Does your company have a target on its back?

December 1, 2005 By    

Despite a considerable effort to operate businesses safely, many companies complain that the cost of lawsuits is dragging down their ability to operate profitably.

 John V. McCoy
John V. McCoy

There appears to be some real support for these concerns, especially when it comes to energy companies in the United States. A recent survey of energy companies in the United States conducted by the law firm of Fulbright & Jaworski found that the average energy company faces 49 lawsuits, 10 of which were filed in the last year alone.

In more than one-third of these companies, a whopping 21 to 50 percent of the company’s legal budget is spent on litigation.

A substantial majority of these disputes involves contract disputes and personal injury actions. In-house lawyers for energy companies also are concerned that more and more cases concerning environmental and toxic law issues are on the horizon.

Getting a handle on the costs associated with litigation is difficult, if not impossible, for these companies. Survey responses suggest that many companies don’t know how to budget for litigation costs; many can’t even identify what is spent on litigation.

There appears to be a general consensus in the industry that the uncertainty of the cost of litigation makes it more difficult for companies to make strategic business decisions. Other strategic business outlays, such as research and development and sales and marketing, take a hit as a result of this uncertainty.

Litigation costs represented about 5 percent of the company’s gross revenues for those that did track them, according to survey results.

One of the most interesting findings of the survey is that respondents said they are most interested in controlling costs that they perceive as spiraling out of control. In fact, this was of greater concern than winning or achieving a particular business outcome.

Given these results, it important to game plan early and often with outside legal counsel about the cost/benefit and risk/benefit of the litigation at hand. There are always cases that are unique due to policy considerations or those that are in an intractable posture. But those cases are few and far between.

Active management of the case from the cost versus risk assessment can have impact on the growing outlays of funds for litigation.

Another radical approach to reducing litigation costs would be to make the laws governing legal disputes in court more uniform. Currently, rules governing lawsuits vary greatly from state to state and judge to judge in any given court in the country.

More consistent laws would hold companies accountable to a single standard instead of the dizzying array that exist for various state and federal court jurisdictions. That change alone would provide a greater predictability of outcomes in these cases.

The complexities and difficulties of the current legal system hinder the ability of propane companies to make sound strategic decisions and predict outcomes. While it would be a difficult step to complete, a move to make the laws governing legal disputes in court more uniform would be a great first step.

John McCoy is a trial lawyer with the firm of McCoy & Hofbauer in Waukesha, Wis. A founding member and past president of the Propane Gas Defense Association, he specializes in catastrophic fire and explosion cases and product liability disputes.

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