By: Joe Thorpe
Litigation is a constant. Government regulation is on the increase in virtually every corner of American finance. The Federal Reserve, the FDIC and the SEC all have expanded powers and the Obama administration is creating a dizzying array of new agencies and councils. Virtually every major corporation now has a professional team of corporate compliance officers and their plates are already full.
Whatever happens to the economy in the next few years, one thing is crystal clear: your corporate legal department’s costs are on the rise. This will be the case regardless of your corporate line of business notwithstanding that you are a good corporate citizen.
Frederick Nietzsche in his book, Ecce Homo: How One Becomes What One Is penned his famous quote, "whatever doesn't kill you makes you stronger". When I mentioned this to a friend the other day, he quickly pointed out that soon after his book was published, Nietzsche went stark raving mad and lived for 11 more years. I'm not sure if it was drugs, syphilis or nervous breakdown but whatever it was, it didn't kill him and it certainly didn't make him stronger. After thinking about it, I think my friend was right. Merely surviving a calamity isn't what makes you stronger. What makes you stronger is identifying what's wrong and doing something about it.
Identifying the problem as to corporate litigation expense is actually the easy part. Examine your billing statements and you will find that at least 70% of your litigation expenditure on any given matter is related to discovery and the lions-share of that is the document review. Reviewing documents for responsiveness, privilege etc. has always been a fundamental requirement of the discovery process. And, that process has always involved handing over the requirement to outside counsel. Much of the document review in the larger firms is being conducted by first and second year associates and managed by more senior attorneys. What has changed is that we are no longer focusing this document review around 20 or 30 boxes of paper. Now it's 20 or 30 GB of electronically stored information (ESI) and a first-year associates’ billing rate these days is at least $250 per hour. The same is true with document reviews for government investigations and regulatory compliance. The target documents are no longer measured by boxes but by gigabytes or terabytes and the billing rate for large firm first years are….well, you can fill in the blank.
Now to put some perspective on this, consider that we are looking at approximately 12,000 documents per gigabyte. In a straightforward first pass review we might expect a reviewer to get through approximately 600 documents per day. Therefore, 20 days to review 1 GB or 12,000 documents. If the billing rate is $250 per hour we would be looking at approximately $40,000. That probably wouldn't include his or her manager’s time for direction and work review and oh yes, there were 20 GB needing to be reviewed. Just a tad over $800,000!
In the cost calculator below, with 40 GB collected and at a filter rate of 50%, we illustrate the above scenario of 20 GB for attorney review (240,000 documents), together with collateral costs. Note that costs for collection, filtering, processing and document production together represent just over 7% of the total costs. My conclusion: Yes, there is an elephant in the room!
