ANNUAL REPORT. OF LEGAL EXPENSES FOR OUTSIDE Counsel

Transcription

1 ANNUAL REPORT LEGAL EXPENSES FOR OUTSIDE Counsel Fiscal Year 2013

2 SUBMITTED JANUARY 31, 2014 CHARLES F. ROBINSON AND VICE PRESIDENT LEGAL AFFAIRS KAREN J. PETRULAKIS CHIEF DEPUTY

3 FICE THE TABLE CONTENTS I. EXECUTIVE SUMMARY 1 CHART 1 Outside Counsel Expense (Isolating the Top Five Matters)... 2 CHART 2 Outside Counsel Expenses... 3 CHART 3 Expense Per Billion in Revenue... 3 II. INTRODUCTION THE UNIVERSITY S LEGAL FUNCTION 4 III. BACKGROUND REGARDING OUTSIDE COUNSEL EXPENSES 5 IV. SUMMARY ANALYSIS 7 CHART 4 Summary of Outside Counsel Expenses... 7 CHART 5 Comparison of Outside Counsel Expenses... 7 CHART 6 Comparison of Outside Counsel Expenses by Category... 7 V. RISK SERVICES PROGRAM LITIGATION 8 CHART 7 Risk Services Expense Summary... 8 A. Employment Practices Liability... 9 B. General Liability C. Professional Liability D. Workers Compensation VI. CORE LEGAL SERVICES 13 A. Core Legal Expenses by Practice Area CHART 8 Core Legal Expenditures by Practice Area CHART 9 Comparison of Core Legal Services Largest Billing Practice Areas Construction Health Care Labor and Employment Business Transactions Non-Risk Services Litigation i REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

4 FICE THE B. Core Legal Expenses by Location CHART 10 UCOP Expenses by Practice Area FY 2012 and FY CHART 11 UCLA Expenses by Practice Area FY 2012 and FY CHART 12 Core Legal Services Expenses by Location FYs VII. INNOVATION ALLIANCES AND SERVICES (FY 2013) 24 CHART 13 IAS Revenue and Net Legal Expenses FYs VIII. OUTSIDE COUNSEL SAVINGS PROGRAM 26 A. Rate Reductions and Alternative Fee Arrangements B. Aggressive Cost Management C. Strategic In-Sourcing of Select Practice Areas D. Enhanced Training and Preventative Advice E. Summary of Current Plans IX. CONCLUSION 30 APPENDIX TABLES 31 Appendix Table A Summary of Risk Services Litigation Expenses by Campus Appendix Table B Summary of Core Legal Services Expenses by Practice Area Appendix Table C Summary Core Legal Services Top Categories of Expenses by Location Appendix Table D Enhanced Pre-Litigation Training Appendix Table E Affirmative Recoveries to the University by Subject Appendix Table F Affirmative Recoveries to the University by Billing Arrangement ii REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

5 FICE THE I. EXECUTIVE SUMMARY For fiscal year 2013, the University of California paid gross legal expenses 1 of $93.1 M, representing a 25 percent increase over the previous fiscal year. (Chart 2) This is the first year-over-year increase in outside counsel expense since late FY 2008, when the Office of General Counsel (OGC) embarked on an ambitious outside counsel cost savings program and achieved substantial savings (a total of $88.7 M saved over the five year period). The University s annual gross outside counsel expenses are still $6.3 M lower than the level in FY 2008 (from $99.4 M in FY 2008 to $93.1 M in FY 2013). Considering the tremendous growth of the University s enterprise over the same five-year period from $20 B to $25 B in annual revenues and the accompanying increase in demands for legal services, this reduction is significant. Total outside counsel expense has been reduced from $5 M per billion dollars in revenue in FY 2008 to $3.7 M per billion in FY (Chart 3) Increased outside counsel expense in FY 2013 was in large part attributable to a small number of major matters. Just as the conclusion of a few major litigated matters contributed to sharp reductions in total outside counsel expense in FY 2011 and FY 2012, similarly, a small number of major matters drove total expense up in FY As shown on Chart 1, the top five matters alone accounted for $12.1 M of the total. Of those top five matters, three are large-scale affirmative recovery cases in patent, construction, and medical billing reflecting OGC s heightened focus on actions to recover amounts due to the University. The results in those matters already have been well-worth the higher legal expense. For example, the fees expended on the UCLA Santa Monica Hospital construction matter one of the top five in FY 2013 resulted in a net recovery of $16.4 M. In the patent case (Medivation), the University achieved a trial court judgment entitling the University to a $32 M recovery, and the University should recover its attorneys fees if the judgment is affirmed on appeal. Overall, in FY 2013, OGC s Oakland and campus-based attorneys generated a total of $67.3 M in affirmative recoveries the highest total in the past four years -- in areas such as trusts and estates, bankruptcy, contract disputes, reimbursement for hospital services and construction defect litigation. (Appendix Table E) The other two Top Five matters involve a major transaction the affiliation between UCSF Benioff Children s Hospital and Children s Hospital & Research Center Oakland and a matter with high institutional interest defending a criminal prosecution related to a tragic lab fire accident. Reflecting the University s strategic decision to make greater investments in its technology, and the resulting continued growth in the size of the University s patent portfolio, technology transfer-related legal expense was up $7.3 M in FY Importantly, 64.3 percent of these patent prosecution costs -- $20.9 M was reimbursed by licensees and other third parties. An additional driver of increased outside counsel expense in FY 2013 was the fact that OGC operated for most of the fiscal year with reduced in-house staff, holding attorney vacancies open due to uncertainty regarding state funding. Following the passage of Proposition 30, OGC moved forward with recruiting for seven vacant attorney positions. 1 Gross outside counsel expenses include all expenses (legal fees and costs and experts costs) paid by the University to outside firms, including in the Technology Transfer area where 64.3 percent of the FY 2013 patent prosecution expenses were reimbursed by third parties, resulting in net expenditures of $72.2 M. 1 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

