A Breach of Trust
Despite the recent revelations about high-level corporate larceny, we all know that the vast majority of businesspeople are out to earn an honest buck, and most of us are content to operate on that assumption. That's natural. Life is much easier, and more fun, if you can trust the people you do business with.
So it always comes as a shock when you discover that a supplier or a customer has deliberately set out to take advantage of you. The question is, How should you respond?
I faced that question about three years ago, when a review of our contracts revealed a problem with one of our leases. The lease covered 10 two-way radios we'd been forced to get two and a half years earlier because of the digital revolution, which had suddenly rendered our analog walkie-talkies obsolete. Our service provider had informed us that the monthly charge for the two-way service would double -- from $20 to $40 per device. On top of that, we would need all new equipment, and each new radio would cost about $800. (Today you can buy better ones for $50 each.)
To cushion the blow, the service provider had found a leasing company that was offering an attractive financing deal. Instead of buying the radios outright, we'd be able to pay for them over 12 months and then purchase them for $1 apiece. That was better than the alternative, so we'd signed the lease papers, made a $2,000 down payment, and started paying $525 a month for the 10 radios.
Thirty months later, we were still paying, and we would have continued to shell out the money if someone in our accounting department hadn't noticed that the lease agreement had expired 18 months earlier. For some reason, the leasing company had kept sending us bills, which we'd kept paying. My partner Louis, the president of our company, asked me how I wanted to handle the matter.
"Just call them up and tell them they owe us about $10,000," I said, assuming it was a mistake. "There shouldn't be a problem."
But there was a problem. When Louis called the leasing company, he was told that it didn't give rebates. "All we can do is send you a letter saying you don't have to pay the monthly charges anymore," a company representative said. Dissatisfied with that response, Louis kept calling back until he reached a senior vice-president. "What state are you in?" the vice-president asked, after Louis had explained the situation.
"New York," Louis said.
"The law in New York says we don't have to pay you anything," the vice-president said. When Louis started to argue, he said, "Look, it's too damn bad. Pay the dollar you owe us per phone. It's not our problem." Louis continued to protest, whereupon the vice-president urged him to perform an act on himself that is physiologically impossible, using language we can't print in this magazine.
I was, of course, incensed when Louis told me what had happened. I figured there had to be a law protecting people in our situation. We called our lawyer, Wayne, who assured us there was. He said he'd send the leasing company a letter. "I don't want to spend money on this," I said.
"No, just a lawyer's letter," Wayne said.
He sent the letter, and nothing happened. Weeks went by. Wayne sent more letters and followed up with phone calls. The leasing com- pany ignored him. I was getting exasperated. "What are we going to do with these guys?" I asked Wayne one day.
"We can sue them," he said.
"Just what I need, a lawsuit," I said.
"Not only can we sue them, but I have a feeling you're not their only victim," Wayne said. "You could have a class-action suit here."
"That's lawyer talk for a lot of money," I said. "You can do whatever you think is necessary, but I'm not paying a nickel more than $1,000."
Wayne agreed and proceeded to file a suit, which produced the desired effect. Before long, the leasing company's lawyers contacted him. After some discussion, they indicated that their client would be willing to reimburse us for the extra $9,450 we'd paid on the lease. "OK, let's settle," I said.
My partners, Sam and Louis, were opposed to settling, however. They were angry about the way we'd been treated, and they wanted the leasing company to do more than simply reimburse us. We'd get a better deal if we waited, they said. Wayne agreed. "OK," I said, "but only on three conditions. First, I won't pay any more legal fees. Second, whatever court appearances or depositions are required, Sam and Louis have to handle them. Third, I have the final say on any settlement."
The case dragged on for a couple of years, with numerous court appearances and the leasing company's vigorously denying everything we charged. I needled Sam and Louis from time to time, asking them where my $10,000 was. They told me to be patient. As for Wayne, I knew he was running up significant expenses, especially after the case was transferred from Brooklyn to the leasing company's home city, a plane ride away. But he remained optimistic.
The big question was whether we did, in fact, represent a "class." Were there other companies in our situation? We didn't know for sure; we were just guessing. When we filed a discovery motion, the leasing company fought it in district court and won, but the decision was overturned on appeal. So we finally got to ask our question: how many other customers had received -- and paid -- monthly bills beyond the end of their lease? The answer, it turned out, was more than 750.
That revelation changed the way I viewed the case. It seemed obvious to me that the leasing company couldn't have overcharged so many customers by accident. The practice must have been part of the business plan. Clearly, the owners had expected that many customers, like us, wouldn't notice when their lease expired, and relatively few would sue to get their money back. Even if the company reimbursed all the customers who raised a stink, it would still come out ahead.
I generally try to avoid letting emotions cloud my business decisions, and I don't like using lawsuits to settle scores, but I have a real problem with companies that intentionally abuse the trust of the people they do business with. Whether or not what they're doing is illegal, it is certainly unethical in my view. I decided that the leasing company needed a lesson in the hazards of cheating customers.
My opportunity came this past spring, when the judge finally announced that he was prepared to certify the case as a class action and would do so in three weeks unless we reached a settlement. Soon afterward, Wayne's partner, Bill, and Louis met with the leasing company's lawyer, who asked what we were looking for. On my instructions, they gave him an outlandishly high figure.
"What did he say?" I asked when they returned from the meeting.
"He laughed," Louis said.
Eventually, the lawyer called Wayne back with a modest counter- offer: $10,000, plus interest going back five years, plus reasonable attorney's fees. "You should remind your client," he said, "that after the class action is certified, $10,000 plus interest will be the most he can get." Wayne said he'd talk to us and call back the next day.
Evidently, the leasing guys hadn't gotten the message. I decided we had to spell it out. I told Wayne that he should give the lawyer a counteroffer the next day -- $1,000 less than our original demand. Then we'd keep negotiating in that vein. Our next counteroffer would be $500 below the previous one. On the fourth round, we'd go down $250 more and, on the fifth, another $125. Thereafter, we'd start raising our offer by $125, $250, and so on until we got back to the original number.
"And you should tell him one other thing," I said to Wayne. "Say that your client knows he can get only $10,000 plus interest in a class-action suit, but there are more than 750 potential members of the class, and they could get whatever they're owed as well. So maybe it would actually serve the greater good to let the class-action suit go forward."
In the end, it didn't take all that long to reach a settlement. I'm afraid the final agreement forbids me to tell you the exact terms of the deal we made. Let's just say that we didn't stick to the rule that a wise judge taught me many years ago. "The best deal in the world," she said, "is when everybody walks away a little unhappy." (See Street Smarts, April 1998.) In this case, I'm quite sure that the leasing-company people were a lot unhappier than we were.
But I did learn a lesson. In the future, we're going to pay closer attention to the expiration dates on our leasing contracts, and you should, too. Who knows? You may find that somebody owes you a lot of money.
Norm Brodsky is a veteran entrepreneur whose six businesses include an Inc 100 company and a three-time Inc 500 company. This column was co-authored by Bo Burlingham. Previous Street Smarts columns are available on-line at www.inc.com/keyword/streetsmarts.
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NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.