Minitrials Are Cheap And Quick

Legal costs continue to skyrocket, so companies continue looking for alternatives. Here's one that works.

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In today's legal system you could win the lawsuit and lose the corporation. Automatic Radio almost found itself in that position when a circuit board subassembly it had purchased from giant TRW Corp. malfunctioned, causing radios to fail a few months after they were sold. Automatic Radio, a Boston-based company with sales of $15 million to $18 million in the automobile radio aftermarket, was literally driven out of the marketplace. It filed suit against TRW, in what Craig Spangenberg, the company's outside counsel, likes to call a "wrongful death" case.

The suit turned on complex technical issues of design and workmanship, as well as the hard-to-define area of how much future income was lost. Litigation could have continued for years, costing each side hundreds of thousands of dollars. Instead, the case was settled in a two-day procedure called a "minitrial," an innovation that both businessmen and lawyers are hailing as one answer to soaring legal costs. For small companies especially, observers see the minitrial as protection against a potentially devastating drain on limited resources.

"General Motors, Du Pont, and IBM can afford to litigate," Spangenberg says. "But I can foresee many situations where a small corporation might go bankrupt before litigation is completed."

First used in 1977 to settle a drawnout patent infringement case, the minitrial is not a trial in the usual sense. It is held outside the court system, and its results are not usually binding. Some attorneys prefer to call it an "information exchange," but under any name it is a process designed to encourage private settlement.

In the typical minitrial, opposing counsel present a concise version of the case before a panel composed of a top management representative from each company (who must come with settlement power) and a "neutral adviser," usually a jurist, chosen by mutual agreement. To keep the proceeding brief, as much of the case as possible is prepared on paper and submitted to the panel beforehand. (Most witnesses, for example, are represented by depositions.) In many cases, arguments have taken only an hour or two on each side. A key to success is that both parties agree in advance on the ground rules, which may be custom-designed for each dispute.

After the presentation, the managers retire in private to try to work out a settlement. If none is reached, the neutral adviser is charged with the duty of writing an opinion as to how he believes the case would be decided in court. He will also give a verbal opinion on the spot if asked. His opinion is not binding, but proponents of the minitrial contend that foreknowledge of how the case might be decided will put pressure on the litigants to settle. Moreover, observers add, if a company advocates litigation in the face of expert opinion that it will lose, stockholders might rebel.

So far, apparently only one minitrial has been held in which the adviser's written opinion was required; all others have resulted in settlements. Minitrials are thought to work best in cases involving questions of fact or of mixed fact and law, such as patent infringement, unfair competition, or product liability. An example is the case involving TRW and Automatic Radio. "When TRW first proposed a minitrial, Automatic Radio was dead set against it," Spangenberg recalls. "They thought it would give away our case." He cautions, however, that the minitrial process can be abused if one side holds back and uses it to observe the other's case. That didn't happen in the Automatic Radio dispute. "I was prepared to rely on TRW's good faith," Spangenberg says. "We both agreed to give it our best shot."

The case took three days (one of the longest minitrials so far). Present were Automatic Radio's president and TRW's executive vice-president, with irving Younger, a former judge and law professor, as neutral adviser. TRW's insurer was also present.

After three hours alone in a locked room, the managers called in Younger for his advice, then settled. That afternoon, TRW hunded Automatic Radio a check for $2 million. The amount was "within the range I expected," Spangenberg says. He believes that if the case had gone to court, automatic Radio would have won, but litigation would have taken four more years and cost each side at least another $500,000.

More important, he adds, "We eliminated the time drain. Executives worrying about a lawsuit aren't very productive. I was concerned not just about a possible trial, but also about the future of the company." By the time of the minitrial, Automatic Radio was already rebuilding with new product lines, including bug killers and log splitters. The company recently changed its name to Armatron International. Sales are back up to the pre-disaster level of $15 million to $18 million.

Another value of the minitrial, Spangenberg says, is that it brings the issue to the attention of high-level management. In this respect, it's particularly helpful for a small company in dispute with a giant. "The chairman of the board, the president, and the vice-president of Automatic Radio were involved with the suit on a daily basis," Spangenberg points out. "But they couldn't get to anyone upstairs in TRW."

Spangenberg says his clients were probably mad at the wrong people. "They were very bitter," he says. "They thought TRW was trying to drive them to the wall." As it turned out, Automatic Radio's grudge was against a very small division of the company. For the trial, however, TRW had sent the executive vice-president and his staff, not the individuals with whom Automatic Radio had been angry. "I took that bitter personal hatred of some underlings out of the case and turned the minitrial into a discussion of whether or not the corporation as a whole was liable," says Spangenberg.

According to Norbert A. Schlei, a Los Angeles attorney who participated in another minitrial, the procedure provides a sort of catharsis for the litigants. "Both sides," he says, "have an emotional investment in the rightness of their views and find it psychologically impossible to back down without an encounter of some kind." A court trial also provides such an encounter, he points out, but the minitrial does it "sooner, cheaper, and quicker."

Cost savings in a minitrial can be even more dramatic if the approach is adopted early. In a patent infringement case between Shell Oil and Intel Corp., total costs for the minitrial were about $10,000, as opposed to an estimated $1.3 million if there had been formal litigation.

Among the most active proponents of the minitrial is the Center for Public Resources, a New York-based, business-oriented think tank whose goal is to utilize business resources to meet human needs. The group campaigns, for example, to reduce corporate legal costs so the money and time can be applied elsewhere. According to Deirdre Henderson, co-director of the center's legal program, a minitrial narrows the dispute, promotes a dialogue on the merits of the case rather than just on the dollars, and converts what has become a typical lawyer's dispute back into a businessman's problem.

At this writing, only a dozen or so minitrials are known to have been held. The figure may be higher: One of the advantages of the procedure is that it can be completely confidential. Ronald A. Katz, an independent business consultant in Los Angeles, says he recently helped organize a minitrial between two companies, each with sales of about $25 million. (The details are unavailable because neither company wanted its customers to know that the feud existed.) Katz also has a client with sales of only $1.5 million who is about to recommend a minitrial to an opponent, and he knows of four cases in which the mere suggestion of a minitrial has led to negotiations resulting in settlements.

Katz's recommendations for getting the procedure started are simple: The manager, not the lawyer, should call the manager on the other side. "Most executives communicate very well," he says. "But they don't talk. They leave that to the lawyers."