can be managed by allocating resources up front to reduce long-term uncertainties.
In short, the costs that can be anticipated are less costly than the costs than are not. (ii) Protecting Trade Secrets and Other Confidential Information In a world where know-how has increasing value, the protection of confidential information has led to an enhanced risk of litigation involving employees and business partners. Probably, what is most important to limiting the risk of litigation in this area is specifically identifying what information should receive trade secret protection and taking steps to secure that information by promulgating and implementing standards for confidentiality. Like in the area of employment discrimination, the courts reward parties that have taken well-documented proactive measures to identify and protect their secrets. While the law in New York, for example, imposes on the employee a common law duty of loyalty that would technically preclude him from using trade secrets to his own advantage, employment contracts should clearly spell out the employee’s duties concerning the use and protection of confidential materials. In addition, it may be appropriate to include non-compete covenants in employment contracts, which would restrict the future employment of certain individuals who have had access to trade secrets.
It should be noted in this regard, however, that courts dislike these sorts of covenants, often because they are too restrictive in imposing terms that would virtually prevent the former employee from earning a living. As the courts in New York provide, restrictive covenants pursuant to employment agreements should be construed restrictively and should be framed to protect against the specific risk about which the employer has a legitimate concern. In a very recent decision issued by the Court of Appeals, New York State’s highest court, BDO Seidman v. Hirsh berg, decided on May 13, 1999, the standard for enforcing a non-compete covenant against a former employee was revisited.
According to the court, a restraint is reasonable only if it (a) is no greater than is required for the protection of the legitimate interest of the employer (defined as a trade secret, confidential customer lists or protection from competition by a former employee whose services are unique or extraordinary); (b) does not impose undue hardship on the employee, and (c) is not injurious to the public (unduly restricts competition in the relevant market).
From a litigation standpoint, is it better to include in an employment contract a possibly unduly onerous non-compete provision that could have deterrent effect or one that is less intimidating but more likely to be enforced? The answer is that while onerous provisions may have some deterrent effect with employees who are litigation averse, in general, they are more likely to invite litigation, because there is a perceived higher prospect that they will either be wholly stricken or limited. The less intimidating provision, on the other hand, may be more effective in reducing litigation risks because it is more likely to be enforceable against the offending employee. (iii) Structural Risks for Litigation How corporations and subsidiaries are structured can also have an impact on litigation risk. For example, under certain circumstances, personal jurisdiction can be asserted over parent corporations for acts committed by their subsidiaries. Certain measures, however, can be taken at the outset to limit this risk.
For example, subsidiaries should be as fiscally autonomous as possible, and possess a high degree of independence in determining materials for products and marketing strategies. Subsidiary employees should be trained in the U. S. to the extent possible and Americans should be integrated into the highest echelons of the subsidiary’s management.
Where the courts have found a subsidiary to be either the alter ego or the mere agent of the parent corporation, jurisdiction has been found over the parent in the United States. Even if the foreign corporation can avoid having a presence in the United States as defined under state law, jurisdiction may, nonetheless, be asserted pursuant to a state’s Long Arm statute where the claim arises out of a contract or transaction effected in the state or where the corporation’s acts outside of the state somehow impact upon the state. These transactional bases for jurisdiction should be kept in mind when transactions are being structured. For example, the foreign corporation may want to center contract negotiations outside of the U. S. At the same time, it is not necessarily true that avoiding a substantive presence in the U.
S. will eliminate litigation where there is uncertainty about what forum and what law should be applied. Where ambiguity reigns, the American partner will inevitably sue in a U. S.
Court despite the vagaries of a foreign corporation’s presence. It is also unrealistic to expect that a transaction can be kept wholly outside the U. S. where an American party is involved. American corporations are generally counseled about the jurisdictional aspects of contract negotiations and will, to the extent they can, require some negotiations to take place in the U. S.
In the end result, the best course may be to limit litigation risk by including in the contract choice of law and forum provisions. Such provisions can substantially limit the costs of litigation if it occurs by eliminating the need to adjudicate jurisdictional and choice of law issues. Such provisions can also allow the parties to gage their risks in a specific forum under specific legal rules and make provision for litigation contingencies. As exemplified by such provisions, litigation risks can be most effectively managed where the parameters of the potential risks are known. Ambiguity not only raises the risks of litigation but also raises the risk of having to incur increased costs.
