In a Crisis, Your Trusted Advisors Aren't Any More

The next major economic blunder I witnessed enabled me for the first time to take the matter out of the hands of the blunderers.

A major client had acquired the leading company in its industry segment. The government attacked the acquisition under the antitrust laws.

The company's large Wall Street outside law firm with a partner on the company board recommended that the company simply roll over and agree to divestiture because no company had ever beaten the government in a merger case brought under Section 7 of the Clayton Act.

I opposed that and, to make a long story short, that was the first time the government ever lost a merger case under Section 7 of the Clayton Act.

It was then I began to realize that not having over the horizon insight into crisis avoidance/management did not have to be an incurable disease. You must immediately look beyond your normal representational resources for a specialist who can handle bet the company situations.

Later, after I had established my own law practice as a boutique business litigation resource, I had many more occasions to be that specialist.

A couple of other stories will help the reader with insight into how I handle potentially disastrous situations by going outside the box and looking back into the interstices of how the issues began to develop. I can now usually head them off or resolve them if I wasn't lucky enough to have been brought in at the very beginning before it went viral.

These examples developed in the following manner and they blew up in the clients' faces at just about exactly the same moment.

1. CEO - Great Leader, Terrible Witness

In the first such instance my client's former trial firm had garnered the account by agreeing with everything the head honcho said, telling him that he was absolutely right and that if he didn't make his stand on the issue in this case he could kiss his business advantages goodbye.

None of that was true and a competent law firm would have known that. To this day I don't know whether they knew it and misrepresented the situation in order to get the case or whether they really were that ignorant. They made their stand and lost the case. That was the point at which I was contacted.

The client wanted to appeal. The client wanted to sue the lawyers for not putting the president back on the witness stand for further testimony.

What an appeal would have accomplished would have been to take a lower court's correct rulings and have them confirmed by a federal court of appeals for a more potent precedent to be used against the company in all future cases on this pivotal issue - and there were a lot of them waiting in the wings.

When a franchise company loses a major case its franchisees see it as a wounded animal and close in for the kill.

I almost got fired because I urged them not to appeal but to simply take the defeat and move on.

I again almost got fired when I privately told the president that he was the worst prepared witness I had seen in years and that putting him back on the stand would have only made things much worse.

But I urged him not to sue the other lawyers because there were far more important things needing attention and there was no high probability of success in the malpractice suit anyway.

I think I was kept on because I was willing to be the first lawyer to say no to the president and take my chances on his being mature enough to recognize what it takes to do that.

There were more than a couple dozen other cases pending in courts all over the country to deal with, all previously "handled" by the same predecessor law firm, and they were all potential time bombs. We either favorably settled or tried to a victory over 15 of these lawsuits, whereupon the company started to shrink from the sheer weight of pervasive contention.

2. Winning Lawsuits versus Good Business

Winning lawsuits does not automatically translate into marketplace success, and this company turned out to be a one trick pony left behind by advances in its core technology.

Illustratively, when I suggested diversification over dinner one evening, the response was "When I want a goddam lawyer to tell me how to run my business I'll ask him".

The opportunity to avoid becoming irrelevant arose early and often. The company was enabled by a technological change in its industry, and it had mastered that technology. However change continued and its owner refused to adjust even though many asked him to.

"That's not part of our franchise" was his stock response to requests from his franchisees for support on the implementation of the newer technology in their franchises.

Told that the new technology was not part of the franchise, they opened separate businesses to exploit the new technology, using other names, and paid no royalties on that business.

Then the owner of the franchisor became furious and began accusing these franchisees of stealing from him. These were many of those other lawsuits I inherited from the prior law firm that had obviously not done any homework or saw the problem and pretended it wasn't there for the sake of the monthly bills.

The hardest of these were the California cases where covenants not to compete are not enforceable in franchise settings. Fortunately for my client, counsel for the franchisees was no more astute than that and mispleaded their claims so poorly that they could be defended to the point at least of them paying us money in most instances as the price for a release from an unenforceable covenant not to compete and a franchise agreement.

Configuring a potential loss into a revenue event allows it to be reported rather favorably.

3. Mass fraud claims

Next, in another case over 120 franchisees joined together as joint plaintiffs in a gigantic racketeering and antitrust case with pendant fraud claims, asking the court for $ 62,000,000. The company's CPAs threatened not to give a going concern opinion because of that case.

