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When litigation strikes: The in-house and outside counsel relationship

On Behalf of | Feb 9, 2022 | Business Litigation

There is no one size fits all solution to the practical and logistical problems that confront a company when it engages in litigation, either as plaintiff or defendant. There are those industries wherein litigation is an integral part of the conduct of business – banking, insurance, pharmaceutical, securities (although most is relegated to NASD arbitration) and many others. Those companies that are regularly engaged in litigation have long ago figured out the relationship between in-house and outside counsel, although it does serve a purpose to revisit the issue periodically.

This article is directed towards those companies that do not routinely litigate as an ongoing part of their business. For these companies that I suspect comprise the bulk, in terms of numbers, of the litigation filed in the country, unexpected litigation, as either plaintiff or defendant, is an unsettling experience. Some corporate executives believe that the matter can simply be turned over to counsel who can prosecute or defend the claims without input from any of the key corporate employees involved in the matter that is the subject of the litigation. Sometimes the business people who are involved in a transaction that gives rise to litigation insist on a “fight to the death” over principle until the attorneys’ bills start to mount and the fees and costs are charged against their department.

The reaction of corporate executives whose companies are involved in litigation are many and varied for those who have never been involved in litigation, and that includes in-house counsel who have no litigation experience and routinely deal with matters of corporate governance, transactions or regulatory matters of a non-adversarial nature. These companies are feeling their way through the relationship with outside counsel and have no idea of what to expect. For those companies whose in-house counsel has litigation experience, the process is much smoother and expectations are more realistic.

Selecting Outside Counsel

For the company that does not regularly litigate, one of the first tasks it must undertake before commencing litigation is the selection of litigation counsel, if it does not already have one. There are a number of ways that this takes place. In-house counsel I have friends, classmates or referral sources that can recommend capable outside counsel. There are numerous law lists of attorneys they can facilitate the process of selection. There are questions of whether to hire a large firm, a small firm or something in between, and each has its benefits and drawbacks. If outside counsel is not been engaged in the past to represent the company, I recommend that in-house counsel make a list of six lawyers and law firms that appear to have the qualities and attributes best suited to represent the client. After that, I recommend that in-house counsel personally visit and interview each of the attorneys and make a selection only after the interview process is complete. There have been many articles written on the selection of outside counsel and I recommend that in-house counsel read a few of them before starting the selection process.

Litigation Is Best Viewed in a Business-Like Manner

The first thing that in-house counsel should take to heart is that litigation should be measured by many of the same fundamentals and rudiments that the business people apply in solving their business problems.  By way of example, when a business plans an expansion in terms of size, by acquisition or organic growth, or the sale of the new product or service, the business people study the market, determine the need, analyze the scope of the project, project revenues, expenses and profits and arrive at a conclusion.  In-house counsel should apply similar disciplines to litigation as are applied to these routine business matters.

One of the first things the company has to do is to determine what is the ultimate objective of the litigation, whether it is purely economic driven, or policy driven, or combination of the two. In either case, the company has to consider the resources that it is willing to devote to the litigation to accomplish its objectives. Those resources are measured in terms of personnel and dollars. Therefore, whether it is preparing for litigation as a plaintiff or as a defendant, in-house counsel and outside counsel must define the scope of the problem. In defining the scope, counsel must ask the whether the issue is one of dollars, a principle or statement of corporate policy. If the issue is one of dollars for the corporate defendant, does that mean that the company will look to settle the case at the earliest possible opportunity as a matter of cost effectiveness rather than spending money to prove its innocence – in which case principle and policy are less important considerations.

If principle and/or policy are important and are the primary objectives of the litigation, then the company ought to know that the result may or may not be justified by the cost. In all cases, at the very outset, in-house and outside counsel must confer to establish the objective of the litigation and just as soon as outside counsel can conclude an initial investigation involving witnesses and documents, a preliminary budget for the litigation should be developed, discussed and evaluated. For those companies that do not regularly engage in litigation, it is at this point that the business people should be brought in to understand the economics.

I one-time heard it expressed by a very knowledgeable and experienced in-house counsel that litigation budgets are, at best, 50 percent wrong. I have often found that to be the case and that fact should be discussed between in-house and outside counsel. The process of constructing a budget requires outside counsel to think about the strategy for the case and consider the relative importance of witnesses. It also serves as a guideline, but not a straitjacket, to review and to compare the projected budget against the actual expenses as the case progresses as a way to achieve efficiency and economy.