In general, forum selection and choice of law provisions are accorded prima facie validity and will be enforced absent a strong showing of ‘unreasonableness, unfairness, overreaching or fraud.’ Related to the standard choice of forum clause is the ‘service of suit clause’ frequently found in insurance contracts. This provision has been interpreted by the New York courts to be akin to a permissive consent to forum clause which does not bar subsequent actions commenced by the insurer, such as a declaratory judgment action, in a proper forum of the insurer’s own choosing. Finally, in choosing the appropriate forum and law to govern the contractual relationship, consideration should be paid to the state court requirements relating to the enforcement of such provisions. New York, for example, is relatively liberal in allowing parties to a contract to choose New York law and a New York forum even where the contract has no relationship with New York. Section 5-1401 of New York’s General Obligations Law provides, for example, that, subject to certain exclusions, in a contract covering in the aggregate not less than $250, 000, parties may choose to apply New York law.
A New York court will enforce such provision whether or not the agreement ‘bears a reasonable relationship to this state.’ Likewise, section 5-1402 of the General Obligations Law provides that, subject to certain exceptions, the parties may choose with respect to a contract covering in the aggregate not less that $1 million, New York as the choice of forum. The only additional requirement here is that the choice of forum provision specifically provide that such foreign corporation or non-resident agrees to submit to the jurisdiction of the courts of New York State. (iv) Shifting Risks As previously stated, one way of reducing litigation risks and controlling attending costs is to reduce uncertainty. Consistent with this theme, counsel should consider in the appropriate circumstances including in agreements liquidated damages and attorney’s fee shifting provisions. (A) Liquidation Damages Where the nature of the transaction would make it very difficult to calculate damages or that damages would otherwise be difficult to prove in the event of a litigation, parties have frequently determined a priori the amount of damages that either party or both may incur in the event of a breach. The law of New York, for example, provides that liquidated damages provisions are enforceable if (i) the damages flowing from a breach are difficult to ascertain and (ii) the amount of liquidated damages is a reasonable measure of the anticipated probable harm.
The key issue is whether the damages contemplated are compensatory (which is valid) or penal (which is prohibited).
In short, the courts are wary of such provisions being used as a means to impose penalties on a breaching party above the contract damages that state law provides can be awarded. At the same time, the draftsman may be able to craft provisions that have a deterrent effect without being advertised as penal: First, in drafting a liquidated damages provision one should never employ the term ‘penalty.’ Second, reorder substantive rights and duties in terms of rewarding performance as opposed to penalizing breach. In his Treatise on Contract Law, Professor Farnsworth from Columbia Law School in New York provided the example of determining a deadline for a period of days following the actual anticipated deadline and providing payment of a premium for each day the work is completed ahead of schedule.
Professor Farnsworth also opined on provisions that provide alternative perform or pay clauses that in practice create costs for the non-performing party. In his elaboration of the case law on the subject Professor Farnsworth cautioned that such provisions may still run afoul a court but are more likely to pass muster. Third, avoid blunderbuss provisions in which a single large sum is fixed for any breach, no matter how minimal. Fourth, avoid providing for a sum that is simply added to actual damages. This so-called ‘cover charge’ is more likely to be viewed as a penalty.
Fifth, avoid a floor on damages, which states that damages will be a certain amount regardless of whether actual damages are less. Finally, recite a nonexclusive list detailing the types of loss for which compensation is sought. (B) Attorney Fee Shifting Provisions Under American law, the general rule is that the parties bear their own costs, including attorneys fees. There are two exceptions, however, when a statute provides that the defendant bears the prevailing plaintiff’s costs (i. e. civil rights, racketeering and antitrust statutes) and where the parties themselves agree contractually to shift attorneys fees.
Including a fee shifting provision in a contract is possibly one of the most effective ways of raising the costs for efficient breach by, in effect, imposing a penalty on the party who is found to have breached. Although certain jurisdictions frown on these provisions for the same reason that certain courts may be reluctant to enforce liquidated damages provisions which are viewed as penal, such shifting is generally enforceable. At the same time, it should be noted that while fee shifting provisions can discourage litigation, it may also discourage your own client from initiating a potentially useful litigation of its own. 3. Limiting Litigation Costs An important approach to limiting litigation risks and costs is to develop an effective relationship with local American counsel. The following points should be kept in mind in considering this topic: (a) Prior to choosing an attorney, foreign counsel must assess what legal services are needed and determine the individual practitioners or firms that have expertise.
Depending on the financial wherewithal of the client, it has a range of legal services to choose from. One approach is to retain a large general service firm with a litigation department. The advantages of such a firm is that it is more likely to have the material and human resources to deal with a range of litigation problems and handle large litigation’s where there is a great deal of paper generated. The downside of such a firm is that unless the litigation is an exceptionally large one, the level of expertise dealing with the matter may be more junior. Large full service firms are also prone to be more costly because its attorneys are more likely to use the resources that are more available to them. A second approach is to employ small specialty firms to address certain litigation risks and / or handle certain disputes.