6 FICE THE Given the growing scope of the University s enterprise, and the novelty and complexity of legal issues presented by the University s affairs, continued substantial reliance on outside counsel is anticipated. Systemwide and campus initiatives, including ambitious construction programs, greater investment in technology, online education, centralization of services such as procurement and energy services, employee benefit changes and reductions-in-staff, dictate the need for enhanced legal services. Moreover, the University s demand for services varies widely and unpredictably over time, further driving the need for outside counsel to meet peak requirements. For these reasons, as well as OGC s continued emphasis on affirmative recovery litigation, OGC anticipates that outside counsel expense will remain high in absolute terms and increase modestly in FY In relative terms, outside counsel legal expense will stay flat or decline as a percentage of University revenue which is viewed as a more accurate barometer of expense in the legal industry. Nevertheless, OGC continues to be committed to providing excellent quality legal services in the most costeffective manner possible. Initiatives designed to control outside counsel expense are currently being implemented as part of OGC s 3-5 Year Strategic Plan, including expanding alternative fee arrangements, reducing the number of outside law firms, implementing an e-billing system, and developing a multi-year plan for legal staffing across all practice areas and campuses that takes into consideration current legal service drivers and trends as well as benchmarking data. CHART 1 Outside Counsel Expense (Isolating the Top Five Matters) FYs (In Millions) 2 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

7 FICE THE CHART 2 Outside Counsel Expenses FYs (In Millions) CHART 3 Expense Per Billion in Revenue FYs (In Millions) This Report is organized into four sections: Introduction to the University s legal function and the organization and operation of the General Counsel s Office Summary of the three main outside counsel expense categories: Risk Services Program Litigation; Core Legal Services; and Innovation Alliances and Services (IAS) Comparative analysis of expenses over the three most recent fiscal years in each of the three main outside counsel expense categories Review of the continued implementation of the OGC Outside Counsel Savings Program 3 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

8 FICE THE II. INTRODUCTION THE UNIVERSITY S LEGAL FUNCTION The University s legal function is performed under the general direction of the General Counsel and Vice President - Legal Affairs, pursuant to Bylaw 21.2, and is managed through the Office of the General Counsel (OGC). OGC consists of attorneys and support staff in Oakland, on the campuses, at the medical centers, and at the Lawrence Berkeley National Laboratory. There are approximately 80 in-house attorneys working for the University, 30 of whom are located on eight of our campuses (two campuses have dedicated chief campus counsel located in Oakland), all five medical centers and at the Lawrence Berkeley National Laboratory. The legal function consists of three segments: (1) the resident counsel located at the campuses and medical centers; (2) the Oakland-based attorneys located at the central office; and (3) outside counsel retained to supplement the services of OGC. The campus counsel serves as the first legal resource for the University s campus activities. Chief campus counsels serve on the executive leadership teams at the campuses and on OGC s systemwide leadership team. Campus counsel provides general legal advice and counsel on a broad range of matters facing the campuses, many of which constitute multi-billion dollar, stand-alone enterprises. The size of campus-based legal staffs range from eight attorneys at UC Los Angeles to a part-time attorney (resident in the Oakland office) serving UC Merced. The 50 Oakland-based attorneys perform legal services for The Regents and the Office of the President (UCOP) and directly supervise all of the University s litigation. In addition, organized into five broad practice groups, the Oakland-based attorneys provide substantial legal support to the attorneys and managers on the campuses and medical centers in specialized areas of law. These include business transactions; construction; copyright and trademark; educational affairs; governance; health law and medical center services; labor, employment and benefits; land use and environmental health and safety; legislative affairs; litigation; national laboratory affairs; real estate; and technology transfer. Outside counsel are retained when the legal work can be performed more efficiently by outside counsel, such as when OGC lacks a particular expertise or the infrastructure necessary to support the service. Outside counsel are also retained when the volume of work exceeds the capacity of the OGC to provide appropriately timely service. Typically, the litigation managed through the University s Risk Services Programs can be more efficiently performed by outside counsel retained under aggressively cost-contained, negotiated hourly rates with direct legal oversight from OGC attorneys. Risk Services litigation represents over one-third (35.3 percent) of the total outside counsel expense. The University s complex organization, diverse funding sources, novel business transactions and heavily regulated activities create many legal challenges that are often of first impression. A number of these challenges benefit from the expertise that can only be obtained by an outside counsel specialist with broad experience across a range of clients and industries. Specialists are retained, for example, in areas of health care investigations and compliance; patent prosecution and infringement actions; complex real estate and business transactions; copyright and trademark prosecution and infringement actions, complex litigation with systemwide implications and other similar matters. New initiatives at both the systemwide and campus level such as health sciences transactions and online education generate new legal questions and require expanded legal services, including the specialized assistance of outside counsel. Additionally, increased outside counsel retentions are necessary to pursue affirmative litigation to recover amounts owed to the University in range of areas, including probate, construction, patent, and securities law, hospital collections and contract disputes. 4 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

