The Financial Accounting Standards Board (FASB) has revived its ill-conceived proposal to require corporations to report possible financial losses from ongoing litigation. If enacted, this new standard would force companies to reveal critical information about their potential liabilities, legal strategies, and insurance coverage. While the reporting would be speculative and of minimal value to shareholders, it would still provide important information to trial lawyers — especially of the class-action ilk –and encourage more litigation against business.

FASB made its initial proposal in June 2008 but pulled back after a flood of opposition from companies, business groups and others. (Shopfloor.org’s coverage of the 2008 consideration.)

The board sought more comment, did some field testing, made some modest but still welcome adjustments, and on July 20 issued a new proposal, “Disclosure of Certain Loss Contingencies.” It’s better, but still not good. As The Wall Street Journal editorialized Thursday in “FASB’s Tort Bar Gift“:

Take the provision requiring companies to disclose their liability insurance coverage. Lawyers would be able to target their damage requests to the coverage maximum, or launch new lawsuits in the knowledge that more insurance dollars remain. This is why judges typically insist that coverage only be divulged under a secrecy order.

Another provision proposes that companies disclose the “average settlement amount” in various categories of litigation. This is another bull’s-eye for the trial bar, which will seek to meet or exceed that figure in each of its demands. It also sets a prejudicial standard for all companies in similar litigation to meet.

Oh, and don’t forget proposed disclosure of “the existence of studies in reputable scientific journals . . . that indicate potential significant hazards related to the entity’s products or operations.” So corporate America would be obliged to do the trial bar’s research.

The costs of U.S. hyperlitigiousness are already a major competitive disadvantage for companies operating in the United States. Why would anyone want to increase those costs?

On Thursday, FASB extended the comment deadline for another 30 days, setting the new deadline on September 20. (News release.) The National Association of Manufacturers is developing its comments.

As the proposal is now structured, the benefits in transparency for shareholder are minimal, the potential for expanded anti-competitive litigation is great.

And isn’t funny how two of the biggest potential boons for the U.S. trial lawyers are being considered largely out of the public eye in recondite areas of accounting standards and tax law? There’s the FASB proposal and also the attempt by the American Association for Justice to win a $1.6 billion tax break through the U.S. Treasury since the AAJ’s efforts have been thwarted in Congress.

Walter Olson at Overlawyered.com provides links to reaction here.

Another batch of comment letters came into the Financial Accounting Standards Board about FASB’s proposal, “Disclosure of Certain Loss Contingencies–an amendment of FASB Statements No. 5 and 141(R),” up to 217 as of this afternoon. (Comment deadline was Friday.) This is proposed change to accounting rules that would require companies to report contingent liabilities resulting from litigation. FASB’s intentions are understandable and the goal of increased transparency is certainly not malign: There’s a lot of litigation out there that can affect the bottom line and it’s reasonable for investors to have insight into the possible effects of these lawsuits.

But, really, is the public served by a company’s speculation about what cash-seeking trial lawyers might or might not accomplish with their litigation against the business? The overwhelming majority of the submissions — certainly above 90 percent, we estimate – oppose FASB’s proposal. As the NAM’s comment letter said, “We believe the proposed standard would lead to less accurate and less useful information for investors, threatening the attorney-client privilege and the attorney work product doctrine, unnecessarily provide information to potential claimants, and force corporate defendants to disclose privileged information to plaintiffs thereby jeopardizing their ability to defend the litigation.”

Today’s WSJ Law Blog notes the opposition from the pharmaceutical industry, noting the instructive case of the circuitous, extended, serpantine, confusing, ultimately questionable but still expensive Vioxx litigation. (That’s our description.) The Law Blog uses “torturous,” always a good term when discussing torts:

Remember the long and torturous road of the Vioxx litigation? A $4.85 billion settlement. Then multi-million dollar jury verdicts in Texas and New Jersey, some of which were reduced under state damage caps before being tossed aside completely on appeal in the spring.

The point we’re trying to make here is that, for Merck, the Vioxx litigation took the company down several unpredictable roads. So it’s perhaps somewhat understandable that Merck, along with five of its drug industry competitors, are a bit peeved over a proposed accounting rule that would require companies to disclose estimated costs of all continuing litigation. …[snip]

In a joint letter from Merck, Pfizer, Eli Lilly, J&J, Novartis and Wyeth, the companies told FASB that that 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.” Others, including GE, DuPont, Boeing and McDonalds, have also objected to the rule. Click here for a WSJ editorial from last week on the proposed rule.

For more, including the views of the “socially aware” investors who want even MORE speculative reporting, see this Point of Law.com post.