How to Quantify the Bullets Dodged

On April 30, I attended the Summit on Law and Innovation at Vanderbilt Law School in Nashville. It was one of best Summits ever. Vanderbilt Law an innovation pioneer fostering innovation year in and year out.

Now to my post. One of the presenters was Lawton Penn, a partner at Davis Wright Tremaine who leads the DWT De Novo team. She too is a true innovator.

One of the stories she told involved a GC who expressed concern about having to go to a meeting with the CFO.

It was all about budgets.

The GC said that the leaders of other departments had multi-million-dollar budgets and were typically coming within one-half of one percent of meeting them, and so was not looking forward to saying, “Just trust me.”

The GC was asked why she feared the meeting. She went on to say that the Law Department had done very well and had avoided some scary bullets. But then she asked a memorable question: “How do you quantify the value of dodging bullets?”

My mind switched to how I would quantify “dodging bullets” for litigation.

First, I’d build a spreadsheet of the past. The spreadsheet would show how many lawsuits were filed against the company each year, and then break them down into case types, and then show the trends over time, and the total, average, and distribution of the litigation “cost,” meaning the cost of verdicts and settlements, defense attorneys’ fees, expert witness costs, and administrative costs.

No matter what, all of this cost would be a loss to the company. I say “loss” because any lawsuit filed against a company is a forthcoming loss. No matter whether the case is “favorably” settled or won at trial or on appeal, there are losses in productivity, potential damage to the brand, and the costs of administration by the Corporate Law Department, the fees charged by outside counsel, eDiscovery vendors, experts, and the payouts for settlements or verdicts.

Not even insurance, if any, will cover it all.

But those costs can be compared against the costs in prior years and even the net revenues of the company.

I can only show you a template for such a spreadsheet. I don’t have actual data to present, so I will use old, and not market-relevant, data for a company I won’t name.

In part one, I will use only the publicly available litigation data from PACER (the federal court litigation database). Since the data does not include state court cases, it’s incomplete in that and in other ways.

But the six (6) Nature of Suit (NOS) codes listed below account for 152 cases out of 190 total cases over a 5-year period of time , or about 80% of the total.

In part two, I will use publicly available financial data and also use the $350,000 per case data that I compiled in my book, Preventing Litigation: An Early Warning System, etc. (2015).

(Important note: Each Law Department can compute its own cost average per case each year.)

There are only a handful of Nature of Suit codes, and they are:

NOS descriptions

190 -- Breach of Contract

440 -- Civil Rights:  Other

442 -- Civil Rights:  Employment (i.e., employment discrimination)

710 -- Labor:  Fair Labor Standards Act (FLSA)

791 -- Labor:  ERISA

830 – Patent

COMPANY X                                                                                                                

                                190      440          442          710       791       830    

2013        9           5              7             9           13           2                          

2012        7           0            11             1             6           9                          

2011        2           1              4             1             7             1                          

2010        9           7              5             2             7           9                          

2009        3           4              4             0             6           1                          

                      30         17            31            13          39         22                                                                                                                           

Now read this from the bottom up; that is, starting in 2009 and going forward in time.

There’s a certain magic about that sort of rear-view-mirror review: Trends and/or problems appear.

For example, take breach of contract (NOS 190), the trend was low at 3, bounced up to 9, then down to 2, then up to 7 and stayed up at 9.  

But notice that Civil Rights: Employment went from 4 to 5 to 4, which is essentially flat, but then flared up to 11 and then moved down again, but only to 7.

And FLSA cases when from 0 to 2 to 1 and then from 1 to 9.

And the ERISA cases went from 6 to 7 to 7 to 6 and then more than doubled to 13.

Wow, what’s happening with employment issues? Hmmm.

Let’s step back and think more generally.

With trends, a GC might make hiring plans for on-coming threats (as in L & E, above; or the wave of asbestos lawsuits.

Or, perhaps, she might ask questions about whether employment or product liability insurance levels are set right or need to be adjusted.

And then there’s the financial context. With cost and caseload numbers, the GC could compute the cost per case in each year. And, of course, the cost per case, when multiplied by the number of cases, would tie back to the total cost.

Being a data-driven person, that’s how I’d try to manage the Law Department, and I think I’d be looking for any tool that would help me drive the frequency and the cost of the top five types of lawsuits that bedevil the company.  

And if I ever found a tool that would help me drive the frequency of a particular type of litigation down on a year-over-year basis, then I would be able to explain what went right.

But in general, I’d have data and metrics and trends and a principled way of holding my head up in a meeting with anyone in the C-suite.

But here’s the problem.

I think everyone in the legal profession is aware that law firm leaders are in their positions to build revenues for the firm and to increase the annual distributions.

Law Departments of the Future should not be mired in such short-term thinking. If they persist in that myopia they’ll have no budget for innovation. And then they’ll be stuck with contending that the profession is “special,” and that “Trust me” is an answer that’s good enough.

It’s not. In these tech-turbulent times, the tech companies are moving from mobile-first to AI-first. Law Departments should take note, arguing for innovation budgets, and move from increased efficiency to creative disruption.

Put another way: How about a paradigm shift to innovation, experiments with new tools, and a management style that more data-driven?

With new AI and blockchain tools that are just now coming over the horizon for the Corporate Law Departments of the Future, my argument is simple: Give them a try. See if they make a difference.