9 FICE THE III. BACKGROUND REGARDING OUTSIDE COUNSEL EXPENSES The University s outside counsel expenses are segmented into three broad categories: Outside counsel expenses for litigation managed through the General Counsel and UCOP Risk Services (OPRS) Self-Insurance Program; Expenses for patent prosecution, defense, infringement and other matters related to the UCOP Innovation Alliances and Services (IAS) and technology transfer offices on the campuses (collectively referred to as IAS); All other outside counsel expenses for various Core Legal services, including both litigation and nonlitigation transactional and counseling services. The first two categories of outside counsel expense largely concern court or administrative processes in a few relatively predictable (in terms of volume) areas of the University's legal practice. These categories are supported by reliable budgets and have dedicated funding sources for payment of the legal expenses. The Risk Services category of expenses is funded by annual fees assessed against the Office of the President, the campuses and the medical centers, determined by actuaries and based on a number of factors including payroll, headcount, and loss experience. Funds in this program are held in trust and administered by the University s Chief Risk Officer under the auspices of the Executive Vice President and Chief Financial Officer. The IAS category of expenses is funded largely from reimbursement paid by patent licensees, or from royalty revenue and other campus sources, as required under the University s patent policy. These funds are administered by the Executive Director Innovation Alliances & Services under the direction of the Vice President Office of Research and Graduate Studies. Each campus is responsible for the funding and staffing of its technology transfer activities, including providing financial resources for the legal support of those functions. Broadly speaking, expenses in the Risk Services category can be viewed as a University cost of risk associated with the operation of its enterprise. In contrast, IAS expenses can be viewed as an investment in the University s intellectual property to encourage industry to bring inventions to market, thereby fulfilling the University s mission of creating public good from its research programs. For example, the revenue generated by the University s patent portfolio has averaged over $120 M for the past ten fiscal years. (Chart 13) Moreover, in FY 2013, 63.4 percent of the IAS legal expenses for patent prosecution were reimbursed by licensees and other third parties, thus substantially reducing the overall legal expense for the University in this area. The third category, Core Legal Services, spans a broad spectrum of practice areas and consists of significant training, counseling, compliance, and business transactions activities, as well as complex litigation. Generally, OGC incurs outside counsel legal expenses for Core Legal Services only as a pass through. OGC outside counsel expenses are charged to the client department requiring the service. As is shown in Appendix Tables B and C (Summary of Legal Expenses by Category and Summary of Top Categories by Location), the legal work performed in the Core Legal Services category is highly reflective of the initiatives at each location, therefore, more difficult to predict and budget for than the work in the other two categories. While largely driven by legal risk management and compliance demands, the Core Legal Services category also includes support of the University s business-related investments as well as affirmative litigation to recover amounts owed to the University. Such affirmative litigation includes trusts and estates, bankruptcy, patent 5 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

10 FICE THE infringement, commercial transactions, reimbursement for hospital services, and construction defect litigation. Over the past five fiscal years (FYs ), affirmative litigation is estimated to have generated over $272 M in revenue, largely due to recovery of monies for reimbursement of hospital services ($84.3 M), construction defect litigation ($56.6 M) and probate litigation ($49.9 M). As shown in Appendix Table E, the University recovered $67.3 M in FY 2013, the highest recovered total over the past four fiscal years. The $15.1 M increase in recoveries (from $52.2 M in FY 2012 to 67.3 M in FY 2013) was largely fueled by a $24.9 M increase in construction recoveries (from $11.9 M in FY 2012 to $36.8 M in FY 2013). Operating with a reduced number of in-house attorneys for much of the fiscal year with a resulting greater reliance on outside counsel, large net recoveries were achieved for UCLA (Santa Monica Hospital, $16.3 M) for UCDMC (Surgery Pavilion, $12.4 M) and UCSF (Rutter Center, $7.7 M). Probate litigation recoveries were also strong in FY 2013 ($12.5 M in FY 2013 as compared to $3.0 M in FY 2012). Nearly all of the trusts and estates litigation is handled in-house, with very little outside counsel assistance. Late in FY 2013, OGC filled a vacancy in this practice area to buttress in-house capacity. Two legal assistants and a probate attorney review and monitor the approximately 1,300 trusts and estates that name The Regents as a beneficiary each year to ensure that The Regents receives its correct distributions and that the named trustees and executors are appropriately carrying out their fiduciary obligations. In cases where fiduciaries are not acting appropriately or are not carrying out the charitable intent of the decedent towards The Regents, one of our in-house litigation attorneys will initiate actions in Probate Courts throughout California and sometimes beyond. Most of the $12.5 M in probate recoveries is the direct result of such efforts by in-house personnel. This report relies on data from three primary sources: the Office of the President Risk Services (OPRS) claims management system; the Office of Innovation Alliances and Services (IAS) financial system, and the Office of the General Counsel s invoice payment system. The data compiled from these sources tracks closely with the University s general ledger and provides the necessary granularity to enable management interpretation and analysis. Total expenditures may deviate slightly from those reported in the general ledger due to the University s policy of accruing expenses at year end; such expenses are not reflected in the FY 2013 report which is generated from a system that works entirely on a cash basis. Totals may also deviate from those reported by OPRS and IAS due largely to similar timing issues. In FY 2009, OGC implemented a new billing/tracking system for all outside legal expenses using the same Third Party Administrator (TPA) as OPRS. This service resulted in more efficient billing practices and, most significantly, an improved ability to track and report expenses that has led to a more complete calculation of the University s total costs and improved comparative data. In FY 2011, OGC worked with OPRS in implementing the invoice review services provided by an outside vendor, Legalbill, for the liability programs. Legalbill s review process includes coding of all outside counsel activities and costs, which has enabled OPRS and OGC monitors to drill-down into the data to analyze and compare the costs associated with particular tasks, rather than merely reviewing the total spent on each case. In FY 2013, OGC selected a vendor Bridgeway and is currently in the process of implementing e-billing software (e-counsel) for the processing of outside counsel invoices in Core Legal Services. E-Counsel promises to provide OGC with access to even more data about the activities of our Core Legal outside law firms, together with better tools for analyzing that data. These enhanced data tracking and analytical capabilities should enable OGC to more closely monitor outside counsel expense and target areas where services might be more efficiently performed by in-house resources or through alternative fee arrangements. 6 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

