The Financial Accounting Standards Board ("FASB") has proposed a rule whereby companies are to disclose to their investors the estimated costs of litigation.
Unsurprisingly, the Wall Street Journal objects to anything increasing transparency in our "free" market, raising two contradictory arguments:
Under the proposed change, a company facing a lawsuit would have to list on its financial statement its best-guess estimate of what that litigation could end up costing — not just in attorney fees, but in any potential payout. For a company in high-stakes litigation, that means showing its hand to plaintiffs’ attorneys, allowing them to gauge management’s upper estimate of what the case is worth.
The effect will be to force corporate defendants to fight lawsuits with one hand tied behind their backs — assuming the company can even figure the "fair value" of a lawsuit it has no idea if it will win or lose. Predicting the trajectory of complex, often multiyear litigation is inherently unscientific. As we saw with Merck and Vioxx, a company’s stock price can jump or fall depending on jury verdicts whose results are impossible to predict.
So… the numbers are considered to be "inherently unscientific," just a guess at something "impossible to predict," and yet they will be interpreted by plaintiffs’ attorneys as a precise "upper estimate of what the case is worth."
Look: I know how much a case might be worth. I even know what numbers you should, if you’ve got any brains, consider a possibility. If you tell your investors the same range of liability that everyone from the bailiff to the court reporter has already figured out, that won’t change my settlement position one bit.
Before I took the case, I thought long and hard about the likelihood of winning and the size of damages. As more evidence comes in, I think about both again and again. Contrary to popular defense lawyer / defendant belief, telling me that my case is worthless will not dissuade me, it will encourage me, since I will interpret it as bluffing, a sign of fear and weakness, or baffonery, a failure to evaluate and to defend adequately.
Putting a public number on the case — a number everyone recognizes is at best an approximation of a worst-case scenario you’re working to avoid — will only reveal to me that you’re paying a sliver of attention.
I would write more, except that, seeing the source of this critique to be the editorial page of the Wall Street Journal, I expected it to be misleading and/or poorly researched. I was not let down. Reading the actual proposed FASB guideline reveals this language:
For certain contingencies, such as pending or threatened litigation, disclosure of
certain information about the contingency may be prejudicial to an entity’s position (that
is, disclosure of the information could affect, to the entity’s detriment, the outcome of the
contingency itself). In those circumstances, an entity may aggregate the disclosures
required by paragraph 7 at a level higher than by the nature of the contingency such that
disclosure of the information is not prejudicial. In those rare instances in which the
disclosure of the information required by paragraph 7, when aggregated at a level higher
than by the nature of the contingency, or of the tabular reconciliation would be prejudicial
(for example, if an entity is involved in only one legal dispute), the entity may forgo
disclosing only the information that would be prejudicial to the entity’s position. In those
circumstances, an entity shall disclose the fact that, and the reason why, the information
has not been disclosed. In no circumstance may an entity forgo disclosing the amount of
the claim or assessment against the entity (or, if there is no claim amount, an estimate of
the entity’s maximum exposure to loss); providing a description of the loss contingency,
including how it arose, its legal or contractual basis, its current status, and the anticipated
timing of its resolution; and providing a description of the factors that are likely to affect
the ultimate outcome of the contingency along with the potential impact on the outcome.
I guess that takes care of everything they’re worried about. The only thing a company can’t do under these guidelines is intentionally or negligently fail to inform investors of a potential source of substantial liability. Is that really so hard? What are "senior litigators from 13 companies, including Pfizer, General Electric, DuPont, Boeing and McDonald’s" so afraid of? What have they been hiding from investors all this time?