Traditionally, corporate legal departments play defense, not offense. However, there is a recent trend that is turning tradition on its head and turning legal departments into profit centers. This trend does not suggest that legal departments should chase dollars indiscriminately. Rather, legal departments should be selective in the recoveries they choose to pursue, and resort to litigation only when necessary and cost-effective. Here’s how to effectively structure a thriving recovery program.
The Trend: Origin and Success
The plaintiff-recovery strategy started with technology and pharmaceutical companies becoming plaintiffs to protect their intellectual property and expanded to a broad range of companies pursuing claims to recoup money from insurers, suppliers, and business partners. This trend was first noted in 2006, and by 2008 companies began reporting the financial success of their recovery initiatives. DuPont has reported that it brought in over $500 million between 2005 and 2008.
The recession accelerated this trend as companies trimmed legal budgets and asked their legal departments to seek recoveries. Tyco International and Michelin have pursued actions against their insurers, intellectual property infringers, suppliers engaged in price fixing, and partners that failed to live up to their contractual obligations. In one recent quarter, Ford recovered enough revenue to more than offset all of its legal costs.
U.S. companies are also pursuing international recovery efforts. DuPont has expanded its recovery efforts in China and Russia, and Ford has begun to seek recoveries in India, China, and Europe.
Answering Critics
Although the plaintiff recovery strategy has proven successful for many companies, it has critics. Some argue that the profit incentive pushes in-house lawyers to pursue questionable claims, and that lengthy court battles can distract executives from more fundamental business tasks. Another concern is that recovery initiatives can destroy valuable relationships with business partners. However, a recovery program employed through the use of prudent legal and business judgment can generate revenue and avoid these pitfalls.
The key to a successful program is to be systematic and prudent in choosing recoveries to pursue. Legal departments should look for low-hanging fruit—instances where the procedure to recoup losses is simple, and the proof straightforward and certain.
For complicated matters, legal departments should weigh the risks and rewards of pursuing a potential recovery—considering factors such as likelihood of recovery, the possibility of litigation, and the effect on business relationships—and incorporate the traditional in-house cost-minimizing orientation into evaluating potential recoveries. This balanced approach will ensure that companies pursue recoveries responsibly, and ultimately achieve the goal of increased profits.
The pursuit of a recovery carries a certain amount of risk. Legal departments should understand the risk of each initiative, but also have a sense of the big picture, and continually assess the success of the recovery program as a whole and make adjustments. Critics also fear that litigation will distract executives, particularly if they are continually deposed. The objective of a recovery program, however, is not to generate litigation. Litigation should be thought of as one arrow in a quiver of potential courses of action. Some recoveries undoubtedly carry a substantial risk of litigation, and in those instances, the legal department should carefully consider the potential disruption of management among other costs. Identifying which key officers are likely to be witnesses should be on the case evaluation checklist.
Another concern is that pursuing recoveries will destroy essential business relationships with customers, suppliers, or business partners. Through the exercise of prudent judgment, however, companies can assert their rights without seriously damaging their business relationships. Good fences make good neighbors. Companies enter into contracts to protect their rights, and these agreements should not be cast aside in the interest of preserving good relations. The forceful assertion of a company’s legal rights can often result in increased respect between business partners and facilitate future successful dealings. Moreover, companies are increasingly leaving litigation as a last resort and are willing to work out resolutions informally. In fact, some of the most successful recovery actions have been those that pursue winnings other than cash, such as long-term price freezes or discounts on future sales. If a company’s rights are asserted forcefully and diplomatically, business partners are often willing to come to a resolution. And a confidentiality agreement may also encourage partners to cooperate while still maintaining good relations.
Structuring A Successful Recovery Program
Given the benefits of recoveries, companies would be wise to pursue recovery initiatives in a structured fashion. Many companies will find four areas that are worth exploring: commercial contracts, intellectual property, and insurance claims, and opportunities in which proofs of claims can be submitted.
Recoveries often arise in the context of commercial contracts, and legal departments should proactively monitor their company’s agreements, ensuring that business partners are living up to their contractual obligations. For example, if a supplier voices its intent to void contracts, it should be called to task and sued for breach of contract, if necessary, to enforce the agreement. Agreements with vendors, tenants, and outsourcing companies are all areas where systematic enforcement can bring in cash.
Companies can also pursue recoveries in the intellectual property arena. Companies can recover patent and trademark licensing payments and royalties—audits of agreements may reveal that sales are improperly reported or that despite increased sales, royalty payments are being made at the same level. Companies have also recovered overpaid patent expenses such as filing, prosecution, and maintenance duties, and through examination of companies’ patent portfolios, have recovered revenues from patent infringers.
Insurance recovery is another valuable component of a strategic recovery program, and has been a lucrative source of revenue for corporate legal departments. Often insurance claims exist for losses already written off the books. Such recoveries go straight to the bottom line. DuPont sued its insurers for reimbursement for asbestos claims against the company and recovered roughly $92 million in settlement. As with other forms of recoveries, recoveries from insurers typically can be accomplished without litigation. Litigation can be saved as a last resort, and companies not looking to litigate immediately should be sure to preserve claims.
In addition, insured companies should carefully arrange their policies so that recovery is possible, and be sure to understand the effect of indemnity agreements on insurance coverage in terms of who has responsibility to pay for a claim. Each party to an indemnity agreement typically has insurance, and companies should be cognizant of who is ultimately responsible for payment of a claim, and whether (and under what circumstances) responsibility should be shared. Companies should also be cognizant of potential insurance coverage under additional insured provisions in business partners’ policies.
Sometimes, filing a proof of claim is all it takes. A company can pursue its rights as a creditor when a business partner files for bankruptcy, and can recover valuable dollars without resorting to costly litigation. Similarly, class action settlements and insurance insolvency proceedings present opportunities for companies to recoup funds. A related area is where solvent insurers in the U.K. liquidate using a procedure known as a scheme of arrangement. Independent businesses will often assist in filing proofs of claims that meet the requirements of a given proceeding and will do so on a contingency basis, significantly relieving the time and cost of pursuing a recovery. In some circumstances, organizing the information needed to file a proof of claim may be overly burdensome. Cost-benefit analysis is important.
Conclusion
While legal departments have traditionally served as cost-minimizers, some companies’ legal departments have become proactive and have purposefully pursued recoveries. This may be a trend well worth joining. Through careful selection of recovery initiatives, legal departments can bring revenue to the company while maintaining valuable business relationships and avoiding costly litigation.
John Vishneski, a partner in Reed Smith’s Chicago office, is a trial lawyer who focuses his practice on complex insurance coverage litigation. He also acts as both a neutral and a party-appointed arbitrator in complex insurance coverage disputes. Abraham Souza is in his third year at the Loyola University Chicago School of Law, where he serves as editor-in-chief of the Loyola University Chicago Law Journal. He was a summer associate at Reed Smith and will return as an associate upon graduation.
Reprinted with permission from the 4 September 2013 edition of Corporate Counsel © 2013 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.