11 FICE THE IV. SUMMARY ANALYSIS Total legal expenses for FY 2013 were $93.07 M, as compared with $74.38 M in FY The difference ($18.70 M) represents a 25 percent overall increase from the previous fiscal year. (Chart 4) After two years of lower than usual expense for Core Legal Services due to the conclusion of a few major litigated matters, Core Legal outside counsel expense increased $6.2 M in FY 2013 (an increase of nearly 40% over FY 2012). Key drivers of the Core Legal increase included several large affirmative recovery cases (in construction, student health insurance, and hospital billing) and legal services required to support major campus initiatives such as the recently announced affiliation between UCSF Benioff Children s Hospital and Children s Hospital & Research Center Oakland (CHRCO). Overall outside counsel expense in the Risk Services Programs increased by nearly 19 percent ($5.22 M) in FY 2013, with higher costs in all programs other than General Liability, fueled by a small number of high exposure cases. (Chart 7) Reflecting the University s strategic decision to make greater investments in its intellectual property, and the continued growth of the University s patent portfolio, IAS experienced a 23.4 percent increase ($7.29 M) in outside counsel expense in FY Notably, however, 63.4 percent of the FY 2013 patent prosecution legal expenses, or approximately $20.9 M, was reimbursed by licensees and other third parties. CHART 4 Summary of Outside Counsel Expenses FYs (In Millions) Category FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 $ Difference (FY ) $ Difference (FY ) Core Legal $24.42 $25.37 $19.27 $15.59 $21.79 ($2.63) $6.20 Risk Services $27.94 $29.86 $29.96 $27.59 $32.81 $4.87 $5.22 IAS $31.14 $25.20 $27.73 $31.19 $38.48 $7.34 $7.29 Total $83.50 $80.43 $76.96 $74.38 $93.07 $9.57 $18.70 CHART 5 Comparison of Outside Counsel Expenses FYs (In Millions) CHART 6 Comparison of Outside Counsel Expenses by Category FY 2013 (In Millions) 7 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

12 FICE THE V. RISK SERVICES PROGRAM LITIGATION The Risk Services Self-Insurance Litigation Program encompasses over 80 percent of the litigated cases against the University by volume (approximately 500 open litigated cases) and is administered jointly by OPRS and OGC. For purposes of this analysis, the program is divided into four subparts -- Employment Practices Liability (EPL), General Liability, including Auto and Property (GL), Professional Liability (PL), and Worker s Compensation (WC). Litigation in the Risk Services Program is a high volume practice area involving over 1,000 open claims and litigated matters (not including Workers Compensation claims) at any one time. OGC and OPRS regularly review the defense bar in these areas, and retain the state s leading trial experts to serve on the University s established defense panels at aggressively negotiated billing rates. In FY 2013, OPRS and OGC reviewed and made modest adjustments to some of the rates paid to panel firms, which had remained constant for the prior four years. In FY 2013, OGC and OPRS engaged in an extensive process to select new defense panels for the EPL program at UCLA, UCI and UCR, and also reviewed the PL defense panels for UCLAMC and UCIMC. Following high-profile clashes between campus police and student protesters in the prior fiscal year, this year, OGC and OPRS selected law firms for new Police Practices defense panels for Northern California and Southern California. OGC and OPRS also closely manage defense costs through comprehensive defense panel guidelines, and through the retention of a Third Party Administrator (TPA) to help oversee the management of the program. Additionally, since FY 2011, the Risk Services Program has relied upon Legalbill s invoice review service to monitor law firm compliance with the defense counsel guidelines and to enhance data analysis, reporting and decision-making. The partnership formed among OGC, OPRS and the outside defense panels has created a model program that is efficient, with clear and substantial accountability and control processes. After a $2.3 M decrease in FY 2012, the Risk Services Program s overall legal expense increased by nearly 19 percent in FY 2013 (from $27.6 M in FY 2012 to $32.8 M in FY 2013). (Chart 5) The overall increase in this category was fueled by increases in all of the Risk Services programs except the General Liability program, which remained flat. The Employment Liability Practices program (increase of $2.3 M), Workers Compensation program (increase of $1.8 M), and Professional Liability program (increase of $1.2 M) all experienced higher outside counsel expense, due largely to a small number of very high-exposure cases. (Expense by location in these programs is shown in Appendix Table A.) Below is an analysis of each of the Risk Services categories of legal expenses (EPL, GL, PL, and WC). CHART 7 Risk Services Expense Summary FYs (In Millions) 8 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

