New England Biz Law Update
Eleven years after its debut, the results of the once-revolutionary litigation model pioneered by DuPont have been nothing short of spectacular.
The much-admired DuPont approach – which focuses on cutting the number of outside firms employed, emphasizing early case assessment and pressing for alternative fee arrangements – has particular relevance today for companies of all sizes looking to control costs in unsteady economic times.
Overall, the program has saved DuPont 12 percent to 20 percent each year since its inception, according to Thomas L. Sager, DuPont’s vice president and assistant general counsel.
And a 2002 Deloitte & Touche study of 18 employment law cases against DuPont revealed that the chemical giant’s average overall litigation costs in those cases were shaved by 28 percent.
The benefits experienced by DuPont – in terms of both cost and accountability – are not just for Fortune 500 companies, Sager said.
“The smaller the law [department], the bigger the need to develop a network of firms that will put aside their competitive interests and do more in a cohesive and coherent and effective way,” Sager said. “If you’re a one-person department, you need those firms to act as an extension and work with you.”
And the law firms working with DuPont have experienced benefits as well.
Boston attorney John C. Wyman said his firm – Connecticut-based Murtha Cullina – saw the advantages of the DuPont program right away.
Murtha Cullina has received more business from DuPont under the network than it would have without it, said Wyman, noting that work has also come from other sources, including referrals of non-DuPont matters between firms participating in the company’s network.
‘Convergence’
Limiting the number of outside law firms a company does business with can help control the bottom line – which is always a concern but particularly so when the economy is as sluggish as it has been in recent years.
Before the DuPont Law Firm Network came into existence, the company dealt with 350 outside counsel law firms, Sager said.
Now, however, under the so-called “convergence” program, DuPont has dramatically trimmed the number of firms it works with to a mere 37 across the nation.
To do so, DuPont insisted that – in exchange for handling DuPont business in a certain specialty or geographic area – each participating law firm would agree not to compete for business with the other law firms in the network, to work together with the other law firms in the network when it makes sense, to perform early case assessments, to “unbundled” services, and to bill DuPont under alternative fee agreements.
“We found we could not adequately direct and get alignment from the 350 law firms, so the underlying premise [became] to do more with less,” Sager observed. “The fewer the firms, the greater the opportunity for operating efficiently, identifying objects, holding firms accountable for those objectives, and deriving more disciplined and better results.”
Reducing the number of outside firms to whom legal work is referred takes a significant amount of work up front, Sager cautioned.
“If you design one of these, you need to ask: ‘What is your vision? What is the playbook? What are the core elements that drive you?'” Sager said. “You have to identify what you want them to do and measure their performance. You can’t just tell firms to be cost-efficient, resourceful and good team players, because everybody thinks they do that already.”
Accountability is an important part of a system like this, Sager noted.
“Several in DuPont and elsewhere think these [law] firms take the relationship for granted. It’s something people have to be sensitive to and develop a system of accountability so that when [a problem] does occur,” it can be addressed, Sager said.
Annual reviews are an important component of the program, he added, noting that he also encourages in-house counsel to put their personal relationships aside when dealing with outside counsel in a law firm network.
“This is not about golf outings or big dinners or hockey games. It’s about understanding [both sides’] wants and needs and reaching some kind of balance and trying earnestly to meet them,” Sager said.
If the relationship is not working, “then you’ve got to figure out why and correct or sever the relationship,” he asserted. “You [can’t] be dependent on any particular individual by way of a lawyer in a firm. You’ve got to think first what’s in the best interest of DuPont, not Tom Sager or that law firm. People have problems distinguishing that. Sometimes it’s the hardest decision telling someone you’ve known for five years [that a working relationship needs to end].”
DuPont has also encouraged the use of temporary lawyers for certain tasks and limits travel and document imaging costs, “all with an eye to driving more accountability and discipline,” Sager said.
Each outside firm is required to provide DuPont with an annual assessment that outlines the savings DuPont has realized from each firm.
At an annual meeting for its law firms, DuPont reviews the accomplishments of the previous year, areas that need improvement, and the challenges ahead for the coming year. It also gives firms a chance to get to know others in the network, which will helps them become more comfortable working together on future projects.
