Ben Swain had built his wholesale leather business using a combination of shrewd planning and tremendous risk taking that made him double his business every two years for a decade. About the time Reagan retired, he made his biggest move to outmaneuver a Taiwanese competitor and it blew up in his face. He faced utter ruin.
Things go wrong in bunches. He was going through a bitter divorce. His board of directors was split between his wife’s brother and sister and his own selected in house people. The board meetings were usually tense standoffs where Ben just managed to keep control since he had four of the seven board members on his side. He had broken his leg in a skiing accident and was hobbling along on crutches. And he had just discovered that his best witness was not only leaving the company, but was going to work for the very Taiwanese he was fighting and would undoubtedly be a hostile witness. We stood a very good chance of losing the case.
He sat across the desk from me in a very rumpled state. In the best of times Ben looked pretty disheveled. He was a big man, not fat but big, and suits on him always looked like he had slept in them the night before. He always needed a shave by three in the afternoon, had a habit of playing with a pen in one hand while making points with the other, and was brilliant.
Not just smart, but brilliant. He could look over the figures for a market and within half an hour come up with a concept for entry into the market that would never occur to an MBA. What impressed me even more, when he saw he made a mistake, which was not often, he was ruthless, freely admitting his error, ruefully telling himself he was an idiot, and then would fix the mess. Unlike most business people, he did not have his ego in appearing right-his ego was in winning the battle. He put it well:”It’s not about being always right. It’s about fixing it fast when you were wrong. That’s how you succeed.”
That March morning he was going to have to use all of his brilliance since I was telling him about the declaration his ex manager, who I will call Al, just wrote for our opponents. Al not only stated that the Taiwanese theft of our trade secrets did not harm us since we no longer used that technique-he said that he was unsure the theft had even occurred. He might have just mislaid the specifications and technique folder in a cab during a business trip to Taipei.
Previously, he had sworn that the specifications were taken from his briefcase while he was having a solitary dinner in a restaurant in which our competitors were also having a business dinner. The competitors had mysteriously come up with our unique technique four months later after unsuccessfully trying to duplicate it for five years. The documents were never found and the only thing missing from the briefcase were the specifications and techniques. He had been planning to meet with a new manufacturer that evening and was shocked to see the competitors at the next table. When he returned from the bathroom after foolishly leaving the briefcase there, he noticed it had moved a bit but never examined the contents until later that evening.
Ben was besides himself at first, telling Al he was an idiot and even wondered to me if Al was in their pay. But as usual, Ben did not waste time with regrets. He poured his energy into improving the technique and our competitors ultimately gained next to nothing. Ben was not done. He saw this as an opportunity to cost his competitors in court and to, “teach them a lesson that what works over there doesn’t work here.” He also know that they probably had no litigation budget, were unused to American litigation, and having them spend a few hundred thousand in an American court rather than the market place struck him as a great idea.
It seemed to be working. Our opponents made the mistake of hiring the largest firm they could find, thus had a litigation cost three times that of our client. That firm was a billing machine and while it cost our client more to respond to their many, many litigation maneuvers, each such maneuver cost the Taiwanese three times what it cost us and did little harm to our case. Unused to attorneys and litigation, our opponents must have been sweating blood.
And the case was going well. The circumstantial evidence just kept getting better. They had no technical history in their laboratory of developing the right technique, no lab notes, no experimental data at all. Their scientist evaded answering how he had suddenly come up with the right concept. While all the men at the dinner denied touching the briefcase, and no waiter would get involved, their testimony as to details was contradictory and suspicious. We had a pretty good case, had just hired an engineer expert who could testify as to reverse engineering, and then our case exploded.
Al quit, took a job with the Taiwanese and submitted a declaration with the court that was a killer. Ben listened to me read the declaration, his fingers drumming on the crutch that was across his lap as he sat in the big leather client chair on the other side of my desk. After I finished, he blinked once but said nothing for a moment. Then, “Our case dead?”