13 FICE THE A. EMPLOYMENT PRACTICES LIABILITY (EPL) (FY 2013) The Employment Practices Liability Program covers employment claims arising from the University s 195,000 employee workforce, including wrongful termination, retaliation, discrimination, harassment, defamation, emotional distress and other employment-related torts, including approximately 80 open litigated cases at any given time. In FY 2013, outside counsel expense incurred in the EPL program increased $2.3 M (from $3.8 M in FY 2012 to $6.1 M in FY 2013). (Chart 7) This increase correlates with the increased number of trials in FY There were four employment trials in FY 2013 (on the UCLA, UCI and UCD campuses) as compared to two trials in FY The expected increase in litigation costs associated with trials is reflected in the year-end totals. In addition, the EPL program saw an uptick in highprofile and complex cases in FY 2013, including for example a well-publicized race discrimination case at the UCLA campus, which impacted outside counsel expense. The ten largest EPL cases accounted for 50% of the total EPL program defense costs in FY OGC anticipates that in FY 2014, EPL program outside counsel expense will increase due to continuing expenses in the significant cases filed in FY 2013, including two that are anticipated to go to trial this year. Once these unusually complex employment cases are concluded, it is expected that the EPL Program will return to prior levels. The University s readiness to take EPL cases to trial when appropriate may increase outside counsel expense in the short run but is anticipated to be effective in keeping settlement costs down long term. OGC and OPRS continue programs to control EPL program costs, such as the acceptance of selected employment practices claims into the non-litigated employment practices program (NL-EPL). The purpose of the program is to identify employment claims that may be suitable for early resolution before a court action is filed. Since its inception in FY 2007, the number of NL-EPL matters filed per year has increased to approximately 25 claims. The NL-EPL program has contributed to cost savings by resolving numerous employment matters using in-house attorneys and thus eliminating the need to incur outside counsel expense. In addition, as shown in Appendix Table D, OGC s Labor & Employment attorneys regularly conduct numerous training programs throughout the University of California system, in an effort to improve employment practices. Employment Practices Liability Expenses (FYs ) Fiscal Year Amount No. of Billing Matters FY 2013 $6,101, FY 2012 $3,787, FY 2011 $4,168, FY 2010 $4,507, Average $4,641, Employment Practices Liability Expenses Top Five Campuses (FY 2013) 9 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

14 FICE THE B. GENERAL LIABILITY (GL) (FY 2013) The General Liability Program encompasses approximately 100 open litigated cases each year, including damages claims arising from a broad range of institutional and employee-created liability, including police practices, student harassment (including Title IX athletics), public accommodation under the Americans with Disabilities Act, dangerous condition of property, auto liability (personal injury and property damage), and other torts. Outside counsel legal expense in the GL program remained essentially flat, decreasing by a mere 2 percent, from $6.0 M in FY 2012 to $5.9 M in FY (Chart 7) The GL program experienced a decline both in the number of GL claims and lawsuits with outside counsel expense, and in the number of large cases (cases with total costs of $100k or more during the fiscal year). At the same time, however, the GL program continues to accept a number of complex litigation matters, including several involving high institutional interest, such as litigation involving privacy of medical information and constitutional issues. Accepting coverage for these claims alleviates pressure on the campuses to identify funding sources for outside counsel expenses, but the higher expense associated with these complex cases offsets the decrease that the GL program might otherwise experience based on the declining number of more typical litigated GL matters. to $3 M, more than 50 percent of the total. One of the top five GL program cases is a multi-million dollar affirmative recovery claim, in which UCSF is pursuing insurance recovery in connection with the failure of the UCSF Preliminary Utility Plant. Given the diverse subject matters covered within the GL program and the effect that costs associated with large litigation matters has on the overall legal expense, it is expected that the GL Program will continue to experience volatility in the cost of outside counsel and remain relatively high in FY General Liability Expenses (FYs ) Fiscal Year Amount No. of Billing Matters FY 2013 $5,852, FY 2012 $5,957, FY 2011 $7,481, FY 2010 $4,895, Average $6,046, General Liability Expenses Top Five Campuses (FY 2013) In FY 2013, a significant portion of the GL program expense continued to be associated with the ongoing cost of responding to student protest activities on several of the University s campuses, including the high-profile Occupy movement protests on the UCB and UCD campuses in the Fall of In fact, three of the five largest matters in the GL program in FY 2013 (in terms of outside counsel expense) are related to protest activities, totaling almost $2.3 M (nearly 40 percent of the FY 2013 total). The five largest GL matters amounted 10 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

