But old habits die hard. Consider the case of Alan B. Epstein.
Epstein founded Judicate Inc., in Philadelphia, the first (and still only) public company offering dispute-resolution services. Last year his board fired him because of Judicate's poor showing. Epstein filed suit. Judicate offered -- what else? -- to submit the suit to ADR. Epstein made his own offer of ADR.
Neither one, of course, accepted the other's proposal.
LAWSUIT #1
The Case of the Stolen Secrets
The Litigants
Defense Technologies Inc. (DTI): A Bedford, Mass., marketer of electronic security systems for corporate jets. Privately owned; largest shareholder is Michael Leavitt. Sales of $1.5 million in fiscal 1988. Shepherd Intelligence Systems Inc.: Competes in the same market as DTI. Private company in Lexington, Mass., with 1988 sales of $1 million. Founded in 1986 by Robert F. Jasse, founder of Chomerics Inc., an Inc. 100 company.
The Conflict
Not much remained of DTI on a Monday morning in December 1985. Only a part-time secretary, to be precise. The rest of the crew, including the president, had walked out, defecting to a competing company started only days earlier by Robert Jasse.
Jasse had negotiated for two months to buy DTI from owner Michael Leavitt. But on December 19 he learned that Leavitt had given someone else a right of first refusal to buy the company. Jasse was furious at what he considered Leavitt's deception. The following day, a Friday, Jasse announced that he would start a competing company. And he resolved to hire anybody who had anything to do with DTI's product. DTI president Michael Forhan quit and joined Jasse the same day. DTI's technician followed. By Monday Jasse had plucked two more employees from Micrologic Inc., DTI's subcontractor, including the chief engineer of the aircraft security system.
Within the space of a few days, DTI had all but ceased to exist. Stunned by Jasse's action, Leavitt fought back. He immediately appointed a consultant, James Bricker, to be the new president. As the new year started, he filed suit against Jasse and his new company, Shepherd Intelligence Systems. He charged Jasse and others with theft of trade secrets and other wrongful acts and charged Forhan with breach of his fiduciary duty as an officer of DTI.
Within months the dispute had escalated into five lawsuits. And the fire they generated began to consume both companies.
The Battle
Jasse decided to follow the "Pac Man" offense -- consume as many resources as possible in litigation and hope your opponent goes bankrupt before you do. Even the smallest companies use the litigation process itself -- and the enormous sums it takes to sustain it -- as a weapon to punish their opponent.
Remarkably, Shepherd Intelligence did not even have any revenue when Jasse decided to fight a battle of attrition. "Our strategy was to spend $1 for every $2 they spent," says Jasse, "hoping they would reach the breaking point before we did. We knew their burn rate for legal fees was about twice what ours was; sooner or later that would hurt them. We knew how much it was hurting us."
And hurt it did. Jasse says many potential investors walked away when they learned about the lawsuit. Michael Oyer, Shepherd's chief engineer, complains that product development was slowed because $100,000 of Shepherd's funds went to its lawyers.
But Jasse was right -- his opponent, DTI, suffered the most. Each year it spent more than 10% of sales, which reached $1.45 million in 1987, on legal fees; at one point, it fell six figures in debt to its lawyers. But what more could Bricker sacrifice? Already, he had eliminated all spending on sales and marketing; the company couldn't even afford a video or a complete demo model to show to potential customers. Bricker had cut all R&D spending, too.
The companies failed several times in attempts to settle the case. But in mid-1988, as the judge began talking for the first time about a trial date, they reconsidered. Even Jasse was somewhat repentant by then. "The expense was preposterous," he says. "The trial would have cost $100,000."
By coincidence, Bo Foster had joined Shepherd Intelligence as its chief financial officer a few months earlier. Foster, who had worked with Jasse at Chomerics for 15 years, had recently been head of Duke University's Private Adjudication Center, which provides ADR services and research. Foster convinced Jasse to try settling again; he immediately called a professional acquaintance, Eric Green, cofounder of Endispute Inc., a dispute-resolution firm.
Exhausted by their fight, the litigants agreed to a minitrial set up by Green.
The 'Trial'
Jasse remembers sitting with the other litigants just before the start of the minitrial. "How would this thing end in anything but a brawl?" he asked himself. "We were all like a bunch of sailors spoiling for a fight."
The minitrial isn't a trial at all. Essentially, it's an innovative form of mediation. The lawyers argue the case in the presence of the companies' senior executives; the third-party neutral then advises each side of the strengths and weaknesses of the case and tries to coax them into a settlement.
In the Shepherd-DTI case, the presentations inflamed passions all over again. But for the first time in three years, the executives could intelligently assess the risks of a trial. Neither side had an overwhelmingly strong case; each faced a significant chance of losing, with uncertain monetary damages as well.
