Keeping Legal Costs Down. (Litigation).

The managers at the Loewen Group know just how bad a lawsuit can be. After a Mississippi jury slapped the Canadian funeral home chain with a whopping $500 million judgment in 1995, the company began an inexorable downward slide toward bankruptcy.

Once the world's second-largest funeral home firm, Loewen shrank from a robust company valued at $45 a share -- a price that tempted scores of independent funeral directors to sell out to it -- to a debt-ridden operation that was de-listed in 1999 by both the Toronto and New York stock exchanges. Today, its former chairman, Raymond Loewen, lives in exile in Hawaii, and the crippled company's management team, besieged by a class-action lawsuit from former owners of funeral homes holding worthless Loewen stock, is struggling to emerge from Chapter 11.

The company has had other difficulties, of course. Loewen weighed itself down with $3.2 billion in debt, used to finance an ambitious cemetery purchase program and to make itself less attractive to a takeover-minded Houston-based rival, Service Company International. Yet the legal dust-up always loomed large. Even after settling with plaintiffs, Loewen's Mississippi troubles consumed top corporate officers' attention for several years, led to widespread public distrust and ultimately served as the coup de grace forcing the company's collapse.

"Loewen is in an industry that tends to come under a great deal of consumer scrutiny," says Thomas Franco, president of Broadgate Consultants, a New York public relations firm and former adviser to Loewen. "By involving themselves in protracted litigation, they were unwittingly providing a platform for consumer activists and regulators to pile on."

The case has emerged as an object lesson in just how badly a seemingly minor legal dispute can tumble out of control. After settling for $175 million in stock and cash from the Loewen concern, Jeremiah O'Keefe, the former mayor of Biloxi, Miss., and owner of a family funeral home there, said he would have happily settled what was essentially a breach-of-contract suit for less than $10 million.

Companies large and small are taking to heart the advice once delivered to a friend by noted jurist Learned Hand: "I should dread a lawsuit beyond almost anything else short of sickness and death." PricewaterhouseCoopers reports that U.S.-based companies spend from 3 percent to 10 percent of their revenues in managing litigation and paying insurance premiums. When court costs, attorneys' fees, insurance premiums, payouts to claimants and "every other conceivable expense" is totted up, says Loretta Worters, director of media relations at the Insurance Information Institute, the legal tab hit $161 billion in 1999, the most recent figure available -- about 2 percent of the U.S. gross domestic product.

Loewen is just one of many businesses hobbled by lawsuits in recent years. Product-liability judgments, workers' compensation claims and allegations of environmental damages, among others, have wreaked havoc not just in the tobacco and asbestos industries but in the auto, tire, chemicals, pharmaceutical and health care sectors as well. Add to that the rise of what Business Week magazine has called The Litigation Machine" -- the sophisticated efforts of plaintiffs' attorneys to pool resources, share information and harness technology in the service of class-action lawsuits that can mean outsized judgments and punitive damage awards running into billions of dollars.

"Class actions are totally out of control," says William E. Bailey, special counsel at the Insurance Information Institute. "Certain kinds of lawsuits are run by factories -- one lawyer and 15 clerks -- and they are unfair in that they enrich lawyers at the expense of the class."

Randall M. Walters, a law partner at Jones Day Reavis & Pogue in Columbus, Ohio, agrees. "I think that the litigation process is basically driven by plaintiffs' attorneys who seek out claims on behalf of consumers and employees and then look for harm later," he argues.

At the same time, lawsuits alleging employment discrimination and sexual harassment have proliferated. So much so, predicts David Keenan, vice president and claims counsel at the Chubb Corp., that 20 percent of the cases decided by the U.S. Supreme Court during the current session will involve issues of employment law. "It's a minefield -- especially in the area of affirmative action and reverse discrimination," Keenan says.

What to do? Industry lobbyists have been appealing to Congress and state legislatures, urging legislators to limit damage claims. They are also beseeching lawmakers to crack down on gun-slinging plaintiffs' attorneys by making it harder to bring what they charge are frivolous claims. This would be done through laws requiring plaintiffs to bear the legal costs for unsuccessful claims. And defense attorneys are employing risk-control strategies of profiling jury selection and shopping for court venues; for example, they are steering clear of juries in Mississippi and Alabama, famous in legal circles for outsized plaintiff awards.

Even so, many of the best-run companies are opting for a different tack. Whether at the urging of insurance carriers, fear of the courts, frustration with arbitration systems or other reasons, many companies strive mightily to avoid legal disputes altogether by forging better relationships with employees, vendors and consumers.

A whole new industry has grown up over the last decade to assist companies in this endeavor. Management consultants, trainers and educators, law firms and a new generation of litigation-risk experts are counseling businesses on ways to avoid conflict and, ultimately, being sued. There is no exact number available of those offering such services, but by all accounts, their ranks continue to grow.

Michael P. Emmert, managing partner of the litigation advisory services practice at Ernst & Young LLP, is a case in point. He says E&Y's practice has 220 professionals, including teams of fraud experts who are former agents with the Federal Bureau of Investigation and the U.S. Treasury Department. The practice also boasts people with backgrounds not only in law but in finance, accounting and economics. By June 2002, Emmert says, litigation advisory services is expected to comprise 300 persons -- a 36 percent growth rate in just seven months.