“Not dead. But in the Emergency Room and bleeding badly.”
He blinked again. “You know, I don’t think they stole anything. I think he gave it to them.”
“Maybe. Maybe not. More likely they just figured hiring him at an outrageous cost was cheaper than paying American lawyers.”
He grunted what might have been a laugh. “They’re right. Until he stabs them in the back in a few years.” He stared out my window and mulled it over. “So, let’s presume we lose. What do we face?”
“They did not cross complain against you. There is no attorneys fees clause since there was no contract between you and them. So, even if they win, all they get are out of pocket costs for deposition reporters, filing fees, that sort of thing. Expert fees. Those will be high. Figure a hundred thousand risk there.”
“And, of course, we get no recovery. We pay your fees and our costs and will lose.”
“Probably. We have a chance…but a small chance now.”
He brightened a moment. “Of course, they pay their own attorney fees even if they win, still get nothing, and you say their attorneys are incredibly expensive.”
“I expect the fees they have already spent exceed five hundred thousand dollars. If it goes to trial, you can almost double that.”
He smiled then and thought it out, hands still drumming on the crutch. I popped his bubble a bit.
“If they win, they could later bring litigation against you for trade libel or some such thing. Unfair business practices. That could be expensive down the road.”
“Could they win?”
“Unlikely. You relied on Al and we have his depositions in our favor from before. I don’t see a chance of them proving bad faith.”
“We can show he changed his testimony.”
“True. But we also have the burden of proof and he was a key witness for us. Without him testifying that they moved his briefcase, our case is weak.”
“We can show he once said that.”
“He will say you talked him into that. Had to so he could keep his job. That sort of thing.”
“He will admit lying, then.”
“True. No one will believe anything he says. But the problem is that we needed his testimony to prove our case.”
“He nodded, still thinking hard. “And they won’t sue us. Not after what they paid for attorneys. They’ll never want to be in an American court again.”
“So, we lose but we win in some ways. They spent more than us. We disrupted them coming into the market. And we got rid of a man I don’t trust. Good luck to them in hiring him.”
“He’ll probably be ideal for them. Same ethics.”
“Damn right. Now, here’s the real problem. The Board of Directors is not going to think like I’m thinking. They’re going to see me spending two hundred thousand in fees and either losing the case or dismissing it, losing our engineer to the competitor, and looking like fools in the market place. Some of the Board already doesn’t like me.”
“I know. At least some of the Board. Any chance of settling with your wife in the immediate future? Getting your board back? I wish you had created a buy and sell agreement.”
“Tell me about it. Lord, I need it now. Another stupid mistake. I’m full of them.“ He sighed. “No, it’s going to be a long fight. She knows she can jerk me around by having her family on the board, figures it will improve her bargaining position. My divorce lawyer says a year or two until that changes.”
We both sat there looking thoughtful. I was the first to talk. “Is this litigation result enough to threaten your role in the company?”
He sighed. “Not if the stock wasn’t community property. But it is. So I can only vote half my stock. If the board baulks, and there is a new election of members of the Board, unclear if I keep control.”
“If she was stupid enough to replace you, she’d kill the company. That won’t help her.”
“Well, she might see this case as so bad that her brother should take over.” He winced at the thought. “I still control half the stock. But so we deadlock.”
“Bad. If you deadlock, the court appoints a Receiver. That, alone, will kill your company. The Receiver will be mediocre at running your business. Will take no chances. And will be expensive.”
“Right. So, if it comes down to a fight, to save the company, we will both put someone else in charge. And I am out of a job. Maybe.”
We thought it out some more. He was getting upset enough to have to pace but with crutches his pacing was merely trying to walk back and forth across the office from me on his crutches. He soon realized how ridiculous it was. He finally sat down again.
“This is nuts. I’m trying to run a company and make good decisions and have people with a different agenda looking over my shoulder. And she knows if she makes me really uncomfortable, I will be more inclined to pay her a premium for her stock. Can’t believe I let this happen.”
