Living with Litigation: The way CEOs handle brushes with litigation will probably determine how successfully they manage their companies - Cover Story

Chief Executive, The, Dec, 2001 by Jeffrey Rothfeder

There are 43 frames hanging on the wall of T.J. Rodgers office in San Jose, CA. To the chief executive of Cypress Semiconductor, these ornaments are what deer heads are to a hunter: They're the ones that didn't get away. All but a single empty frame contain documents and letters pertaining to lawsuits or, threatened litigation from angry competitors, patent holders, and a lawyer who represents investors. Cypress, the $1.3 billion maker of 400 different kinds of chips, has been in business 19 years. In that time, Rodgers says--and the wall immediately reminds anyone stepping foot into his office--he has never lost a case.

The one blank frame is more prop than anything else. When someone threatens Rodgers with litigation, he invites the person into his office to discuss the matter. Then he treats his visitor to a tirade with one succinct message: proceed and you're in for a long and drawn-out fight, because, to use Rodgers' words, "Cypress has no intention of caving in to blackmail or intimidation." Then Rodgers points to the frame with nothing in it and says, "That could be you. Go ahead, try me. Make my day."

For anyone who knows the brash Rodgers, such an attitude is nothing new. Aside from his business success, he has made a name for himself by taking contrarian stances like opposing government support for the teetering semiconductor industry a decade ago, attacking a public transportation initiative and the Rev. Jesse L. Jackson in the same year, and supporting a tax cut for the rich, because people like him "deserve" one.

While some question Rodgers' audacity, saying that it is all sound bites and theatrics just for the attention, that is not the case here. When it comes to lawsuits, Rodgers is dead serious. "They're parasites on a company that force you to deal with things that are separate from pursuing legitimate business interests," Rodgers says. "They're a distraction. But you have to take them seriously for your company to survive and you must protect your company against them."

Most chief executives today can relate to those sentiments. many of corporate America's biggest names--Philip Morris, Microsoft, General Electric, and IBM--have lived under the cloud of litigation for years. They face everything from government antitrust and criminal actions to huge class-action lawsuits and attacks from state attorneys general. Some, like Ford, Firestone, Grace, and Dow Corning, have faced an onslaught of product liability litigation. A few have even been forced into Chapter 11 bankruptcy to dear the books of the potential liabilities attached to the countless number of lawsuits against them.

Small companies aren't immune, either. Shareholders are becoming more and more aggressive and rivals are protecting intellectual property to the point that litigation has become a virtual cottage industry among technology startups. Many firms barely open their doors or complete an IPO before receiving the first threatening letter from a lawyer.

Lawsuits may not be what CEOs want to spend their time on, but for many top executives, the way they handle brushes with litigation may determine how successfully they manage their companies.

The experience of CEOs who have nimbly guided their companies through litigation, making critical decisions relating to internal morale, external communications, and appropriate defensive strategies, can be the difference between a thriving corporation and one that crumbles under the weight of legal wrangling.

"It's the CEO'S job to steer and manage the ship," says Bob Fitzpatrick of the Boston law firm of Hale and Dorr, "and decisions surrounding a lawsuit can affect a company as strongly as any an executive has to make." Hale and Dorr represented the Beatrice Food Co. in the environmental lawsuit popularized in the book and movie "A Civil Action."

If there's a recent model for how a CEO should guide a company under legal attack, consider Geoffrey Bible, chief executive of the Philip Morris Cos. Since 1994, the year Bible took over leadership of the cigarette and consumer goods giant, the company's cigarette unit has faced an unending stream of lawsuits, more than in the preceding 30 years. Individuals, class-action groups, all 50 states, and even the Justice Department have sued the company. Yet Philip Morris' performance has by any measure been remarkably strong.

In 2000, the company's revenue hit a record $80 billion, and its net profit margin reached 10 percent, compared to only an average 3.5 percent for 8,000 of the largest public companies. Even in a bear market, Philip Morris' shares were trading at $49 as of October 1, ballooning 60 percent in 12 months. Although 56 percent of Philip Morris revenue is still tied to cigarettes--in the second quarter of 2001, about half of those sales were international and half in the United States--Bible accomplished all of this while never apologizing for the company's leadership position in the beleaguered tobacco business.

Bible's strategy for guiding the company so deftly through litigation is a textbook example, legal experts say. His public posture keeps employee morale high and maintains shareholder confidence. To do this, Bible consistently asserts that Philip Morris will not let the lawsuits interfere with its ability to do business.