Grappling with higher hourly rates for outside counsel and rising litigation costs, big corporate law departments are shifting more of their litigation to smaller law firms, according to a recently released study.
The study found that the percentage of litigation work that law firms with fewer than 250 lawyers received from Fortune 50 companies has soared from 56% in 2018 to 79% now.
During that same period, firms with more than 500 lawyers lassoed 17% of that work in 2022, down from 37% in 2018 and from a peak of 38.5% in 2020, according to Thomson Reuters Institute’s 2023 State of the Corporate Law Department.
Findings were based on 1,569 interviews with legal departments at companies with more than $1 billion in revenues.
“Many corporate legal departments are starting to realize that they don’t need to use their standard big firms to do lower-value work,” said Ken Callander, principal at Value Strategies, a consulting firm for legal departments.
“I always recommend to clients that they put a matter-intake process in place to align the value of the matter to the value price point of the firm. … Clients are starting to understand that there are a lot of good attorneys out there that can provide lower-matter-value services at better prices.”
Many of those attorneys used to work at big firms but decided to move to smaller ones because they didn’t want to put up with Big Law politics or culture, Callander said.
Legal departments are exploring alternatives because they want to get relief from fast-rising hourly law firm rates. In 2022, hourly rates for law firm partners climbed 4.5%, according to a recent report by LexisNexis CounselLink, the largest increase in at least a decade.
Experts attribute some of that spike to law firms’ feeling pressure from inflation and a drop in lucrative M&A work.
Meanwhile, many corporate legal departments are feeling financially pinched. Thomson said 65% of departments are seeing increasing volumes of work, while 59% are dealing with “flat if not decreasing” budgets.
“This increase in levels of matter volume is being driven by growing global regulatory complexity, along with fallout appurtenant to the global economic slowdown.”
Meanwhile, corporations in certain industries—particularly medicine, transportation and consumer products—are facing higher legal defence costs from an ever-more-sophisticated “mass tort machine” that’s securing more so-called nuclear verdicts, said Lauren Sheets Jarrell, director and counsel for civil justice policy at the American Tort Reform Association.
For example, last August, a Gwinnett County, Georgia, jury returned a $1.7 billion judgment against Ford Motor Co. after a pickup truck crash that included a rollover claimed the lives of a Georgia couple.
It was the highest punitive award in Georgia history. The outcome led the association to rank Georgia No. 1 in its rankings of so-called Judicial Hellholes, ahead of notorious Pennsylvania, California and New York.
During a Travelers Insurance webinar last week, Jarrell said third-party litigation funding, in which investors get a slice of damages along with the plaintiff and attorneys, are fueling many cases that a plaintiff ordinarily could not afford to bring.
Alexia Cruz, Travelers’ senior vice president and claim general counsel, said the trend raises a number of concerns, including that foreign governments may gain access to corporate intellectual property and other sensitive information by funding suits against U.S. companies.
Corporate legal departments may be able to reduce their litigation costs not only by engaging with smaller, less-expensive law firms but also through the greater use of artificial intelligence.
Such technology could identify the type of cases with the potential to “go nuclear.” Such data can help companies decide which cases to elevate and come up with effective defences.
“I really get excited about the potential of these data and analytics tools,” Cruz said. “There are endless possibilities of what you could do with that information as a predictive model, even in the most complex pieces. So I think there should be a lot more dialogue and thought around the use of data and analytics in the future.”
Originally published by Law.com