Yet another aspect of the agreement involves DuPont’s agreement to refer business to these law firms when appropriate, while the law firms are encouraged to refer any of their clients that might be interested in forming a business relationship with DuPont.
Wyman, of Murtha Cullina, said he saw the DuPont model as “an opportunity … to do something that for many years I’d been trying to do in my practice, which was to anticipate issues that could come up and help clients practice more preventative law than they had traditionally done. [And] it provided an opportunity to really understand the client’s business and key people, and to come up with better ways to go about representing the client.”
Early Case Assessment
In addition to shedding the number of outside law firms on the payroll, companies looking for ways to weather uncertain economic times may also be able to take a cue from DuPont’s efforts at early case assessment.
The early case assessment concept is a simple one: getting to the heart of the matter without delay and continually trying to stay a step ahead of plaintiffs.
The primary element of early case assessment is systematically collecting data and documents by way of a checklist of tasks, particularly in routine cases that have an expected pattern of events. This allows both in-house counsel and outside lawyers to get a solid read of a case at any time — from theme of the defense to problems of proof.
While this sort of approach seems time-consuming and intense, it is well worth it, especially for small companies — even those who think their law department doesn’t have the resources, experience or expertise to do it, according to Jeffrey C. Melick, former in-house attorney for The Toro Company and now assistant general counsel of Global NAPs, Inc., a telecommunications provider based in Norwood, Mass.
“A company’s size doesn’t matter,” Melick said. “A huge Fortune 500 company can have staff cutbacks and can’t devote the time. It can be the same at a small company. It really depends on the workload of the people involved and the commitment of the company that wants to resolve cases. If you’re paying fees out of your own pocket, it’s to the advantage of a small company. A large company can easily afford extended litigation costs.”
Toro, the lawnmower and snow blower manufacturer, has also seen dramatic savings since adopting early case assessment in the early 1990s, according to a recent article by Melick.
Toro estimates it has saved $75 million since 1991. Some 95 percent of the 1,000 claims submitted to the early case assessment program have been settled and in-house counsel now deal with only between 25 and 50 outstanding claims, instead of the 125 to 150 that had been pending in the past, Melick wrote.
As well, Toro claims it has reduced its legal fees by about 79 percent from $47,000 to $10,000 per case, and reduced its average settlement amount from $68,000 to $20,000, according to Melick. These savings also led to lower insurance rates, he indicated.
An early case assessment program typically involves several steps,
“The first thing you do is talk with the people in your company to find out as best you can what the facts are,” said Melick. “Gather the contracts involved, invoices, and for any problems that occurred, talk to the people who deal with the actual implementation of the contract. Find out what’s going on.”
Melick stressed that this involves talking directly to the actual people involved, “not just [receiving] a funnel of information from people who think they know what’s going on.” He added that it’s important to speak with people who will testify at trial.
After reviewing relevant documents, the next step is to call opposing counsel and inquire about their theory of the claim, Melick said.
Parties can agree to suspend the operation of civil procedure rules while investigating enough information to assess the claim and attempt to reach an early settlement. Plaintiffs’ attorneys may be motivated to go along as a way to receive a settlement within months instead of years.
“A lot of the time you can sit down with the other lawyer and say, ‘We can litigate the heck out of this, or we can try to sit down and have some resolution,'” Melick said. “Share some information that you would ultimately share under oath, but do it up front and get to the position where you can analyze and evaluate your case and your opponent can evaluate the strength of their case.”
At this point, both sides should sign an agreement allowing opposing attorneys to talk to their witnesses. The agreement should also state that if the case goes to trial, any information gleaned from those conversations could not be used, he said.
From there, the next step is to take statements under oath that are recorded by a court reporter. But don’t call it a deposition, Melick cautioned, because “it’s too litigation-like.” The transcript would be destroyed if the case goes to trial, he noted.
“The goal is to get the [legal department and claimant] in a position to evaluate what will happen down the line in formal discovery,” Melick said. “The next step is to set up a mediation and have both parties present their case.”
Aim for a 30-day investigation period, Melick suggested, so the claim can be in mediation the month after it is filed.
