Originally Published June 26, 2013

Editor’s note: This is the second in a three-part series.

The number of mass torts filings in the United States hasn’t seen a precipitous drop-off, but profit margins for the law firms defending those cases have taken a hit.

A confluence of events over the past five years has caused mass torts work, namely in the pharmaceutical space, to face increasing rate sensitivity. That has caused firms to either reconfigure their mass torts practices or de-emphasize the work altogether. Even some still involved with defending mass torts now use the once lucrative work more as a springboard for other assignments in practice areas facing less rate pressure.

The caveat to that phenomenon is that some of the country’s most notable, and profitable, law firms are still actively involved in defending mass tort cases. The bottom line is that a profitable drug is going to be vigorously defended. The structure of that defense, however, may look slightly different than it once did.

“The management of mass torts from a defense firm perspective and from a client perspective has changed,” said DLA Piper partner Raymond Williams. “I think that clients and the firms themselves are more efficient in how they handle these litigations.”

The reason for that is multifaceted. First, as with any practice area in the recession, clients pushed for more efficiencies to reduce legal bills and give predictability. That coupled with the advent of predictive coding and other document analysis technology has led to less document review, more thoughtful decisions on who will be deposed and fewer junior lawyers working on matters, Williams said.

Then the “mass” in mass torts comes into play. Clients can afford to pay an intellectual property lawyer $800 an hour for the limited engagement that lawyer handles. The same level attorney working on a mass torts matter is only going to earn $600 an hour, for example, because clients can’t afford to pay at the higher rate for as many hours as a mass torts engagement would take, Williams said.

Ultimately, mass tort matters could bring in more in fees, but less in profits. Some firms have decided it isn’t worth it for them to stay in that game, Williams said, while others like DLA Piper continue to handle the work with a focus on better process management and alternative fee arrangements.

The third component driving down the money to be made from defending mass torts is that pharmaceutical companies have gone through significant convergence. There may be just as many cases filed, but the smaller number of drug manufacturers are giving the work to fewer law firms, Williams said. And on top of that, law firms are staffing the matters with fewer lawyers.

Ten years ago, a firm may have had 100 lawyers working on pharmaceutical mass torts litigation, whereas now there are 75 attorneys handling those cases, Williams said. The 25 who are no longer handling the work are the first- and second-year associates who can no longer be billed for the time they spend learning on the job. Williams said he now typically works with fourth- through seventh-year associates and some more senior associates when necessary.

Williams said there is certainly still profit to be made doing mass torts work. But in terms of profitability goals, other practice areas such as intellectual property or government investigations can be more desirable for a firm. The upside to the convergence of drug companies and the outside firms they use is that once a firm gets the mass torts work, it can hopefully lead to work for those companies in areas that are less rate sensitive, Williams said.

Cozen O’Connor partner Gerald Pappert is the former general counsel of pharmaceutical company Cephalon, which he left when it merged into Teva Pharmaceutical Industries. Pappert said he didn’t face any mass torts litigation in his time at the company, but rather dealt with a couple of individual products liability cases. Even those cases, however, which could lead to damages awards, reputational harm, additional lawsuits and government scrutiny, were never viewed as being as critical to the company’s bottom line as a patent case, Pappert said.

Unless litigation posed the potential for exposure on the level of the Vioxx litigation, Pappert said reputational harm and damages from a products liability case is one thing. Losing a patent, however, is when the bottom could fall out from the company’s stock.

“That’s the big enchilada if you’re the GC of a pharmaceutical company,” Pappert said. “You don’t get that same risk with a products case.”

Wall Street can handle large damages payouts in the mass torts space as long as it knows what the figure is and that there is some certainty on the matter’s conclusion, Pappert said. But no matter how well Cephalon was doing in exceeding its budget projections each quarter, the stock wouldn’t rise when there were questions lingering about the security of one of its most important patents, he said. Pappert said he would have been able to justify higher fees on a patent case than on a products liability matter.

“No one was going to complain if I spent more money but preserved our patent, but it would have been very hard for me to explain that I chintzed on the defense of the case, hired a less experienced or less prominent firm in the particular area and then lost the case,” Pappert said.

“Having the best lawyers and most experienced lawyers on a particular matter, even though the fees are higher is something a general counsel can do if, for example, it involves a patent that is a key driver” of a company’s bottom line, he said.

In May 2012, Dechert Chairman Andrew J. Levander addressed the increasing rate pressure facing products liability matters. He said at that time that day-to-day products liability work had become more commoditized. To be sure, Dechert is still actively involved in a number of mass tort matters, including the NFL concussion cases and matters involving Zoloft and Reglan.

“The firm is focused on those areas of practice in which we are a difference-maker and real value-adder,” Levander had said. “In the litigation world right now, that is less so in the products liability area and more so in major, commercial litigation, which can include products liability and does, but other kinds of consumer class actions and sophisticated” litigation as well.

At that time, Dechert was coming off of the departure of at least five products liability attorneys who left for other firms. Sean Wajert was one of those lawyers. He left to open a Philadelphia office for Kansas City, Mo.-based Shook, Hardy & Bacon, a firm known for handling products liability work in a cost-effective manner.

Wajert said firms and clients have benefited from lessons learned in larger mass tort cases. One of the main lessons is that discovery can be handled in a more efficient way, as can the entire matter when parties work on an alternative fee basis. He said hourly rates aren’t the only way of determining a matter’s profitability. Leverage, realization rates and the level of timekeepers on a matter all play into what a firm can earn in these cases, he said.

“My personal view is that there’s a significant amount of product liability work out there and there’s a significant percentage of that work that is challenging for defendants, requires experienced, sophisticated lawyers, and there is a market for that, and firms that can compete in that market can do well financially. There’s no question about it,” Wajert said.

Wajert conceded there is a piece of the mass torts practice that has changed when it comes to profitability and that is the discovery phase of litigation.

“That piece may not be as profitable as it once was for some firms,” he said.

But Wajert emphasized that while most civil litigation settles, mass tort cases often go through bellwether trials to set settlement values. He said clients realize they need “top notch” lawyers for that work.

Williams agreed there is still money to be made in products liability work.

“You have some of the top firms in America still doing mass tort work for pharmaceutical companies, so it’s not commodity work, certainly,” he said.

But there is a balance drug companies are striking in how they defend and manage these cases, Williams said.

The next installment of the series will examine the rising coordination between state and federal judges in the wake of the increasing number of mass tort filings.

Gina Passarella can be contacted at 215-557-2494 or at gpassarella@alm.com. Follow her on Twitter @GPassarellaTLI.