Fixing the Economics of Securities Class Action Defense: Nationwide Defense by Regional Firms
In my last D&O Discourse post, I discussed why changes to the securities litigation defense bar are inevitable: in a nutshell, the economic structures of the typical securities defense firms – mostly national law firms – result in defense costs that significantly exceed what is rational to spend in a typical securities class action. As I explained, the solution needs to come from outside the biglaw paradigm; when biglaw firms try to reduce the cost of one case without changing their fundamental billing and staffing structure, they end up cutting corners by foregoing important tasks or settling prematurely for an unnecessarily high amount. That is obviously unacceptable.
The solution thus requires us to approach securities class action defense in a new way, by creating a specialized bar of securities defense lawyers from two groups: lawyers from national firms who change their staffing structure and lower their billing rates, and experienced securities litigators from regional firms with economic structures that are naturally more rational.
But litigation venues are regional. We have state courts and federal courts organized by states and areas within states. Since lawyers need to go to the courthouse to file pleadings, attend court hearings, and meet with clients in that location, the lawyer handling a case needs to live where the judge and clients live.
Although the attitude that a case needs a local lawyer persists, that is no longer how litigation works. We don’t file pleadings at the courthouse. We file them on the internet from anywhere – even from an airplane. There are just a handful of in-person court hearings in most cases. And the reality is that most clients don’t want their lawyers hanging around in person at their offices – email, phone calls, and Skype suffice. Even document collection can be done mostly electronically and remotely. And with increasingly strict deposition limits, and witnesses located around the country and world, depositions don’t require much time in the forum city either.
In a typical Reform Act case, where discovery is stayed through the motion-to-dismiss process, the amount of time a lawyer needs to spend in the forum city is especially modest. If a case is dismissed on a motion to dismiss, the case activities in the forum city in a typical case amount only to (1) a short visit to the clients’ offices to learn the facts necessary to assess the case and prepare the motion to dismiss, and (2) the motion-to-dismiss argument, if there is one. Indeed, assuming that a typical securities case requires a total of 1,000 hours of lawyer time through an initial motion to dismiss, fewer than 50 of those hours – one-half of one percent – need to be spent in the forum city. The other 99.5% can be spent anywhere.
Discovery doesn’t change these percentages much. Assume that it takes another 10,000 hours of attorney time to litigate a case through a summary judgment motion, or 11,000 total hours. Four lawyers/paralegals spending four weeks in the forum city for document collection and depositions (a generous allotment) yields only another 640 hours. So in my hypothetical, only 0.63% of the defense of the case requires a lawyer to be in the forum city. The other 99.37% of the work can be done anywhere. Because a biglaw firm would litigate a securities class action with a larger team, the total number of hours in a typical biglaw case would be much higher – both the total defense hours and the total number of hours spent in the forum city – but the percentages would be similar.
Nor does the cost of travel move the economic needle. Of course, if a firm is willing not to charge for travel time and travel costs to the forum city, there is no economic issue. My firm is willing to make this concession, and I would bet others are as well. Even if a firm does charge for travel cost and travel time, the cost is miniscule in relationship to total defense costs. For example, my total travel costs for a five-night trip to New York City – both airfare and lodging – are typically less than the cost of two biglaw partner hours.
Of course, there are some purposes for which local counsel is necessary, or at least ideal – someone who knows the local rules, is familiar with the local judges, and is admitted in the forum state. But the need to utilize local counsel for a limited number of tasks doesn’t present any economic or strategic issue either, if the lawyers’ roles are clearly defined. Depending on the circumstances, I like to work either with a local lawyer in a litigation boutique that was formed by former large-firm lawyers with strong local connections, or with a lawyer from a strong regional firm. I just finished a case in which the local firm was a boutique, and a case in which the local firm was another regional firm. In both cases, the local firms charged de minimis amounts. In some cases, the local firm can and should play a larger role, but whatever the type of firm and its role, the lead and local lawyers can develop the right staffing for the case and work together essentially as one firm – if they want to.
All of these considerations show that securities litigation defense can and should be a nationwide practice. It is no longer local. We need look no farther than the other side of the “v” for a good example. Our adversaries in the plaintiffs’ bar have long litigated cases around the country, often teaming up with local lawyers from different firms. Like securities defense, plaintiffs’ securities work requires a full-time focus that has led to a relatively small number of qualified firms. The qualified firms litigate cases around the country, not just in their hometowns or even where their firms have lawyers.
This all seems relatively simple, but it requires us all to abandon old assumptions about the practice of law that are no longer applicable, and embrace a new mindset. Biglaw defense lawyers need to obtain more economic freedom within their firms to reduce their rates and staffing for typical securities cases, or they must face the reality that their firms perhaps are well suited only for the largest cases. Regional firms must recruit more full-time securities litigation partners and be willing not to charge for travel time and costs. And companies and insurers must appreciate that securities litigation defense will improve – through better substantive and economic results in both individual cases and overall – if they recognize that a good regional firm with dedicated securities litigators can defend a securities class action anywhere in the country, and can usually do so more effectively and efficiently than a biglaw firm.