Insurance companies are a key driving force. A number of carriers that write employment practices liability insurance, for example, operate loss-prevention service programs, toll-free telephone numbers for customers who need help with a pressing legal problem and even pay for audits by law firms, says Chubb's Keenan. Moreover, just as an insurance company might encourage auto owners to attend defensive driving classes, underwriters are offering discounted premiums to companies that undergo litigation-proofing.

Chubb, for example, rewards companies that participate in certified training programs by reducing the cost of its employment practices liability insurance. It reimburses companies for 50 percent of a training program's expense for up to 10 percent of the company's total premium, Thus, a company with an insurance bill of $100,000 each year can lower its policy costs by $10,000 if it opts to spend $20,000 on Chubb-approved training. If Chubb uses the carrot, it also uses the stick: Companies that appear to have authoritarian structures or inadequate controls in force, Keenan says, may be denied insurance coverage or issued policies with higher deductibles.

Patricia Eyres, president of Litigation Management and Training Services in Long Beach, Calif., represents the new breed of litigation-prevention expert. After 18 years as a defense attorney, trying to get companies off the hook in the courtroom -- Eyres jokingly calls herself "a recovering litigator" -- she has spent the past 11 years advising businesses on how to distance themselves from legal trouble in the first place.

A lecturer and author of a book (Legal Handbook for Trainers, Speakers and Consultants, McGraw Hill, 1998), Eyres concentrates on the volatile area of employment and intellectual property issues. She contends that many of the strategies companies employ to keep out of legal hot water make good business sense. "I help employers manage within legal limits without being held hostage by the law," she says.

Probably nothing is so preventable, Eyres says, as guarding against a work environment that is "hostile, offensive, intimidating or abusive." She reminds managers that failure to do so can result in outsized monetary damages. One shining example is the sexual harassment case of Weeks v. Baker & McKenzie.

At the legal giant, a secretary who had worked for the firm for only 67 days sued and won $3.5 million in damages and another $5 million in legal fees. A senior lawyer at the firm had dumped M&M candy down her blouse and talked incessantly about her anatomy. One big reason for the award: evidence in court showed that the man had been hassling women in the office for a long time, but the firm had turned a blind eye.

Emmert, the Ernst & Young consultant, says that while his firm does prevention work, the majority of assignments still entail litigation management. Simply put, that means assisting company lawyers in mitigating legal damage after a company has been sued. "The general counsels of the world are really focused on minimization," he says.

Even so, E&Y will field a team to perform what Emmert terms "trend analysis." Essentially, that means identifying trouble spots that may exist in a particular industry. "We try to predict where [clients] may have some conflict," he says, "where such businesses traditionally have been getting into disputes -- whether or not that ends up in litigation, arbitration or mediation. Then we try to help."

One recent assignment, Emmert says, involved dispute-prevention work for an insurance company. An E&Y analysis found that a slight change in the wording of terms and conditions in the company's policies could reduce disagreements between the company and claimants -- and save the insurer substantially.

PricewaterhouseCoopers is a proponent of "integrated dispute management" -- a multi-pronged strategy aimed at controlling claims costs and litigation expenses. Jonathan Bellis, a partner at PwC's law department consulting group, says the firm counsels companies across a broad range of legal issues, including unfair employment practices and sexual harassment, torts and product liability.

PwC maintains that at too many companies, neither the general counsel's office nor the chief financial officer fully understands legal and risk avoidance expenses. In addition to helping companies measure those costs, PwC offers a wide-ranging, holistic program to companies that runs the gamut, from guarding against risks to managing litigation.

Along the way, PwC will design compliance programs and provide training, ascertain how much insurance is needed, look for alternative ways to resolve disputes and help companies manage the costs of outside counsel. One aim, says Bellis, is to pull together all of a company's divisions -- finance, product development, marketing and advertising- to work both collaboratively and with a deeper understanding of the legal implications of their activities. Problems often arise, he says, "when people are working in silos, and the left and right hand do not know what the other is doing."

Law firms, too, are getting into the litigation-prevention act. Reid Ashinoff, an attorney and crisis management expert at Sonnenschein Nath & Rosenthal in New York, says that a big part of his practice is helping companies "see themselves as their harshest critics see them." He adds: "A lot of clients engage us to do legal audits, to help them come to grips with legal issues, to see if they have any liability in their manufacturing processes or services. We can help identify a problem area before it erupts." Companies have a right to confidentiality if a legal audit turns up any actions for which they could be liable.

While the benefits of heading off litigation well before cases get to court seem almost indisputable, many think that business still has a long way to go. Chubb's Keenan says that in the area of employment practices, the commonly accepted figure is that only about 10 percent of U.S. companies avail themselves of training programs and other litigation-avoidance opportunities. "As a general proposition, prevention services are underutilized," he says. Adds Bailey, the attorney with the Insurance Information Institute: "My impression is that most companies feel that the way to combat legal troubles is to buy more insurance, rather than address the problem."

Paul Sweeney is a freelance business writer in Brooklyn, NY.