The advantages of smaller, more specialized firms are that they are likely to be more responsive than are large firms to client queries and are more likely to apply the skills of their most experienced attorneys. Over all, such firms may also be cheaper because fewer junior attorneys are used. The downside of using small firms is that their resources are more limited and that in the event such a firm is over extended, it may have difficulty completing the work. Moreover, because of lack of human resources partner level attorneys may be required to perform more menial tasks, which could be billed for at the higher rate. This problem, however, can be addressed at the outset of the relationship through a memorandum of understanding that paralegal and junior level work should be billed at lower rates. The third approach may be to mix and match.
Foreign counsel may want to hire a larger full service firm to deal with repeating disputes that require the application of larger scale material resources, and to retain specialists to deal with specific kinds of disputes, especially in the labor and intellectual property areas. The Fourth approach may be to use different local firms at certain stages of a litigation. In a large case where there is a significant likelihood of trial, foreign counsel may want to consider having a firm with paper generating resources to handle the initial complaint and discovery phases of the litigation and another firm with trial expertise to handle the trial. Although the advantages of this mix and match approach is that the appropriate resources and expertise are leveraged at the appropriate times, the downside is that there may be a certain amount of double billing, owing to the fact that trial counsel will have to take time to learn the case. Local counsel may also be reluctant to enter into such a piecemeal arrangement. Moreover, to mix and match effectively requires that foreign counsel be highly educated about the local legal market.
This expertise may be difficult to obtain in an emergency situation, which is frequently the case in litigation. One quick route to at least some knowledge about the possible choices of counsel available is to obtain the updated directories of the local bar associations. The firms of committee chairs and other high level personnel may be a good start to identifying individual attorneys and firms with expertise in certain matters. (b) Financial Arrangements One key to limiting litigation costs is to conclude a comfortable arrangement with counsel.
In the American system, lawyers can be paid on the basis of the billable hour or under certain circumstances on contingency. There are a variety of other kinds of payment relationships that can be negotiated including a combination of variable billable rates with caps. The point is that foreign counsel has room to negotiate an arrangement with local American counsel. In reviewing costs, foreign counsel should note that it is now customary in the U.
S. for the attorney to provide the client with an itemized bill of costs that should be scrutinized for several items: (1) over billing for phone calls (most last only a couple of minutes); (2) multiple billings for conferences involving a number of attorneys who are each billing their time; (3) misuse of resources, i. e. a partner doing research when a more junior associate is available to do the work at a less costly rate, or where the client is represented at a deposition by more than one attorney; (4) billing for administration like filing; (5) over billing for certain tasks like letter writing. In general, a rule of thumb with billing is that the attorney’s bill is to some extent negotiable and that disputed items will normally be deducted. Foreign counsel should keep in mind, however, that while it is customary for attorneys to reduce their bills to facilitate their relationship with clients, one gets what one pays for.
Attorneys will not be enthusiastic about providing services to clients that attempt to force a fee reduction without serious justification. The relationship between attorney and client should above all be fair. (c) Although local counsel’s opinion should be accorded serious weight concerning interpretation of local law, its judgment should not substitute for that of foreign counsel. It is important in this regard to allow local American counsel to educate foreign counsel on the statutes and case law bearing on the issue. The educational process, however, requires a certain amount of aggressiveness on foreign counsel’s part. As a general rule, American attorneys will not enter into such a dialogue unless foreign counsel requires it.
(d) Foreign counsel should establish the specific lines of communication between its client and American counsel at the outset of the relationship. As a practical matter, American counsel should rely on foreign counsel as the first source of information. Foreign counsel may need to refer local counsel to someone in the client corporation, but it is important in this event that foreign counsel make sure that it is being copied on any correspondence to the corporate representative and that it is in communication with all parties that interact with local counsel so that the risks of miscommunication or misunderstanding can be minimized. Where there is a difference of language, foreign counsel should take an active role as an interlocutor between the client and local counsel, particularly with regard to discussions where terms of art are being used to convey legal or economic concepts.
Conclusion There is no secret to limiting litigation risks and costs. The fundamental analysis is to reduce the costs and benefits of a course of action to economic terms that can allow counsel to compare the relative risks. The most significant source of risk relates to imperfect information about a certain course of action and the uncertainty that this situation can create. In the final analysis, one can only take account of the risks that one knows about. Second, with respect to known risks the point is not necessarily to eliminate them, but manage them in such a way as to minimize long-term costs. Probably the most important first step to internalizing litigation costs is to establish a comfortable relationship with local counsel ahead of a crisis.
Finally, it is important that, time permitting, foreign counsel become familiar not only with the substantive local law governing a certain transaction, but the local bar community and the resources that bar associations, in particular, can provide in the effort to locate high standard representation and special expertise.