At this point, I stop to note that in-house counsel has to understand that there are at least five elements to every suit that affect the cost.  If one of those elements is out of control, the cost of the litigation can, and most likely will, get out of control. The first element is outside counsel, which we will assume is you, and we will assume that you are knowledgeable in the law that is involved in the case and that you have reasonable expectations concerning the outcome of the case. The second element is opposing counsel and the question is whether opposing counsel is knowledgeable in the law and whether he has reasonable expectations concerning the outcome of the case. The third and fourth element is your client, represented by in-house counsel, and the opposing party, and the question is whether each is communicating with their counsel, being informed on the law and whether each, as a client, has reasonable expectations of the result. The last element is the judge. If the judge makes definitive rulings as the case progresses and moves the case along, that element is under control. If the judge fails to make dispositive rulings and insists counsel “meet and confer” repeatedly and even the best-intentioned counsel cannot agree, then the case is out of control.

If any one of the other five elements is out of control, then the case is out of control. In-house counsel needs to understand this. Therefore, implicit in the relationship between in-house and outside counsel is a full and candid discussion of all aspects of the case that are necessary to bring in-house counsel to the same level of understanding about the case as outside counsel. This is much easier when in-house counsel has litigation experience. If he or she does not, then there needs to be a process of education so that in-house counsel can feel comfortable when asked to make a decision to guide the activities of outside counsel.

The Creation and Implementation of a Partnership

The best relationship between outside counsel and the client is that of a “partnership” of sorts. It is a relationship to which each is asked to contribute and it is a relationship that fosters a full and free exchange of ideas.

As I said above, the client, through the management by in-house counsel, has to provide outside counsel with the tools necessary to prosecute the litigation, whether as plaintiff or defendant. That means the investment in time of personnel involved in the matters giving rise to the litigation through interviews and then, perhaps, the preparation of written statements. That means the investment of time personnel to collect all documents relevant to the dispute. It also means the investment in time of IT personnel to do a complete scan of the computers of the employees involved in the dispute, of the network and of any stored data to mine all information that has a bearing on the matter.

After counsel has had the opportunity of interviewing the pertinent witnesses and reviewing the relevant documents and data, in-house counsel has a right to expect a preliminary analysis of the case that would include a statement of the applicable legal principles that are involved and a range of the probability of success or failure. In addition, in-house counsel can expect a reasonably detailed budget of the case. As an aside, one of the reasons why budgets are so inaccurate is that counsel at this juncture is crystal ball gazing as to how long it is going to take to prepare for the depositions of Witnesses A, B, and C, the length of those depositions, the litigation style of opposing counsel and a multitude of smaller issues that creep into every litigation that you cannot foresee. These unforeseen matters often comprise the bulk of the litigation costs.

It is at this juncture that the client through in-house counsel and outside counsel have to get on the same philosophical page about the litigation and the same ethical page about the manner in which the litigation a sample.  Is the litigation going to be handled in the character of an “iron fist in a velvet glove,” a “good citizen,” “win at all costs,” or, “bury the opposition?” Companies present their character through their outside counsel in litigation. It is not hard to distinguish between those companies that are the “good citizens” whose business ethics compel them to do the right thing and those companies that are playing “hide the ball” and walking the ethical tightrope.

Accordingly, if the public perception of the company is important to the company and its business, it must communicate its ethical standards to outside counsel. It must tell outside counsel “this is who we are and this is how we deal with our stakeholders, our employees, our vendors in the public.” Throughout the course of the litigation, there may be opportunities for the company to make a decision of whether to take a “shortcut” or to take the “high road.”  It is the obligation of outside counsel to discuss those situations with in-house counsel who will have to make a decision. In-house and outside counsel have to be on the same page on these occasions.

I at one time heard the general counsel of a major United States company whose name everyone would recognize say to a room of 500 lawyers that outside counsel are the enemy and they cannot be trusted.  The statement was a shocking statement when it was made and it is even more shocking as time passes and the relationship between in-house and outside counsel becomes more refined. I knew several lawyers in the room who were partners in major law firms that had fired that client because of that client’s attitude.  In order for a good partnership to exist, the client and counsel must have trust and confidence in each other. If it is lacking, then the combination is wrong, the team will not work and the company and the law firm should seek other counsel and clients. Trust and confidence is at the very heart of the relationship.

Several things can help forge the “partnership” relationship. Firstly, outside counsel should understand the client’s business if a knowledge of that business is at all relevant to resolving the litigation. Here, a trip to the client’s offices, or plant or other facility, or a tour of the client’s projects or accomplishments is in order.  In addition, it is useful for in-house counsel to furnish outside counsel with a copy of the company’s mission statement, ethics statement and value proposition, if they exist. Whatever else in-house counsel can do to define the client and make that client alive to outside counsel is helpful in promoting the partnership relationship.

