Litigation Budgeting: Possible or impossible?

What Good is a Litigation Budget?

By Eric E. Bensen and Rebecca K. Myers

There is probably no other part of the litigation process where the cold hard reality of hindsight has less in common with the lofty expectations of planning than the much demanded, but universally-dreaded litigation budget.  Budgeting is a foundational brick in virtually every sound business process. While it always poses its difficulties – too low for the department head, too high for executives – and usually imperfectly matches expectations, it serves a legitimate purpose and, with some planning, can usually serve that purpose well.

In litigation, that all goes by the wayside. It would state the obvious to say litigation is unpredictable and thus, difficult to budget for. It goes beyond that. Were it the case that litigation budgets were typically off by 20, 30% or even 50%, they would still largely serve the financial function of helping corporate law departments set their overall annual budgets. However, even the most carefully prepared litigation budget can be off by 100%, 1,000%, or more.

To illustrate, a given budget for a litigation that reflects thoughtful consideration of the costs of discovery, motion, trial preparation and appeal may anticipate total costs of, e.g., $1.5 million.  If the case is dismissed at an early stage on dispositive motion, however, actual costs may be as little as $75,000.  In that event, the budget, although carefully prepared, will prove to have been completely detached from reality.  That can happen in the best of circumstances.  Small, but critical mistakes can lead to the opposite result as well.  For instance, where a plaintiff brings what appears to be a small matter, but fails to anticipate complex counterclaims, a $75,000 budget may quickly give way to $1.5 million in actual legal fees.  In between, unanticipated depositions or motions, related litigations, and the like can easily put the most thoughtful budget to shame.

The reality, however, is that corporate law departments are parts of corporations and corporations require budgets.  Moreover, as litigation becomes a more regular part of the business process, stricter budget requirements are being imposed on law departments.  Thus, as difficult as the budget process can be, budgets are a reality to be dealt with.

To make the process more palatable, let us observe that as erratic as litigation budgets may be when it comes to predicting actual costs, they can be very effective when it comes to controlling them.  At the outset of litigation, two uncertainties present themselves.  One is the exact scope of the litigation.  As discussed above, even under the best of circumstances, the actual scope of litigation can vary wildly from its anticipated scope.  For this reason, the litigation budget as a financial tool, i.e., a tool for anticipating costs, will always be of dubious value.

The other uncertainty is whether in-house and outside counsel have the same expectations about the scope of the anticipated litigation.  A proper budget can be used to ensure that those expectations are in line.  True, on the financial side, in-house and outside counsel may be in complete agreement and completely wrong, but that does not undermine the value of the litigation budget as a management tool.  A detailed budget, one that accounts for the number and nature of anticipated motions, scope of discovery to be taken by each side, including depositions, length of trial, etc., provides an opportunity for in-house and outside counsel to discuss their expectations regarding the estimated costs of the litigation using detailed criteria.

For instance, if the litigation budget sets aside $500,000 for discovery with no further detail, there is no basis to evaluate whether $500,000 is too much or too little.  A litigation budget that indicates, for example, that outside counsel expects 20 depositions when perhaps in-house counsel expects only 10, provides a basis for the two to begin a dialogue about how many depositions should be expected, i.e., whether 20 depositions is realistic or whether 20 will plainly include depositions of marginal or no potential value.  Having that conversation before the litigation begins is a powerful way to keep costs under control.

Depositions are just one example, of course.  The same applies to motions, scope of document requests, expert witnesses, length of trial and virtually every aspect of the litigation process.  As long as outside counsel provides sufficient detail in the litigation budget, outside and in-house counsel will have a basis to compare expectations respecting each stage of the process.  Where those expectations do not match, a detailed budget will provide a basis to identify and resolve the differences.

In sum, a proper litigation budget necessarily serves two purposes, but only one of them well.  The first is financial, that is, anticipating costs as accurately as circumstance will allow.  The second is managerial, that is, controlling costs by providing an early opportunity for in-house and outside counsel to compare on a detailed basis their expectations concerning the scope of the litigation.

The tools needed to quickly develop a meaningful and detailed litigation budget along with concrete methodologies and tools to address case evaluation, the decision to bring suit, whether and when to settle, staffing issues, document collection, review and production, privilege review, trial preparation and other facets of the litigation process are provided in Bensen & Myers on Litigation Management.

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