Litigation budgets have been a part of life for outside counsel for the better part of two decades. Many corporate counsel still use this tool to varying degrees: from a refusal to pay lawyers' fees in excess of a litigation budget to an inconvenient necessity that is filed and forgotten shortly after it is finalized.
While not always beloved by litigators, the purpose for litigation budgets remains sound. Articulating a client's litigation goals and thinking through the pathway to reach those goals certainly is desirable. Indeed, an analogy can be drawn between corporate counselrequiring a litigation budget and investors requiring a business plan before contributing capital to a start-up company. That said, all business tools evolve and improve through experience. Litigation budgets too can benefit from a discussion of their shortcomings. The ways in which budgets fall short can lead to improved litigation planning, which may in turn help lawyers and in-house counsel to reduce the costs of litigation.
The Litigation Budget Is Just A Number
All too often, this is true. Typically, budgets are requested at the inception of the retention of outside counsel. Litigators required to draft a budget early on or before litigation is commenced may simply estimate a final number and "work backward from there," allocating most of that figure to discovery and trial. By way of example, after calculating the total amount attributable to discovery, the litigator "backs into" the number and cost of depositions.
This practice is understandable if not forgivable. A good deal of an attorney's work in litigation is reactive in nature, and cannot be known at the time the budget is drafted. For example, often budgets require the allocation of certain amounts to detailed specific tasks, such as a motion to compel discovery, at a point in time when it is not known whether there will be a discovery dispute, let alone whether the discovery dispute is one of simple noncompliance or a complicated issue of discoverability. Thus, the litigation budget becomes "just a number" and not a true planning device.
And if a client uses litigation budgets as a bright-line ceiling for paying attorneys' fees, budgets are even less likely to be accurate. Outside counsel simply will over-estimate the projected figures to protect his or her fees. This only pushes the budget further away from a true planning tool toward a fee protective device. In such cases, not only is the budget "just a number," it is an artificially high number at that.
This is not to say that clients should not ask litigators for projected costs of litigation. To the contrary, a litigator must be able to predict litigation expenses if he or she is to opine on cost-effective strategy and solutions. On the other hand, if the only number that concerns a client is the total cost of the representation or the total cost of a subset of litigation (e.g., "I predict the cost of discovery to be x"), then it is less useful (and more time consuming) to allocate costs to the level of detail of, for example, motions to compel, photocopying costs, or postage expense.
Litigators Are Not Permitted To Bill For Preparing The Litigation Budget
To be sure, billable hour "requirements" follow litigators through every step of the day. Certainly, clients should not have to pay for a lawyer's time preparing bills. On the other hand, any litigator worth his or her salt knows that preparation is a critical element of successful litigation and that litigation strategy planning is the most important part of preparation. Clients understand that this important work is billable. It follows, therefore, that if litigation budgets are to reflect well-thought-out litigation strategy, the time spent preparing budgets should be billable. If not, litigation budgets will be assembled quickly, without the commitment of sufficient thought to be valuable, and will bear little resemblance to reality.
The Numbers Behind The Budget Should Reflect Business Goal, Not Legal Decision
Moreover, litigation budgets drafted by a litigator without significant involvement of corporate counsel or the client are not particularly valuable as a tool to control litigation costs. There should be a direct correlation between a client's litigation goals and the planning and projected cost of litigation. As an obvious example, if a client wants to settle - at any amount - before the commencement of litigation, a litigation budget should reflect that plan for the litigation. Litigation budgets prepared in isolation by litigators are the proverbial "tail wagging the dog." Without reflecting the business objectives of a client, the budget does not accurately predict litigation cost and may not lead toward the attainment of a client's goals.
Litigators Can Only Control Half Of Litigation Costs
While sound litigation and strategy planning can reduce the cost of litigation, ultimately a party can only control its own strategy and planning. It is not unheard of for one side of a lawsuit to make conservative discovery plans while the other side engages in "scorched earth" tactics. Budgets drafted before the commencement of litigation may not reflect the anticipated response to the strategy adopted by the adverse party. The inability to predict with accuracy the litigation strategy of the opposing party is another reason that fixed budgets do not necessarily accurately predict litigation costs.
