Blood Feud

David Deetz's upstart company devised a $2 technology that holds the key to a $3-billion medical-equipment market. Trouble was, the Fortune 100 conglomerate he had once worked for wanted it, too. Using litigation as a strategic weapon, the big company almost won

The stock was hot. On Monday it had gone public at $13. By Tuesday morning it was pushing $15. David Deetz was getting richer by the hour.

The offering would produce $28 million for the company Deetz had cofounded: Diametrics Medical, in St. Paul, Minn. But then came Wednesday -- August 11, 1993, the day the offering was to close. Deetz was heading into a meeting when a reporter from the St. Paul Pioneer Press called, requesting a comment on the just-filed lawsuit.

Lawsuit? It was true: Pittsburgh Paint Glass, one of America's Fortune 100, had sued Diametrics for patent infringement and theft of trade secrets. The timing couldn't have been more devastating. Deetz recalls having "this sick feeling that just wouldn't go away." Dread overwhelmed anger.

Diametrics had $28 million of other people's money, and Michael Connoy, its president and chief executive, knew that when the news hit the wires on Thursday the market would chop the stock in half, triggering shareholder lawsuits. Connoy worked late into the night, talking by phone with key investors about what to do. At 3:30 a.m. on Thursday he called NASDAQ's emergency hot line and told officials not to open the trading of Diametrics' shares that morning.

On Friday Diametrics began "unwinding" the initial public offering and returning all the money raised. What didn't come back was the $501,000 spent on underwriting fees. "Going public" had netted Diametrics Medical a negative half-million dollars. And that was just the ante.

Over the next eight months the lawsuit would push Diametrics to the edge of extinction. It scared away would-be customers and employees. It diverted the company's scientific talent to the legal defense. And in legal costs, deferred business, and money lost from the public offering, the suit cost Diametrics, a promising development company with no revenues, more than $20 million.

Most people know $8-billion conglomerate Pittsburgh Paint Glass (PPG Industries Inc.) as a leading producer of paint, glass, and chemicals. But in the deindustrializing 1980s, the company made a strategic decision to offset its cyclical core businesses with a segment that offered purer growth. PPG created a biomedical division, and in 1987 it eagerly hired David Deetz, a brilliant young scientist, to start up a business unit to develop a radically new type of blood analyzer.

What PPG and Deetz pursued -- first in concert and later in competition -- was no less than a commercial-scientific equivalent of the Holy Grail -- a four-pound "black box" that would transform the business of analyzing blood. It could be used at hospital bedsides; it held considerable promise for use in ambulances and outpatient clinics. Over the past 20 years major health-care companies have spent upwards of $200 million trying to develop a portable, point-of-care device to measure vital blood characteristics: oxygen, carbon dioxide, and pH levels. The annual sum currently spent on such diagnostic tests is $3 billion worldwide, one half of that in the United States alone. Moving a test that is now performed by a costly, cumbersome benchtop machine to a lightweight portable device confers an invaluable advantage -- speed. Today doctors send blood samples from critically ill patients to a hospital laboratory and need to wait 20 minutes for results. Patients, meanwhile, can be brain-dead in four minutes for lack of oxygen. Doctors must gauge condition and needs by relying on such basic signs as the color of the patient's skin, tongue, or eyes.

Deetz's idea was to develop a portable device that would measure vital gases in less than two minutes. But of all blood tests, the one for blood gases is the toughest, because oxygen and carbon dioxide are notoriously unstable. That makes it hard to calibrate the analyzer -- to establish a reliable baseline for each test. And yet Diametrics, after three years of hard labor and $22 million in venture capital, had technically succeeded where PPG was still struggling. Moreover, Diametrics had done so by doing precisely what Deetz had urged PPG to do -- and PPG had discouraged and forbidden him from doing.

Beyond the fundamental dispute over technology, the case of PPG versus Diametrics highlights an increasingly hazardous phenomenon of the free-market jungle -- the use of the law as a business tool. Robert Mnookin, the Williston professor of law at Harvard Law School, says, "There appears to be a substantial increase in the number of commercial disputes that are taken to court" with the sole purpose of intimidating competitors. "It's quite possible to use the expected cost of a defense as a strategy to extract a settlement."

While it's common, Mnookin adds, to blame an ever-growing population of lawyers, "the initiative usually comes from businesspeople who are increasingly willing to use litigation as an element of corporate strategy." That impulse dovetails, says Mnookin, with the "increasing impermanence of intellectual property." In today's information-based economy, intangible property can involve substantial investments and create enormous values -- but can be cheap to copy. Litigation thus becomes a form of reasonably priced insurance.

While the growth of commercial litigation in absolute and relative terms is not easy to measure, a mosaic of excess seems to present itself. Consider:

· Size has its advantages. According to a study by Joel Rogers, a professor of law at the University of Wisconsin, Fortune 1,000 companies were plaintiffs in almost 123,000 federal court cases between 1971 and 1990, about 27% of the total examined. They won 79% of the cases in which they were plaintiffs and 65% in which they were defendants.

· Lack of merit makes no difference. Tom Metzloff, a professor of law at Duke University, has examined medical malpractice cases over the past eight years. In 40% of the cases, says Metzloff, "the plaintiff doesn't win or there is no settlement." His research leads him to conclude that between 10% and 15% of those cases should never have been filed.