“You were in love. You didn’t want a prenuptial agreement. You took our draft of a buy and sell and never signed it. Happens all the time.”
“Ain’t no room for love in business,” he laughed bitterly. “OK, you don’t settle. You keep fighting. How long until trial?”
“Six months. Maybe nine.”
“Well, I got six months to get the Board in line, then. What can you do to save the case?”
“We nullify Al by his change in testimony. That’s easy. And the entire case becomes circumstantial evidence. Why did they suddenly develop the formula? Where else could they have obtained it but from Al? And, in effect, Al becomes our target. We say he either sold it or lost it and now has been bought by them.”
“You will crucify him?”
“You bet. We may not win, what with having the burden of proof, but he will have his reputation dragged through the mud. We have no choice now.”
“Doesn’t bother me. He deserves it.” He thought some more, fingers drumming. His beeper rang..this was before cell phones…but he ignored it, staring out the window.
“I could settle this tomorrow and move on, if I didn’t have my ex in the company. Instead, I’m going to spend another hundred thousand, maybe more, pay them another hundred thousand in costs and probably lose. Sure it will cost them more…but I have no real freedom of action anymore.”
He looked at me, then. “I started a business to be in charge of my own life. Now I’m not. I can’t stand that.”
I shrugged. “You didn’t take care of business when you could. A prenuptial and a buy and sell and it would be unpleasant but you’d still be free to run your business.”
“Absolutely. Now I pay the price. Understood.” I saw that expression come over his face that he had when he made up his mind. “OK, keep fighting. I see if I can make the Board slowly see to reason. If you get some great evidence, we keep going. If not, we settle as soon as I can get the Board clearly on my side. “ He stood up on his crutches. “Let’s do it.”
I stood up to open the office door for him. “You got it. If nothing else it will be fun to cross examine Al. He is in for a very unpleasant day or two.”
Ben grinned then. “I can see that.” And hobbled out.
Our deposition of Al was great fun for me. It lasted over three days, though by the second day it was clear that he admitted perjury either in originally testifying for us or, now, testifying for the others. His various excuses of memory changing sounded as stilted as the desperate objections of his defending counsel, who I will call Bill. Bill was a good lawyer, an honest lawyer, had never done criminal law, which I had, and thus had no idea how to defend a witness that was clearly lying. Indeed, I could tell he could hardly stand being in the room with him. Typical testimony:
Lee Stimmel: “So, your recollection of the events altered only recently, is that correct?”
Witness: “About…maybe six months ago…but I really knew what happened all along and I was just trying to keep my job.”
Lee Stimmel: “You committed perjury to save your job? That’s your testimony?”
Counsel: “I object to that, Mr. Stimmel. You are putting words in his mouth.”
Lee Stimmel: “Counsel, he is apparently accusing my client and perhaps this office of condoning perjury. Of using perjured testimony. We take such charges seriously. You may face the same claims in reverse in a few more months.”
Counsel: “We would never use perjury. I resent that.”
Lee Stimmel: “Are you accusing our office of condoning perjury, then?”
Counsel: “Of course not, I did not infer anything of the sort. The witness just testified that he forgot the details of the event in question.”
Lee Stimmel: “My recollection is that he testified he lied to keep his job. That means we condoned perjury, according to the witness, and he has admitted committing a crime.”
Witness: “That’s not what I meant. I meant my job mattered and my memory got confused. I didn’t commit perjury.”
Lee Stimmel: “So, no one asked you to commit perjury?”
Witness: “No, of course not. I was just confused and worried about losing my job. I mean, losing the plans in a cab. I was worried.”
Lee Stimmel: “So you lied to cover up?”
Witness: “Well, you could call it that.”
Lee Stimmel: “But you aren’t lying now, then?”
Witness: “No. Not now.”
Lee Stimmel: “You’re sure of that?”
Counsel: “Objection. Asked and answered. Also harassing the witness.”