Another thing that is helpful, and almost essential for a good working relationship, is for in-house counsel to provide outside counsel with a list of expectations that must be fulfilled. On the other side of the coin, one of the first things that outside counsel should say to his in-house counterpart is “Tell me what are your expectations regarding my representation.” Those expectations may be the frequency of communications, review of documents, periodic meetings, attendance at hearings and depositions, budget revisions, the frequency of billing and any manner of things that are necessary for the in-house attorney to do his job consistent with sound litigation management principles and the expectations of his superiors. The last thing that in-house counsel wants is surprises. They do not want to be surprised that the companies claim is far lower than projected and that the litigation costs are excessive in relation thereto, or that the company’s exposure on the defense side is far greater than anybody had considered and communicated.

Fees and Alternative Fee Arrangements

If there is one thing that separates outside counsel from their in-house counsel, it is the matter of fees.  The institutions that theme litigation as a regular part of their business have reconcile the fact that fees must be paid and, presumably, have made all the agreements with their outside counsel to obtain the most cost effective fee arrangements. When a company that does not regularly litigate finds that it must, fees become a major issue because the cost of litigation is substantial. Litigation may not be a budgeted item, and, consequently, its cost can have a significant impact on a company’s bottom line. This is one reason why in-house and outside counsel should discuss fees at the time of the engagement and again at the time that outside counsel presents the initial budget.

Alternative fee arrangements to the standard hourly billing is the discussion on everyone’s lips. Whether an alternative fee arrangement is appropriate in any given case depends on the case, the client and outside counsel. Far from hourly billing, the more typical alternative fee arrangements are contingency, a hybrid that is part hourly and part contingency or one that is best described as “let the client decide.”

The contingency fee arrangement works if the client is the plaintiff and the claim is for an award of a sum of money. The percentage of the contingency is usually dictated by community standards and may vary from community to community. Contingency fees may also work on the defense, but are not used as frequently in that situation. The defense contingencies based upon the savings produced by the lawyer as against the plaintiff’s original demand. In the case of a contingency, the client could wind up paying a greater fee than might be paid under an hourly fee arrangement. The economics of the plaintiff’s fee arrangement must be weighed at the outset of the representation. If the plaintiff’s claim at the outset is highly probable of success, the client is better off paying an hourly fee because the total estimated fees will be less than under a contingency fee arrangement.

Under the hybrid arrangement, outside counsel agrees to a feed it is comprised of part hourly billing and part contingency. Frequently, hourly fees are billed at one-half of regular rates and the contingency on recovery is set at one-half of the normal contingency. This arrangement is a hedge for both the client and the attorney and is useful if the outside counsel and client believe the litigation will be protracted. A plaintiff would use this arrangement more frequently than a defendant.

There are other variants of alternative fee arrangements. Some firms present their clients with the “suggested” fee and leave it to the client to increase (which has happened) or decrease the fee as the client sees fit. I think this arrangement can only work for outside counsel if he knows the client well and trusts the client. Suffice it to say, that a day does not go by that someone comments on alternative fee arrangements on the Linked-In blog.

It inside counsel and the client agree to an hourly billing or even a hybrid fee arrangement, in-house counsel should insist that outside counsel bill according to the Uniform Task Based Management System (“UTBMS”) of billing adopted by the American Bar Association. There are a number of reasons for this.  First, the billing is presented in discrete categories of work or tasks performed that makes bill review much easier and more meaningful. Second, the bill and the activities described are more transparent and accountability is enhanced. Personally, I do not think in-house counsel should ever accept a bill from an attorney or law firm that is merely a chronological listing of services that sets forth the time expended for each task and the value. The reason why is that a chronological billing is not worth the paper it is written on for purposes of a meaningful bill review and analysis.

Mediation

Some jurisdictions mandate mediation before trial.  In some jurisdictions, mediation is voluntary.  Mediation is non-binding.  It is not the same as arbitration, which is binding. If you are in a jurisdiction that provides for mediation, in-house counsel should inquire of outside counsel of the advisability of early mediation. In-house counsel should consider attending mediation to understand what it is that is driving the opposing party. It is a time of free discovery and an opportunity to look the opposing party in the eye and possibly resolve the case without the need of further litigation.

Conclusion

The ingredients of every effective in-house/outside counsel relationship are trust and confidence. Trust and confidence arise from an identification and communication of expectations concerning what each brings to the table and realistic expectations as to the outcome of the litigation. Openness, candor and accountability are the additional ingredients that cement the relationship. The relationship between in-house and outside counsel can be a rewarding one if it is built on fairness for the client and for outside counsel.

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