At MassTortDefense we typically focus on litigation, with a touch of legislation thrown in. A newly proposed accounting rule – yes accounting – gets our attention today. The rule would modify the standard accounting provisions governing the disclosure of the costs and contingencies of ongoing litigation, and in so doing assist plaintiffs’ attorneys and threaten the attorney-client privilege.
The change (Exposure Draft, Proposed Statement of Financial Accounting Standards, Disclosure of Certain Loss Contingencies) was proposed by the Federal Accounting Standards Board earlier this year, and would expand the loss contingencies that are required to be disclosed, the disclosure of specific quantitative and qualitative information about the loss contingencies, and a tabular reconciliation of the loss contingencies. (FASB is a private organization that establishes standards used in preparing financial reports that are officially recognized by the SEC and the American Institute of Certified Public Accountants.)
Problems? It may require companies to disclose things that are very remote. The information is also going to have to be updated on a quarterly basis. That will require extensive effort by both outside and inside counsel, increasing costs significantly. More importantly, it will also impact litigation strategy. Mass tort litigation is driven by plaintiffs’ attorneys, more so than by law, science, or medicine. The new disclosure rules would undermine the attorney-client privilege and work product protection, especially to the extent they seem to expect the company to give its own assessment of what the results will likely be. They seem to require greater disclosure of the company’s litigation strategy and analysis of the strengths and weaknesses of its position to a far greater extent than ever seen before. The rules thus tilt the litigation balance in favor of disclosing info to companies’ litigation adversaries and, thus, work to the ultimate detriment of shareholders without providing meaningful disclosure to investors.
As anyone who has handled mass tort litigation can attest, budgeting for future contingencies is extremely difficult, with the number of cases, the jurisdictions involved, the courts’ case management techniques, and the number of trials, having huge impact on costs and all being outside defendants’ direct control. Estimating the costs of continuing litigation is highly subjective, subject to huge swings as underlying assumptions change, and unlikely to provide financial statement users with meaningful or reliable information
The proposed change also stipulates that companies may avoid disclosing certain information if the disclosure would be prejudicial to the ongoing legal proceeding, but it is unclear how this provision would protect companies in practice. Almost all the new disclosures seem to be potentially prejudicial in that way.
Pharmaceutical companies are among those most affected by this proposal, because of the mass tort litigation that they face. Six leading drug makers sent a letter last Friday objecting to the proposed rule. The companies are currently defending a wide range of lawsuits, including tens of thousands of product liability lawsuits, many of the lawsuits class actions.
Here’s hoping that comments cause a re-thinking of a rule that seems ignorant of the world of mass torts.