Class action litigation is said to be the sport of kings, in the sense that only kings can afford it. Rare is the class action defendant who feels at all kingly. Judging from surveys of in-house counsel, lack of predictability in legal spend, sporadic communication about fees and strategy, costly discovery or motion practice, and perceived overstaffing are particular stress points in all complex litigation, but particularly class actions.
No matter how they are expressed, these stress points are in essence reflections of corporate counsel's concern that defending a class action is or will be too expensive relative to what is achieved. This demonstrates the critical relationship between the need to define success in a class action, the need to determine the value of success and the need for effective communication.
In this blog post, we look at how to budget for success in a class action by developing a clear understanding, shared by both counsel and client, of the objective, strategy, and scope of work for the class action. We also address how budgeting has taken on an added element of importance in the new era of alternative fee arrangements.
Planning and Budgeting Are Possible in Class Actions
There is a perception that it is impossible to budget for class actions because they are either too big, too uncertain, or too outside of any one party's control.
This is not accurate. Major construction or software engineering projects routinely involve budgets that are tens, if not hundreds, of times larger than the costs of defending a class action and have just as many unknown variables, yet budgeting for those projects is not seen as an unsolvable problem. In fact, for many such projects, having a budget is a prerequisite.
Moreover, many in-house counsel report to their own internal business clients who are extremely familiar with budgeting projects and who demand visibility into upcoming legal spend. It is not acceptable for in-house counsel to say to his or her client that a budget cannot be developed because the class action is too complex.
Quite the opposite, experienced counsel can and should be able to develop a project plan and a budget for all manner of class actions. By deconstructing the action into discrete phases and tasks, determining which resources (lawyers, paralegals and other personnel) will be responsible for which tasks, considering how long each task ought to take, and applying certain assumptions, a budget can be developed for even the most complex of matters. This "bottom-up" budgeting approach can then be tested against a top-down estimate which is derived from the prior experience of counsel and an element of "common sense".
Experience in defending class actions is therefore essential to the development of accurate fee estimates because experienced defence counsel will know what tasks are required, which resource should do what task, how opposing counsel tends to approach a case, and how long each task should take. Experienced class action defence counsel will also have a good sense for what a phase should cost in the aggregate.
Defining Success and Selecting a Strategy
We have previously written about the importance of defining success in the context of a class action because, among other advantages, no plan or budget can be realistically created without an understanding of the objective.
Likewise, we've also written about how there may be more than one way of achieving the objective in any given case. Each possible strategy has implications for time and cost, as well as other important matters such as corporate reputation and organizational impact.
Sophisticated defendants therefore understand that it is short-sighted to select a strategy without also considering the anticipated cost. For example, assuming the objective is to defeat the class action, all things being equal, spending $1 million on a low-probability opposition to certification may be a sub-optimal strategy compared to spending $1.5 million to litigate the case through a higher-probability summary judgment motion following certification.
Defining Outside Counsel's Scope
Clients increasingly want to be involved in the creation of a plan and budget. Executing the strategy to achieve the desired objective is therefore a responsibility shared by client and counsel. Defining who is responsible for what is crucial to planning and budgeting.
At a minimum, the client will be responsible for giving instructions and providing access to witnesses, information and documents required by counsel to litigate the case. Any assumptions or requirements for obtaining instructions, information or documents should therefore be defined at the outset so that they can be incorporated into the plan.
As in-house legal departments grow both in size and sophistication, clients may elect to take responsibility for certain work that in other circumstances would have traditionally been within outside counsel's scope. For example, clients may assume responsibility for conducting custodian interviews and collecting documents internally based on parameters provided by outside counsel, rather than engaging outside counsel or third-party vendors to undertake this task.
Developing a Plan and Budget
Having defined the objective and selected a strategy, counsel and client can develop a detailed plan and budget that defines how and when the objective is to be achieved, in terms of deliverables, tasks and resources.
This detailed planning and budgeting process is instrumental in addressing certain of the stress points identified above:
- Communication – A detailed plan and budget can help avoid disagreements over legal spend by setting expectations regarding anticipated defence costs – both between counsel and client and internally within the client – and allows for regular reporting of actual fees against the budget. Customized reporting can help identify when a matter starts to fall out of budget, or when certain tasks fall out of scope. Without a budget at the outset, this healthy two-way communication can be more difficult.
- Staffing – A detailed plan and budget provides visibility into who is doing what and when they will be doing the work. By creating a shared understanding of the roles and responsibilities of each team member, the planning and budgeting process should eliminate questions such as: who is this person and why are they charging time to my file?
- Cost/Benefit Analysis – Detailed budgeting also forces counsel and client to consider the costs and benefits of tactical options in the context of the overall objective. In particular, the anticipated benefits of interlocutory motions and steps in discovery can be measured against their anticipated costs.
The New Frontier: AFAs and Budgeting
In an era where clients are increasingly asking counsel to think creatively about alternative fee arrangements and other value-based billing options, it is in both client's and counsel's interest to have a well-defined plan before considering and agreeing upon customized fee arrangements. On the one hand, counsel that is concerned that the plan does not account for all work may include an excessive budget for contingencies, resulting in less efficiency and increased fees to the client. On the other hand, counsel that significantly underestimates the work required may later push work down to less experienced lawyers to maintain margins or to keep to an estimate.
Given the need to arrive at a fee arrangement that appropriately balances risk and reward between counsel and client, sophisticated defendants will therefore give counsel the time and information required to develop a plan that will form the basis of an estimate. This is important irrespective of whether the work is to be done based on the traditional billable hour, or an alternative fee arrangement, such as, for example, fee caps, fixed fees for each phase or a fixed fee with a collar. Developing a plan and budget can help the parties arrive at a mutually agreed-upon fee arrangement because both client and counsel will have a better understanding of the anticipated cost and value of the work.
No plan survives contact with the enemy – Helmuth von Moltke
Budgets are a function of the assumptions and predictions that are made, and so it is important to recognize that a budget will almost certainly be "wrong" almost immediately after it is submitted, in that there will inevitably be deviations between the budget and reality due to unforeseen and possibly unforeseeable factors. This does not mean that budgets have no utility; on the contrary, they permit counsel and client to have a real-time, fact-based conversation about the status of a matter, the cause of any deviations from the budget and any corrective action that may be taken before the deviation becomes a significant risk to achieving success in the class action.
Budgeting a class action is challenging. Of that, there can be no doubt. But increasingly it is a crucial, if not essential, element of achieving success in the defence of class actions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.