15 FICE THE C. PRESSIONAL LIABILITY (PL) (FY 2013) The Professional Liability program is the second largest of the Risk programs, following Worker s Compensation. The PL Program currently encompasses more than 400 open matters (including approximately 275 lawsuits), ranging from minor incidents to multi-million dollar malpractice lawsuits emanating from five major medical centers, associated hospitals and clinics, schools of medicine, dentistry and nursing, and student health services. After two years of declining outside counsel legal expense in the PL Program, total fees and costs in the PL program increased $1.2 M during the past fiscal year, from $11.44 M in FY 2012 to $12.65 M in FY 2013, but were still below FY 2010, when total PL expense was $13.8 M. (Chart 7) Similar to FY 2010, when a higher than average number of high severity cases were resolved or tried, FY 2013 saw a rise in the number of high-severity cases. High exposure cases involve increased outside counsel expense due to necessarily more extensive attorney time, as well as increases in expert services and fees and other legal costs, all associated with preparing complex cases for trial or settlement. The PL Program s litigation results were strong in FY 2013, closing 80 percent of claims and 66 percent of lawsuits with no indemnity payment, and winning defense verdicts in seven of nine cases taken to trial. The data confirms that the bulk of this 10 percent year-over-year increase in PL Program legal expense is attributable to expenditures needed to defend the program s largest litigation matters. Indeed, the number of cases in which total expense exceeded $100,000 nearly doubled from 15 in FY 2012 to 29 in FY The overall increase in expense associated with these larger cases was $2.2 M, up from $2.7 M in FY 2012 to $4.9 M in FY Another significant factor affecting the rise in total expense came in the form of increased legal costs (including court costs, court reporters, and electronic document discovery). Legal costs for PL Program cases rose by $560,000 in FY Expert witness fees, a critical component to success in PL cases, were $480,000 higher in FY 2013, contributing to the overall increase in PL legal expense. Suggesting that ongoing efforts by OGC and OPRS to monitor fees and encourage efficiency by the outside law firms in the PL Program are effective, attorneys fees accounted for a relatively small portion ($165,000) of the increase in expense. The PL Program experience is consistent with industry trends and benchmarks, which indicate that overall case volume is trending modestly downward year-to-year but that severity and costs of claims is increasing. This trend has been observed in the industry across the United States but is more acute in California. Though experience shows total outside counsel expense in the PL Program varies widely on a year-to-year basis due to a various factors, it is anticipated there will be some level of additional increase in FY 2014 because the trend of increasing severity is likely to continue. Ongoing efforts to closely monitor expenses and promote efficiency and economy will continue to endeavor to contain costs despite the trend of increasing numbers of high-severity cases that the PL Program and the entire industry is currently experiencing. Professional Liability Expenses (FYs ) Fiscal Year Amount No. of Billing Matters FY 2013 $12,650, FY 2012 $11,440, FY 2011 $11,911, FY 2010 $13,770, Average $12,443, Professional Liability Expenses Top Five Campuses (FY 2013) 11 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

16 FICE THE D. WORKERS COMPENSATION (WC) (FY 2013) The Workers Compensation Program pays claims of University employees who are injured in the course and scope of their University service. Approximately 5,000 claims are filed per year and, unlike the other Risk Service Programs, WC claims are not adjudicated in civil courts. These claims are administered by OPRS with a Third Party Administrator (TPA), and the University retains outside counsel only in claims where the injured worker is represented by legal counsel. WC Program legal expense increased $1.8 M in FY 2013 (from $6,409,216 to $8,205,261 in FY 2013). (Chart 7) The bulk of this increase was attributable to a single, unusual case (one of the University s top five in FY 2013, see Chart 1). Expense in that case was generated by the Los Angeles District Attorney s high-profile decision to bring felony charges in connection with a tragic laboratory fire accident, which were dismissed as to the Regents but are still pending against a University faculty member, with costs continuing to accrue in FY That litigation alone accounted for $2,232,908 (27%) of the total FY 2013 WC Program legal expense. Absent that case, the WC Program outside counsel expense would have realized a minimal increase of $81,740 (1.4%). No other single case in the WC Program generated fees exceeding $100,000 in FY Although it was anticipated that the WC Program would realize an increase in litigation as a result of legislative workers compensation reform (SB 863), which has many components that became effective January 1, 2013, the WC Program did not experience this increase and instead remained virtually flat (aside from the unusual lab fire case, above). With that said, there are still many components of this reform that are still being finalized through the regulation process and undoubtedly will be tested through litigation. Therefore, the ultimate impact this reform will have on WC litigation expense is yet to be determined. Nevertheless, OGC and OPRS are cautiously optimistic that WC Program outside counsel expense will remain relatively flat in FY 2014 due to the implementation of Legalbill and close monitoring of compliance by outside counsel with University billing guidelines. Workers Compensation Expenses (FYs ) Fiscal Year Amount No. of Billing Matters FY 2013 $8,205,261 2,183 FY 2012 $6,409,215 2,401 FY 2011 $6,390,751 2,393 FY 2010 $6,682,876 2,324 Average $6,921,745 2,325 Workers Compensation Expenses Top Five Campuses (FY 2013) 12 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