Lee Stimmel: “Withdrawn. But perhaps the witness will tell us why we should believe him now when he committed perjury before.”
Counsel: “Objection and I instruct my client not to answer. Argumentative.”
And so on…
Proving our own case was another matter. First, we had almost no damages since Ben had designed around the stolen product thus they never cut into our own sales. Second, circumstantial evidence is well and good but we had no direct evidence of theft and our burden of proof required us to prove our case by a preponderance of the evidence. If the jury was unsure who was right-we lose.
I knew that Ben was having increasingly bitter fights within his Board of Directors. His ex-wife was directing her brother and sister to question almost everything he did, including the case, and the endless bickering led to the resignation of one of the directors previously on his side.
The replacement of that director was key to control of the company, the stock was split and it was only a matter of time until a Receiver would be appointed. Sure enough, after a month of not being able to agree on the new director, the ex-wife’s lawyer went to court and after an expensive hearing, the court appointed a retired business man as the Receiver to be on the Board and act as tie breaker until the matter was resolved. At the cost of one hundred thousand a year.
Perhaps three months before trial I received the call from the Receiver asking to be briefed on the matter. As the deciding vote on the divided Board, he was critical to the future of the case, of course, but our firm represented management, not the Board, so I needed Ben’s approval before I could brief the Board.
Ben sounded depressed on the phone. “Won’t matter what you say to him. He’s going to tell you to pull the plug.”
“The case is not dead. We’ve developed some pretty good evidence in the last few months. Remember, we got some dynamite testimony from one of their suppliers who was given a piece of paper for manufacturing purposes that may have had your logo,.”
“You told me. But he doesn’t have the paper any longer…just kinda remembers the logo.”
“True, but that’s still good stuff. I think we have a good chance.”
“And if you say so, I believe you. But it won’t matter. No matter what you tell him the case is over and, most probably, so am I. They’ll fire me next quarter.”
This was the first I had heard of how desperate the situation was for Ben. It seems one of his other big gambles…launching a new product in the Midwest…had not borne fruit. Sales were mixed, overall sales down, and the Receiver was siding with his ex in-laws almost all the time now. “And your divorce? Still stalled?”
“You bet. Why hurry when they effectively are going to grab control of the company, fire me, figure the Receiver is cheaper than my salary, and punish me for all the wrong I did poor old Eleanor.”
I had never heard him sound so bitter. “So, I’m to settle?”
“And do it now. No telling what those bums will instruct you to do once I’m gone. They already blame me for blowing the company, might as well blame me for this.”
It took three weeks but the Taiwanese were delighted to settle with each side walking away with no damages and each paying their own costs and attorneys fees. The testimony of their supplier and the fact that Al now worked for them and was clearly a liar made them very nervous about what an American jury would do.
As I walked away from Court having entered the settlement in the record, opposing counsel came over to me to shake hands. He shrugged. “Not our greatest case, right, Lee? I had a witness who would lie about his mother’s name and you had a CEO who has about a week left on the job.”
“You heard the news, huh?”
“The entire industry knows it. Guess your guy didn’t figure on what happens when stock is divided and a divorce comes along. Didn’t you tell him to do a buy and sell agreement?”
“You know that’s privileged. But, let’s just say the lesson is clearly learned now.”
“Yeah. And I guess my clients know not to hire liars and cheats and expect a good result.”
We shook hands and a trial I would have enjoyed never happened.
Ben was divorced about six months later, bought his wife out for an inflated sum, and went about rebuilding his company. But he was not the same man. He had lost forty pounds during the crisis and at first I thought it was about getting in fighting trim. Turned out it was cancer. Three years later he was dead, the company bought by the very same Taiwanese we had fought.I am convinced the cancer was brought on by the years of stress.
So it goes.
One good thing. They fired Al within two weeks of settlement of the case. Never did learn what happened to him. Don’t much care.
And I have a good story to tell people who wonder why a company should spend the time creating an effective buy and sell agreement.