Why are taxpayers helping companies pay for all their litigation?

The exact question posed by the survey, according to Jessica Schwartz, a spokesperson for the firm, is: “What is your annual litigation spending, excluding cost of settlements and judgments.” Some 53 percent of U.S. survey respondents identified their costs as $1 million or more, with 11 percent identifying their costs as $10 million or more.

Remapping Debate asked for more detailed information concerning the aggregate costs for the companies in each of the “expenditure bands,” but Schwartz said the firm did not have that information. She also indicated that the firm did not wish to extrapolate from the survey data any broader sense of litigation costs for businesses.

A 2010 survey of Fortune 200 companies conducted by the Searle Center on Law, Regulation, and Economic Growth for three business advocacy organizations — Lawyers for Civil Justice, Civil Justice Reform Group, and the U.S. Chamber Institute for Legal Reform — also found significant litigation expenditures. The survey yielded a response rate of slightly less than 20 percent (that is, fewer than 40 companies), but, among those who did report, the average cost of outside litigation in 2008 was $114.9 million; in-house litigation costs among these firms averaged $17.9 million.

In the aggregate, the outside litigation costs for these companies was over $4 billion for the year. Because the range of costs was enormous — from a low of $3 million to one’s companies outside legal bill of $598 million — we wondered why the survey failed to report a median figure. We also wanted to see whether the groups that generated the survey or the Searle Center that administered it had any broader estimate of litigation costs based either on the survey or otherwise.

Barry Bauman, the executive director of Lawyers for Civil Justice, said that he was unable to provide a broader estimate of costs, and said that he did not have information on median cost, referring us to the Searle Center. (Bauman denied that his organization commissioned the survey, saying that Lawyers for Civil Justice — described on its web site as “created by defense trial lawyers and corporate counsel” — had “simply encouraged our members to participate in the survey.” Appendix 1-A to the survey stated that the survey was “formulated by” Bauman’s group along with the other business advocacy groups previously mentioned.)

Derek Gundersen, a coordinator at the Searle Center, said that the team that was responsible for the survey, led by then executive director Henry Butler, was no longer at the Searle Center. Neither Butler, now a professor at George Mason University School of Law, nor the U.S. Chamber Institute for Legal Reform responded to requests for interviews.

Darren McKinney, communications director of the American Tort Reform Association, another business advocacy group seeking limits on litigation including restrictions on class actions and caps on non-economic damages, characterized litigation costs to businesses as “gargantuan,” but said that ATRA, which was not involved in the survey, did not have specific numbers. He speculated that some academic colleagues might have such figures, but was himself unaware of any more comprehensive surveys.

In short, even in the absence of comprehensive data, it is apparent that the litigation spending of some companies enables those companies to take large deductions, and likely that the aggregate deductions for these expenses, even leaving out small businesses entirely, is substantial (American Lawyer magazine’s annual survey of the nation’s 100 largest law firms in 2011 found that total revenue for these firms was $67 billion; much of that revenue, of course, is derived from activities other than litigation — American Lawyer’s research director, Rosemarie Clancy, told Remapping Debate that AmLaw did not have available data on the subset of firm revenue attributable to litigation).

What happens next?

Barry Bauman of Lawyers for Civil Justice said that his organization has “no position on the deductibility of expenses related to litigation.” Darren McKinney of the American Tort Reform Association said that, in the context of broader tax reform, “to the extent that such deductions are considered and reconsidered, there wouldn’t be any argument against that from ATRA certainly.”

Remapping Debate reached out to half a dozen organizations long involved in issues of tax fairness, consumer rights, or corporate responsibility. Christine Hines, consumer and civil justice counsel at Public Citizen’s Congress Watch, was struck by what she called the “hypocrisy” of corporations and their advocates who complain about litigation costs while simultaneously failing to acknowledge their ability to write all those expenses off on their taxes. The deduction was, she felt, an example of the significant assistance corporations get every day that remains largely shielded from public scrutiny.

But most of the other organizations had not considered and were not prepared to discuss the issue. And in one case, a long-time advocate of closing corporate tax loopholes, speaking on background, did not seem at all disturbed by the current arrangement, not seeing any difference between litigation expenses and other business expenses: “A business gets to deduct the cost of cars it purchases and operates to deliver its goods. I don’t get to deduct the cost of a car I buy to deliver myself to wherever I’m going. Should I be able to?”

He added only, “Maybe my thinking on this is limited by what’s always been.”