17 FICE THE VI. CORE LEGAL SERVICES Core Legal Services encompasses the University legal work outside of technology transfer and Risk Services Litigation, spanning a broad spectrum of practice areas and consisting of significant training, counseling, compliance and business transactions activities, as well as complex litigation. (Appendix Tables B and C) After two years of lower than usual expense for Core Legal Services due to the conclusion of a few major litigated matters, Core Legal outside counsel expense increased $6.2 M in FY 2013 (from $15.6 M in FY 2012 to $21.8 M in FY 2013, an increase of nearly 40%). Total expense for Core Legal Services nevertheless remained significantly below FY 2010 levels, when expense totaled $25.4 M. (Chart 2) Since Core Legal Services matters arise out of the individual legal needs and initiatives of a campus or unit of the Office of the President (OP), the expenses associated with this category are the most difficult to predict. Year after year, the data reveals the dramatic impact that a small number of major matters can have on the total outside counsel expense incurred in the Core Legal Services category. As previously reported, in FY 2010, two large-scale, multi-party construction cases and two highly contentious personnel cases significantly impacted the total Core Legal outside counsel expense. The conclusion of those cases resulted in lower than usual fees in FY 2011 and FY 2012, with sharp declines in Construction and litigated administrative hearing expense between FY 2010 and FY In FY 2013, a small number of major matters drove total outside counsel expense up. (Chart 1) Key drivers of the Core Legal Services increase in FY 2013 included several large affirmative recovery cases (in construction, student health insurance, and hospital billing) and legal services required to support major initiatives such as the recently announced affiliation between UCSF Benioff Children s Hospital and Children s Hospital & Research Center Oakland (CHRCO). OGC has heightened its focus on assisting the University in pursuing often large-scale, multi-million dollar litigation to seek to recover money owed to the University. While in some cases contingency fee arrangements can be negotiated with outside counsel (Appendix F), in other cases the University incurs fees during the course of the litigation. Taking these risks in appropriate cases has thus far proven to be beneficial to the University. For example, the substantial fees expended on the UCLA Santa Monica Hospital construction matter resulted in a net recovery of $16.4 M. Overall, in FY 2013, OGC s Oakland and campus-based attorneys generated a total of $67.3 M in affirmative recoveries the highest in the past four years. At the same time, the Core Legal Services category also offers the greatest opportunities for a re-examination of the University's service needs, funding and delivery methods. For example, OGC closely analyzes trends in campus legal demands and outside counsel expense to determine whether or not particular legal services can be more cost-effectively provided by in-house resources. OGC continues to pursue, as part of its implementation of OGC s 3-5 Year Strategic Plan, strategic in-sourcing and other cost-savings initiatives, such as rate reduction measures and new systems to enable closer monitoring of expense, in an effort to maintain excellent legal services and contain outside counsel expense. 13 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

18 FICE THE A. CORE LEGAL EXPENSES BY PRACTICE AREA Chart 8 shows the outside counsel expense in Core Legal Services for the past four fiscal years by practice area. Appendix Table B shows a more detailed break-down of FY expenditures by practice area. CHART 8 Core Legal Expenditures by Practice Area FYs (In Millions) PRACTICE AREA FY 2010 FY 2011 FY 2012 FY 2013 % CHANGE (FY 2012-FY 2013) Benefits/UCRS $137,728 $773,009 $288,088 $348, % Business Transactions $1,419,163 $1,990,022 $1,478,976 $1,797, % Construction $10,285,836 $5,520,670 $3,582,493 $5,970, % Educational Affairs $1,217,280 $934,280 $975,347 $1,177, % Environmental (CEQA) $1,312,218 $957,429 $516,987 $480, % Environmental H&S $34,870 $53,239 $47,343 $343, % Gifts and Tax $93,595 $98,190 $132,834 $203, % Governance $0 $30,029 $60,577 $32, % Health Sciences $5,418,323 $4,087,579 $4,326,745 $6,683, % Labor & Employment $1,597,580 $2,149,019 $1,526,893 $875, % Miscellaneous $53,786 $83,158 $144,447 $239, % Non-Risk Litigation $2,909,430 $2,016,820 $1,942,946 $2,963, % Real Estate $707,616 $393,399 $484,033 $500, % Trademark, Copyright $180,711 $181,547 $85,901 $172, % Grand Total $25,368,137 $19,268,390 $15,593,611 $21,789, % 14 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

19 FICE THE Chart 9 shows changes to the Largest Billing Practice Areas between FY 2011 and FY The same five practice areas continue to predominate in FY 2013: Health Care, Construction, Non-Risk General Litigation, Business Transactions, and Labor & Employment. These five broad practice areas represent 88 percent of all Core Legal Services expenditures in the past fiscal year. Chart 9 combines expenses associated with related practice areas Labor & Employment includes services regarding benefits, for example, and Business includes business and finance transactions and real estate transactions (excluding litigated matters). CHART 9 Comparison of Core Legal Services Largest Billing Practice Areas FYs (In Millions) 15 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

20 FICE THE 1. CONSTRUCTION (FY 2013) After a dramatic drop in Construction legal expense between FY 2010 and FY 2012 due to the resolution of a single, unusually large case, Construction legal expenses increased by 67% in FY 2013 (from $3.6 M in FY 2012 to $6.0 M in FY 2013). This increase is due primarily to aggressive affirmative litigation efforts by the Construction practice group initiated at the end of FY It is also partly due to a 50 percent reduction in staff for the bulk of the fiscal year due to relocation of Construction attorneys to campus legal affairs offices, resulting in a reduced ability to handle matters in-house. OGC s investment in outside counsel expense in FY 2013 for affirmative Construction litigation was amply rewarded, with total Construction recoveries of nearly $37 M. UCLA led the campuses in legal expenses, but also dominated in recoveries, with a $16.4 M recovery in the Santa Monica Hospital litigation. UCLA s Construction legal expense is anticipated to remain high in FY 2014, due to an ongoing affirmative claim relating to the Westwood Hospital project. UCSF s higher than typical Construction legal expense likewise paid off with a $7.7 M net recovery on claims concerning the Rutter Center. In FY 2014, UCSF and UCSFMC will continue to invest substantial fees on a $21 M affirmative claim relating to Rock Hall and another contract claim relating to billing overages. UCDMC achieved a $12.4 M net recovery on claims relating to the Surgery Pavilion, and has multiple, additional affirmative claims pending. UCSC is pursuing an affirmative Construction claim of over $30 M, which will likely generate additional fees in FY UCM s FY 2013 costs were incurred in defending an ongoing $18 M breach of contract lawsuit. Construction legal expenses are not expected to diminish in the next year due to ongoing litigation. The Construction practice group continues to strive to keep costs down by negotiating low panel rates, close oversight of outside counsel, and handling as many matters in-house as reasonably possible. Ongoing affirmative litigation management is straining in-house capacity, even though staffing has returned to pre-fy 2013 levels. Construction Expenses (FYs ) Fiscal Year Amount No. of Billing Matters FY 2013 $5,970, FY 2012 $3,582, FY 2011 $5,520, FY 2010 $10,285, Average $6,339, Construction Expenses Top Five Campuses (FY 2013) 16 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