Updating Budgets
Indeed, for many reasons - including the unanticipated litigation strategy of an opposing party - litigation budgets formulated at the beginning of litigation should be revised throughout the representation to reflect changes in litigation strategy. Naturally, clients that use budgets to limit attorneys' fees lack the incentive for periodic revisions. Similarly, lawyers who cannot bill for the time to prepare a budget or who view budgets as a "make-work nuisance" are unlikely to initiate periodic revisions. Without such updates, the budget will not be accurate in predicting costs and may artificially limit the legal work needed for a quality legal representation.
There is no doubt that the discipline that accompanies the requirement for a litigation budget at the inception of a case is helpful. Litigation budgets can force lawyers to think through strategy decisions and approaches even before litigation has commenced. The question remains, however, whether crafting the direction of the litigation at an early point in the process is more helpful than fixing the amounts of fees and costs attributable to specific tasks, particularly when many such tasks ultimately may not be needed. A better route might be to dispense with the task of identifying with the specificity of the dollar amounts projected for each conceivable litigation task at the inception of litigation, focusing instead on designing a strategy that reflects a client's desires and reduces litigation costs.
An Alternative: The Litigation Plan
An alternative to the litigation budget is a written litigation plan. Since the first step of any representation is to communicate with a client or corporate counsel about the client's objectives and plans for litigation, the plan should reduce those objectives to writing. The articulated client objectives should reflect whether the case is isolated or part of a program of litigation. The plan should state whether any particular legal issues could have precedential effect for the client and whether the case (or a different case) would be the preferred vehicle for raising and litigating a particular issue or defense. It also should specify whether an early resolution is desirable, and if so, the plan to reach such an early resolution. Alternative modes of dispute resolution should be considered (i.e., arbitration, settlement conference, mediation, etc.), giving thought to the reasons why a particular method of resolution would be cost-effective and appropriate for the litigation matter.
In litigation, there are three basic cost points: legal research, discovery and trial/hearing/arbitration. The litigation plan should reduce to writing how these cost points will be managed consistent with the client's objectives. For example, many clients for good reason require express authorization before performing legal research. If the client has a program of litigation (such as a number of similar mortgage foreclosure matters), there is a good chance that the legal research has already been done. Requiring approval for additional research gives the client control over that cost point. Or a client could opt to limit motion practice - even potentially dispositive motion practice - acknowledging that other methods of resolving the case may be more cost effective under the circumstances of that matter.
Similarly, a client could elect to minimize the amount of discovery taken. While arbitrary or artificial limits on the amount of discovery taken in a lawsuit is patently unwise, an important question to be asked is whether a lawyer could resolve a given matter on the same or similar terms having performed 85 percent rather than 95 percent of all possible discovery. Certainly, there are risks in limiting the knowledge gained through discovery, but in some instances those extra five depositions may not yield the requisite additional information such that they justify the added expense.
The projected cost of litigation should not be forgotten. A well-designed plan should include the total projected cost of litigation as well as projected costs of the basic cost points. The purpose of these estimates, however, is not solely as a "budgetary matter." Rather, a projection of costs also: 1) identifies the area of high cost, thereby allowing strategies to reduce those costs; and 2) encourages an analysis of cost-effective business solutions.
In short, we should consider whether litigation costs are more effectively limited through strategy planning or through the financial budgeting process. Litigation budgets were a positive step in forcing litigators to think through the financial impact of litigation. While projecting the costs of litigation remains an important part of litigation planning, the detailed line-by-line projections in pro-forma litigation budgets are of less value in curtailing litigation expense. Careful litigation planning guided by clients and corporate counsel should be considered as an alternative method of reducing such costs.
Published October 1, 2008.
