Loss contingencies created by litigation are unique in several respects. First, the potential loss is extremely difficult to estimate, especially at the outset. An ultimate outcome often depends on factors outside the entity's or its counsel's control. For example, the outcome may be impacted by changes in common law, statutes, or regulations.
Additionally, the outcome will be affected by decisions made by the court throughout the course of the litigation regarding venue, choice of law, scope of discovery, class certification, viability of claims and defenses, admissibility of expert opinions, and admissibility of other evidence. These decisions depend on many variables and are difficult to predict. For some decisions, the court has discretion to choose among a range of possible alternatives. Some of the decisions are subject to reconsideration by the court if circumstances change. Still other decisions (such as scope of discovery and admissibility of evidence) are dependent on how the court resolves issues such as class certification and viability of claims and defenses.
Even after the foregoing issues are resolved, the ultimate outcome may depend on a jury's verdict, which is even more difficult to predict than a judge's rulings. Due to the impact of the string of unpredictable decisions on the ultimate outcome, any effort to predict whether a particular case will result in liability or the extent of any such liability is necessarily inexact and subject to repeated re-evaluation throughout the litigation. From the comments submitted to the FASB by Lawyers for Civil Justice.
The unpredictability of jury verdicts is well-known. Two recent high-profile cases serve to show that even federal appellate rulings may have dramatic and unanticipated impacts. First, within the past month, the U.S. Supreme Court drastically reduced the punitive damages arising out of a 1989 Alaska oil spill. The jury had awarded $5 billion in punitive damages. The United States Court of Appeals for the Ninth Circuit cut that amount in half. The US Supreme Court then reduced the award to $500 million; had one Justice not owned Exxon stock and recused himself; punitive damages might have been eliminated entirely. Exxon Shipping Co. v. Baker , 128 S. Ct. 1183 (2008).
Second, last year, the United States Court of Appeals for the Fifth Circuit effectively terminated the Enron securities litigation, ending as a practical matter the threat of huge damages against the litigating defendants after others had paid enormous amounts to settle. After Enron filed for bankruptcy in December 2001, a wave of litigation engulfed many who did business with the company. Some defendants settled for amounts totaling $7.2 billion; other defendants refused to settle. On appeal, two of the three judges of the Fifth Circuit voted to reverse as a matter of law the district court's certification of the shareholder class while one judge suggested that the class might be appropriate. The reversal effectively foreclosed significant damages from the remaining defendants. Regents of the Univ. of Calif. v. Credit Suisse First Boston, Inc. , 482 F.3d 372,376-77 (5th Cir. 2007), cert. denied , 128 S. Ct. 1120 (2008). Had one of the two judges who voted for reversal voted differently, the case might have proceeded as a huge class action and the non-settling defendants might have faced tremendous financial exposure. From the comments submitted to the FASB by the Association of Corporate Counsel .
Beginning on March 27, 2002, numerous federal securities class actions were filed in the U.S. District Court for the Northern District of California against JDS Uniphase Corp. ("JDSU") and several current and former officers and directors on behalf of a class of purchasers of JDSU's common stock during the period July 22, 1999 through July 26, 2001, as well as subclasses consisting of shareholders who acquired JDSU common stock through several merger transactions. The suits alleged that the defendants made material misstatements and omissions concerning demand for JDSU's products and JDSU's expected financial performance. The suits also claimed that JDSU improperly recognized revenue and failed to write off goodwill and inventory timely, and that the individual defendants sold stock based on material adverse non-public information.
Typical of this type of suit, the action sought unspecified damages. Plaintiffs did not disclose any damages estimate until nearly five years later, as part of expert discovery. Plaintiffs' estimates ranged from $10 billion to $26 billion and changed numerous times up to and through trial. At trial, plaintiffs' expert testified that his preferred method for calculating damages would result in total damages of approximately $20 billion.
After a jury trial in the Fall of 2007, the jury rendered a verdict in favor of defendants awarding no damages to the plaintiffs. During the over five years that the cases were pending, the court ordered mediation which was unsuccessful. JDSU did not accrue any reserves for losses under FIN 14. From the comments submitted to the FASB by the American Bar Association, which include as an attachment a chronology of events in the federal securities litigation and accompanying disclosures in JDSU's SEC filings.