PPG headquarters, eager for profits, seemed to be losing its stomach for investing in the business. When scientists left the company, it often did not replace them. By early October PPG had decided to sell off parts of the biomedical division. A June 1992 memo from PPG's D.R. Wallace, head of business development, to its chief financial officer pegged the sensor unit's value at $10 million. A May 1993 memo from the CFO to Wallace suggested "exiting sensors," noting, "the overall business can't continue to support annual losses of $8 million. Sell license to cut losses and keep participation in future profits."
Meanwhile, Diametrics was readying to go public, looking to raise nearly $28 million -- on top of the $22 million it had already attracted from private sources.
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When PPG sued Diametrics, it had never seen or touched IRMA. That stunned Deetz and Sembrowich. "It's like accusing someone of a crime before you've made a reasonable effort to find out if a crime has been committed," says Deetz. He continues, "We worked hard to keep away from PPG's domain. Anytime we thought we were close to their patents, we talked to our lawyers." That happened, he adds, "four or five times."
In filing its suit, PPG, pleading grave injury to a business that was going nowhere, had gotten a Minnesota federal judge, Diana Murphy, to sign a temporary restraining order (TRO) without notifying Diametrics or its lawyers. That was a breach of the federal rules of civil procedure. PPG hadn't even served Diametrics with the complaint before filing it with the court -- a few days into Diametrics' IPO but three years after Deetz and Sembrowich had started the company.
A PPG spokesperson and PPG's Doug Hillier reply that PPG sued as soon as it became aware of Diametrics' technology and was "confident" that trade secrets had been violated. However, the discovery process revealed that PPG had actually gotten hold of Diametrics' private-placement documents describing its technology in mid-1992 -- a full year before the IPO. Even more striking, claims Ron Eibensteiner, an early investor and cofounder of Diametrics, "Doug Hillier called me to have dinner the month we started the company. He said, 'I'd like to be an investor as well as a director." Eibensteiner adds, "He was extremely intrigued by our concept for a blood-glucose product, and he was aware we were going the blood-gas route."
Those issues raise a critical question. Was PPG's lawsuit timed to coincide with the IPO and do Diametrics maximum damage? Certainly PPG's law firm, Brown and Bain, with an office in Silicon Valley that does a great deal of trade-secrets and corporate-finance work, knew that a well-timed suit could torpedo a nascent stock offering.
When PPG's lawyers filed their complaint and got Judge Murphy to sign a temporary restraining order, they neglected to tell her that Diametrics was in the midst of its IPO. When Murphy learned about the IPO, she was angry. "In the fourteen and a half years I've been here I've granted a TRO without notice twice," Murphy says. "As soon as I found out about the initial public offering, I dissolved the TRO."
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Diametrics had to get to court fast. After returning investors' money from the aborted IPO, the company had just $7.1 million in the bank. Still in product development, it was burning up $800,000 a month. In short order, four lawyers would be working on the defense. A case of this complexity takes 18 to 24 months to prepare. Diametrics' management figured if it couldn't get to trial in 90 days, the company would be out of business.
During the discovery process, PPG unloaded 200,000 pages of documents on Diametrics. By the same token, recalls Sembrowich, "they wanted us to produce every document in the company. We had to bring in additional computer printers, and we set up a war room here." From Labor Day until the trial started, in late November, Sembrowich put in 12-hour days helping lawyers prepare the case.
The trial started in federal district court in Minneapolis on November 22 -- and ran for all of one day. It would not resume until January 10. Time, as much as PPG, was now Diametrics' enemy.
Today's crowded court calendars only intensify the impact of litigation, with the big and the strong benefiting by delay. "As a result, people who are sued often settle just to get it over with even though they have no liability," comments Richard Willard, a partner in the Washington, D.C., law firm of Steptoe & Johnson.
Theodore Eisenberg, a law professor at Cornell who has studied the clogged-calendar phenomenon, says, "It's now harder to get a federal civil trial date because of the growth of criminal cases." (Criminal cases take priority over civil cases.)
Even though Judge Murphy claims that the Diametrics case was put on a fast track, it still was bumped three times by criminal cases. Murphy adds that at any time the court is juggling 350 complex cases. These days she presides over not just elaborate drug-conspiracy cases but labyrinthine white-collar crimes that previously went to state court.
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In early January, Diametrics, running low on cash and hung up in court, had to raise more money from investors. The founders sold 1.3 million shares of stock at $6.21 each -- shares that had fetched twice as much in the public market six months earlier. "That diluted us even further," says Sembrowich. The management, preparing for the worst, drew up a plan reducing salaries between 10% and 40% and projecting layoffs.
Judge Murphy, meanwhile, assigned a mediator to try to broker a solution. The mediator told Diametrics' CEO, Michael Connoy, "You have an 800-pound gorilla sitting on you, and it's not about to move." PPG first wanted $58 million and the technology, which it would consider licensing back to Diametrics. Connoy recalls, "We told them, 'Are you nuts? The technology is not about to change hands.' That was the only thing that could have added value back to their business." PPG never budged from its demand for the technology, and negotiations died that day after eight grinding hours.
In late January the court calendar opened up again, and the trial resumed. By month's end the trial was half over. The judge threw out one of PPG's three claims -- that Diametrics' device copied PPG's design. (PPG's patent lawyer couldn't even identify the novel features of PPG's machine.) Diametrics also appeared to be scoring points on the more central claims, regarding ownership of the sensor card and the gas battery. Suddenly, PPG wanted to settle. Diametrics, which had filed a counterclaim against PPG looking for damages from what it deemed a frivolous lawsuit, refused.