As tough as it was - and 120 plaintiffs with the same history tend to be believed by judges and juries - the franchisees actually paid us $ 750,000 to settle the case they had brought.

The real point of this story is that the owner of this franchisor had so cowed his officers and senior managers that they were afraid of making any gesture in the direction of the newer technology.

The man bullied everyone but me, it seemed. One of his officers once told me that they tried to keep us apart because at least now they were not losing lawsuits and they wanted us to continue as the company's counsel.

In the end our attorney client relationship was somewhat taken for granted to put it nicely and I asked them to obtain other counsel.

They threatened in writing to sue me for leaving them and went around telling people in town that they had fired me for incompetence.

No one believed that and I just ignored it.

That was the right decision. The company has since slipped into almost total oblivion, still unable to accept the notion that it has to evolve in order to enjoy continued success. I can keep the wolves from the door, but no trial lawyer can force any company to open its eyes to realities it wishes were not so.

The last of these stories involves another franchise company whose owner rose to the point of being delusional about almost everything.

4. Wasting your empire.

This last company, also a franchisor, benefited mightily from the advent of the personal computer. Its market position was so strong for several years that it could require its franchisees to buy their PC and other inventory from them and to pay in advance for it. It too was the largest distribution resource in its field.

Ultimately the market began to evolve and its hundreds of franchisees were seeing other avenues they wanted to investigate. The VAR and VAD - value added retailer and value added distributor - were making their entrance into the market and wanting recognition.

The company began to lose its grip on its franchisees, partly from the changes in the market and partly from the delusionality of its owner.

It had come to me before becoming my client and been turned down because the lawsuit it wanted to bring simply did not include any valid claims. When I told this to its in house general counsel his response was that they would find and hire a lawyer who agreed with them. They did. They lost.

The owner had once borrowed a rather small amount of money - around $ 250,000 - giving a note that, in the event of default, would be convertible into a large percentage of the company's stock. The note holder sold the note to someone else, which was his right to do. The maker, owner of a by now very successful franchising company, decided that it was inappropriate for the holder of the note to sell it and announced that he would refuse to pay it. The note holder gave notice of intent to convert the note into shares of the company, which the owner refused to recognize.

The head of the company refused to honor what was essentially a slam dunk obligation and hired the same firm to represent him and the company in that debacle as well. He lost control of the company; had to pay the note plus interest; and had to pay the expenses and attorney fees of the suing note holder. The franchisees, as could be expected, saw this as the pregnant moment to strike and they did so.

While this was going on I had favorably settled or prevailed in 14 straight franchisee cases in courts all over the United States. Ultimately those victories were to no avail.

That franchise system is now no more than a shadow of its previous self. Its former owner fled to a pacific island and continued to get into more trouble until he was kicked off the island.

The enterprise was literally wasted because its controlling interest refused to deal effectively and immediately with impending negative prospects.

As odd as one might think it, similar lapses occur all over the United States. Company leadership seems to feel that by taking a fresh look at a bad situation there is an inherent exposure to criticism. Fear of "embarrassment" and wishful thinking lead to these companies doing and saying the wrong and most damaging things imaginable, urged on by the two most inept resources at hand.

One should never follow the advice of its PR people when bad things happen. PR people do not deal in reality and do not know how to address tough situations in other than formulaic ways, assuming that all situations, no matter what, can be made to fit into their templates. That is simply wrong. At its best it is inadequate.

Similarly, a company facing distress should not give responsibility for addressing it to the accountants or law firms that were associated with the conduct that is being challenged. Those law firms and accountants are almost always preoccupied with covering their own potential liability and for that reason have a poisonous conflict of interest. Get new resources in there and see whether there is a more realistic way to go about addressing difficulties when they arise. For examples of what to do or not do, seehttp://www.franchiseremedies.com/Franchisor_Mishaps.htm.

If you really do want to minimize injury and damages from impending difficulties, you need to make yourself open to critical assessment.

People with confrontation avoidance capability need to be able to speak to you about the situation in real terms in real time.

You are not right because you say you are right.

Even when you really are right the circumstances may be such that you would better serve your own interests by considering compromises of less than indispensable issues and principles.

Disputes are never about "the principle of the thing". They are always about several principles that are vying with each other for priority of consideration.

With the passage of an amazingly short period of time the leading principle may seem less important and other considerations may call more heavily for your attention. Life is fluid, not static.

Get an expert and watch better things happen to you.

As always, you can call me, RIchard Solomon, at 281-584-0519.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.