Expected Upturn in Litigation: No Panacea to General Downturn in Profession

            As we looked at the horizon in 2008 and the first storm warnings appeared, many firms scurried about filling their bullpens with litigators, armed to the teeth and ready to do battle in the tide of litigation that so often rises in times of economic crisis.  So many of us fully expected that litigation would be a growth area.  But, we did not recognize that the combination of a declining economy reduced corporate profitability and the sudden huge inflation of litigation costs, caused by, among other things, the vast cost of e-discovery would actually tamper down corporate passion for litigation.  Accordingly, practice concentrations in litigation sprouted like fields of strawberries, while the consuming public simply lost the taste for strawberries.

          Another reason to be wary of any material growth in litigation is the slowdown in class action litigation.  Statistical studies done at year-end in 2009 showed a declining number of class actions filed (with the exception of the slight blip created by Bernie Madoff litigation, that is, the myriad lawsuits generated by Bernie Madoff and other Ponzi wannabees and their progeny,) – actually a total of a 5% decline in the early part of 2009.  Based on current trends, it is likely that the decrease in 2010 will be about 24%.  As a feeder to corporate firms, class action, as much as we might bemoan the avarice of plaintiffs’ firms, only a naïf would suggest that large firms have not benefitted from the largesse spawned by their defense. This slowdown on the defense side will not only affect large firms, but will trickle down to midsize firms as large firms may be incentivized to compete for a declining volume of litigation business.

          Another unintended consequence of l’affaire Madoff and its progeny, is that the SEC and to a lesser extent, some other regulatory agencies have doubled and tripled their enforcement activity.  This is perhaps bad news for both some business firms and promoters who get caught up in this web, rightfully or wrongfully, but, of course, these various proceedings and enforcement actions create a very significant area of growth area for both enforcement experts and litigators.  But, like many practice areas, this practice area involves a relatively small club.  However, admission to the club is available through a variety of means and given the long half-life of these types of proceedings, it is well worth the investment in time to gain admission.

          Turning back to general commercial litigation, statistics reported by the Federal Judicial Conference and the New York office of Court Administration must be carefully analyzed.  The federal courts report a decrease in newly filed commercial litigation.  While Chief Justice Roberts reported that the federal courts experienced a 7% uptick in business at the federal level, there was an actual decline in commercial cases.  The federal judiciary busied itself with the enormous rise in bankruptcy filings – some 1,200,000 last year – up more than 20% from the preceding year – the overwhelming majority of these cases were individual filings, not corporate filings. The federal courts also experienced a material increase in labor and employment litigation cases, overwhelmingly consisting of cases arising out of the national pandemic of layoffs.   As you know, much of this work has been commoditized and is high volume, low margin work.  An interesting footnote to consider here is that much of the engagement of counsel by clients in this arena is done by HR departments directly, with little or no involvement by in house corporate counsel. Similarly, HR departments typically are independently tasked with the engagement of immigration counsel.  The acquisition of such services is performed with a purchasing agent mentality, with the focus being on the best value for the lowest cost.  Old school ties, institutional ties and golf club or social relationships play little or no part in this world; except to gain an entitlement to respond to an RFP.  That entitlement can just as easily obtained by straight up marketing activities.  I believe that this purchasing agent mentality will be the norm in many legal engagements, with in house legal departments being pressured to reduce costs of outside legal fees.

          Returning to the most recent report by the New York Office of Court Administration, there has in fact been an almost 20% increase in new case filings.  That’s the good news.  The bad news is that these new filings are made up of a tsunami of mortgage foreclosures and consumer debt litigation.  The result is that many parts of the New York courts are being sucked up in this tidal wave and fewer resources are available to adjudicate commercial disputes.  The natural consequence is that judicial resolution of corporate disputes are proceeding at a glacial pace, global warming notwithstanding. Corporate clients are not unmindful of these delays and attendant costs.

          Verdict Search, a National  Law Journal affiliate, confirmed the 2009 downturn litigation.  As reported by The National Law Journal on March 15, 2010, ” Commercial verdicts, including breach-of-contract recoveries, fell from $1.4 billion in 2008 to $421 million last year. Fraud recoveries plummeted by nearly 70 percent to $561.3 million.”   Excluding several extraordinary IP verdicts, IP litigation also experienced a downturn.

              The profession also assumed that a mainstay for the future would be the world of intellectual property. Certainly, with so much of the American economy relying on our ability to deliver advanced technology, not manufactured goods, to the world, we did not recognize that we are in fact in a perfect storm. The plain fact is that technological development relies on the availability of capital.  Our perfect storm has put the brakes on IP. We’ve all seen the decline in business in this area.  This decline was further evidenced by the PTO’s announcement on December 10, 2009 of a decline in new filings.  But, here, with small openings in capital markets appearing and with stimulus funds being on the horizon, it is our considered view that IP work will realize some resurgence. 

             As we noted above, one of the real boogeymen in the actual litigation arena has been the huge burgeoning cost created by E-Discovery.   A simple breah of contract case can easily result in the production of tens of thousands of documents. And Judge Shira Scheindlin of the US  District Court for the Southern District Court, in a series of opinions outlined the explosive hidden landmines that counsel and litigants may suffer should strict compliant when  E-Discovery rrequirements are not strictly followed. E-Discovery equirements, standing alone, has further tampered the historical rise in litigation, which heretofore has resulted in a rise in litigation and served as a counterweight to falling revenues in othe practice areas.  We do note that some large firms, at some substantial risk, has captured some declining litigation revenue by assuming pro-active roles in E-Discovery. Middle Market law firms have shied away from taking active roles in E-Discovery given both the risks involved and the cots of developing an expensive infrastructure.

            Accordingly, law firm managers should not anticipate any rise in litigation during the intermediate term.   Unlike other downturns, we have not seen, nor should we expect to see a rise in litigation revenue during this economic downturn. Staffing in the litigation area should continue to be lean.