Melick cautioned that once the claim reaches mediation, companies should take a step back and evaluate the outcome before signing off on a settlement. “If you don’t feel the settlement is favorable to your company, step back and say, ‘let’s go through litigation,'” he said.
The disadvantages and drawbacks of early case assessment are few, but preventable.
“If you do things quickly, if you’re not careful and fortune doesn’t come your way, there could be a witness or document you don’t find out about. You might miss something,” Melick warned. “It has to be done extremely carefully. You can’t rush through it.”
Dupont’s Sager noted that in-house lawyers who insist on early case assessments “no longer defer to outside counsel on how the case is handled,” Sager said. “Typically, the case comes in and you send it out [and it’s on the road to litigation]. But, now what we’re saying is you need to assess this situation. What is this worth? What is the strategy to get rid of it? What resources are you bringing to bear to get it done?”
The law firms in DuPont’s network are required to work with a DuPont in-house counsel on an early case assessment when a new claim is filed. The goal is to complete it within 90 days and revisit it every quarter until the claim is disposed of to ensure the initial assessment of the case still holds true. Throughout the process, DuPont encourages the drafting of a realistic budget and the use of technology — such as document imaging and bar coding — to make research and retrieval more efficient.
“The inside counsel becomes the quarterback. You’re being proactive instead of reactive,” Sager said. “He who controls the process, in general, controls the result.”
Alternative Fees
Fees paid to outside law firms are a chronic headache for companies, but many companies continue to resist alternatives to the traditional hourly rate despite the compelling need to rein in expenses when money is tight, as it is today.
DuPont and others have reported success in linking early case assessment to alternative fee agreements with outside counsel as a way of helping to further reduce litigation costs.
Companies can assert their “buying power” in getting outside lawyers to agree to alternative fees. For example, flat fees can be paid for routine document assembly during discovery. If a case gets closer to trial, performance-based payments tied to milestones in a case, such as a summary judgment motion, can be negotiated.
DuPont, for example, often negotiates fees under a discounted hourly rate, and rewards the firm for timely, successful outcomes with a bonus of one to three times the amount of the discount of the hourly rate, according to Sager.
Another popular alternative to the traditional hourly rate for in-house attorneys is the “blended” hourly rate, where one hourly rate is applied to all time billed, regardless of whether the matter is worked on by partners, senior associates, junior associates, or paralegals.
This method is suitable where the outside firm is handling more than one matter for the client, according to the Association of Corporate Counsel America
“It encourages the law firm to use lower-cost people instead of higher cost partners,” added Rees Morrison, a partner at New Jersey-based Hildebrandt International.
Some companies have also reported success with using a capped rate – establishing a maximum fee above which the client no longer pays fees – and incentive billing, where outside counsel provides a discounted rate (usually a percentage discount from their normal hourly rates) in exchange for a performance bonus or success award.
Morrison, who heads Hildebrandt’s law department practice group, said that it’s important for there to be “an incentive for the law firm to perform particularly well to keep the client happy so they can make up the difference. The advantage for the law department is they’ve got leverage. Second, it makes the law department articulate why they think the performance is good. There’s not enough of that.”
Offering an alternative fee structure also presents a marketing opportunity for an outside firm that hasn’t previously worked with a particular company, according to experts.
And for firms that have established relationships with a law department, alternative fee structures allow them to take on risk on behalf of that client in tough economic times. If a company is cutting down on the number of law firms it uses, an alternative fee structure can be a reason to keep on one firm over another.
Aside from fees, an alternative fee structure can force a law firm to evaluate its own operations and look for ways to improve efficiency.
Despite the potential advantages of alternative fee arrangements and the need to exert firm control over the corporate purse strings when money is tight, many companies still shy away from using alternative fee agreements
The reason is that in-house counsel perceive that there is a potential for such alternate arrangements to backfire, Morrison said, noting that 90 percent of firms still bill by the hour.
Boston attorney Wyman observed said the hesitation to abandon the traditional hourly billing rate boils down to fear.
“There is the risk that the corporate lawyer is going to end up spending a lot more money than he would have spent on an hourly basis,” he said. “There’s also the risk the law firm will be doing an incredible amount of work and not be getting paid for it.”