21 FICE THE 2. HEALTH CARE (FY 2013) Health Care legal expenses increased $2.1 M in FY 2013, from $4.3 M in FY 2012 to $6.4 M in FY (Chart 9) The increase in FY 2013 is primarily attributable to a major transaction at UCSF and aggressive pursuit of an affirmative recovery at UCDMC (two of the Top Five matters in FY 2013, Chart 1). The $1 M increase in outside counsel legal expense associated with Health Care transactions in FY 2013 was largely due to transactional work related the recently announced affiliation between UCSF Benioff Children s Hospital and Children s Hospital & Research Center Oakland (CHRCO). The CHRCO transaction alone accounted for over $1.5 M in outside counsel expense in FY The University is experiencing an increase in affiliation activity in response to industry developments including the Affordable Care Act. Due to an attorney departure, the Health Sciences practice group was under-resourced in this area in FY With the recent hire of an attorney with expertise in health care transactions, OGC hopes to curb rising expense in this area. Health Care litigation accounted for $3.8 M of the total outside counsel expense in this practice area in FY Litigation costs were led by over $1.5 M in expense related to UCDMC s multi-million claim against the County for its failure to compensate the medical center for services rendered as part of the County Medically Indigent Services Program (CMISP). The remaining Health Care litigation expense was mostly incurred in pursuing affirmative claims against commercial managed care plans and governmental payors who have underpaid (or refused to pay) for hospital and physician services rendered. As shown in Appendix Table E, in return for this investment, The Regents achieved net recoveries of $28.1 M in FY 2012 and $11 M in FY Other medical centers handle managed care litigation on a contingent fee basis. (Appendix Table F) The legal expense associated with Health Care investigations and Medical Staff actions fluctuates from year-to-year with no discernible trend. As anticipated in the prior year s report, costs for Health Care investigations were higher in FY Given continued legal expenses in both the CHRCO and CMISP matters in FY 2014 as well as ongoing investigations, Health Care outside counsel expense is expected to remain high in FY Health Care Expenses (FYs ) Fiscal Year Amount No. of Billing Matters FY 2013 $6,683, FY 2012 $4,326, FY 2011 $4,087, FY 2010 $5,418, Average $5,128, Health Care Expenses Top Five Campuses (FY 2013) 17 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)

22 FICE THE 3. LABOR AND EMPLOYMENT (FY 2013) Labor, Employment and Benefits outside counsel expenses were down significantly in FY 2013 ($1.2M) as compared to FY 2012 ($1.8M). Outside counsel fees for labor and employment matters totaled $832,745 for FY 2013, decreasing by 45 percent over the prior year s expenditures of $1.5M. As is typical, the large majority of outside counsel fees in FY 2013 were incurred in litigating unfair labor practice cases before the Public Employment Relations Board and labor arbitrations under the University s collective bargaining agreements. In FY 2011, fees were exceptionally high due to active PERB cases relating to CNA and AFSCME strikes, and for the same reason, due to recent AFSCME strike activity, OGC expects higher fees to be incurred in this practice area in FY Notably, almost 20 percent of the FY 2013 total represents fees paid to outside investigators to conduct investigations. Outside counsel fees for benefits increased by 21 percent in FY 2013 ($348,689) over FY 2012 ($288,088), due largely to active litigation in the claim by retirees from the Lawrence Livermore National Laboratory that they had a vested right to participate in the University s retiree health benefit program. In FY 2012, the case was pending on appeal and there was little litigation activity. In FY 2013, the appellate court ordered briefing and oral argument, and then remanded the case back to the trial court for further proceedings. OGC s in-house employment attorneys (Appendix Table D) demonstrates the value of these strategic inhouse hires. Labor and Employment Expenses (FYs ) Fiscal Year Amount No. of Billing Matters FY 2013 $1,224, FY 2012 $1,814, FY 2011 $2,922, FY 2010 $1,735, Average $1,924, Labor and Employment Expenses Top Five Campuses (FY 2013) OGC s Labor & Employment in-house staffing has gradually been built back up to pre-2007 levels, with 6.5 attorneys (although the departure of one employment lawyer caused a gap in this practice area at the end of FY 2013). The lengthy list of inhouse employment law trainings conducted by 18 REPORT OUTSIDE COUNSEL LEGAL EXPENSES (FY 2013)