The San Jose Mercury News: Litigation reform: Did Congress do the right thing?, December 24, 1995 | Cypress Semiconductor
The San Jose Mercury News: Litigation reform: Did Congress do the right thing?, December 24, 1995
The San Jose Mercury News: Litigation reform: Did Congress do the right thing?, December 24, 1995
PEOPLE in Silicon Valley may be wondering why high-tech firms were so concerned last week over the fate of the litigation reform bill.
President Clinton originally vetoed the bill, which was designed to limit the number of frivolous class-action lawsuits that have plagued Silicon Valley businesses over the past few years.
Fortunately, the House and Senate voted to override the veto, which means the end of these "dialing for dollar" lawsuits.
Why did Clinton veto the bill? He claims to be concerned about eliminating the legal recourse for suits filed with good cause. But the truth is that the vast majority of such suits have been filed by lawyers seeking self-enrichment. One of the lawyers who has become famous for filing class-action lawsuits is William Lerach, the San Diego attorney who also happens to be a Clinton contributor and White House dinner guest.
What follows is an example of the type of class-action lawsuit high-tech firms have been facing. Judge the merits for yourself and decide if the House and Senate did the right thing.
The anatomy of a lawsuit
It is December 1991. Cypress is 9 years old. We have consistently lived up to Cypress's fourth core value: "We always make our numbers." And, we have enjoyed the Wall Street rocket ride tied to our performance. This quarter is no different: We must continue to make our numbers to meet Wall Street's expectation of 20 cents earnings per share. The semiconductor industry is in a slowdown, we are pushing to get orders and we must ship half of the quarter's revenue in December. Just another typical quarter in Silicon Valley.
Our chip plants work 24 hours a day, 365 days a year; we make chips on Thanksgiving and Christmas. Cypress has "make the quarter meetings" 52 weeks a year. Toward the end of our quarters, those meetings are held daily.
Given our concerns, two weeks before the end of December, we decide to redo the entire forecasting process, matching inventory against backlog, to reconfirm that we can sprint to make the quarter. The word goes out to "just do it." We display bar graphs of revenue vs. plan in every building to make sure employees are well informed on how their profit sharing is going.
Wall Street reacts
Everybody worked hard, but we only achieved an earnings per share (EPS) of 15 cents for the quarter, vs. the analysts' expectation of 20 cents. Wall Street responded in the usual manner: Cypress's stock dropped by $3 5/8 (20 percent) on the next day. Based on the nip-and-tuck timing of the quarter, we did not know until the evening of the final day of the quarter that we would not achieve the numbers. Late that night, I wrote a memo demanding that the divisions give me a dollar for dollar accounting of the $2.4 million revenue miss on $70 million in sales.
No one got excited when the receptionist announced there was a summons server in the lobby. Somehow, we get sued a lot. My old company, Advanced Micro Devices, continues to remind me that I made a mistake in breaking away from them to start Cypress. Big companies like Motorola and National sued us over key employees and trade secrets. And, of course, we have overcome numerous suits from Texas Instruments - the legal firm that also makes some chips (this company has produced 96 percent of its operating profit over the last decade from "licensing operations" while laying off over 20,000 employees).
Whenever we are sued or threatened with suits, I frame the letter and hang it on the long wall in my office, which is now covered with more than 30 frames. I recall, during one negotiation with a small company that was threatening to sue us, asking my secretary to hang an empty frame next to the collection.
When the negotiation broke down to a threat of a suit, I walked over to the empty frame and used Clint Eastwood's famous line, "Make my day." They decided not to sue. At that time, our litigation record was perfect: We had never capitulated to a threat, lost a legal action, or paid a penny over legal issues to anyone.
The plaintiffs go on the attack
But this lawsuit was different. It was simple legal extortion, as practiced by professionals. Weiss & Yourman won out as the sole lead plaintiff among four class-action lawsuit firms squabbling over what they assumed would be a lifeless carcass. Kevin Yourman's initial legal complaint was an infuriating joke.
I've spent my life building things, creating jobs and demonstrating integrity. And now, a Los Angeles lawyer has labeled me a crook guilty of "fraud and deceit." (Yourman seemed to be unembarrassed by the fact that I bought 20,000 shares of stock during the period in which he claimed Cypress officers were dumping shares, thereby defrauding our investors.)
The charges regarding the alleged fraud consisted of a series of partial quotes taken from newspaper articles and press releases, such as, T.J. says, "Our backlog hit a record at quarter-end."
These quotes were then combined with the reality of a share price drop due to the 5 cents EPS problem to "justify" the fraud allegation. Yourman's claim was preposterous, but we remembered that a weak claim against Apple produced a $100 million verdict (which was later overturned).
The first big battle was over "discovery," or whether or not the court would allow the plaintiff to go on a fishing expedition through our records in an attempt to put some meat on their skeleton of a complaint. The judge threw out their complaint as substanceless, but later relented to allow discovery.
Nominally, discovery means that the plaintiff can examine your files and talk to your people to gather evidence for his case.
The real impact? In our case, we spent two years and $1 million producing 750,000 pages of internal memoranda for the other side. The discovery victory was a major coup for the predators, who forced us to spend big money and created an opportunity to "prove" their case using Cypress memos.
Once the plaintiff has your documentation, the case changes from one of unprovable speculation to one of disagreement over the interpretation of your documents. While judges are quite willing to throw out cases based on speculation, they are bound to try cases in which there is a dispute over the facts. The plaintiffs now had what they wanted: Cypress headed for a courtroom.
How plaintiffs attempt legalized extortion
The plaintiffs asked for a devastating $120 million in damages, as calculated by a professional "expert witness," one who makes a living testifying that high damages are reasonable.
In addition to suing the company, the plaintiffs had sued me and five other officers of the corporation, personally. Yourman gave notice to the chairman of our board of directors that he would also be deposed; there would be hassles on every front.
The pre-trial phase, which lasted three years, cost Cypress $3 million. At this point, I was convinced that the lawsuit was real, that it would not go away, that there were a few internal documents that, in hindsight, might look bad to a jury, and that there was a possibility we might lose a substantial amount of money if we went to trial despite overwhelming evidence to the contrary.
Let me describe the process by which the majority of class-action lawsuits end. The plaintiffs declare that they have found a "smoking gun" memo and indicate that they are willing to settle the case. The defendant, by then weary of the suit, poorer by several million dollars, concerned about a potential big loss and pressed by its board of directors to end the litigation, agrees to negotiate.
The plaintiff makes an offer which the company cannot refuse, typically asking for settlement in the range of only 5 percent to 20 percent of the alleged damages. In our case, that would have been something on the order of $8 million.
The company then assesses the settlement offer. It finds out that its insurance will cover only 50 percent of the settlement, bringing the settlement cost down from $8 million to $4 million.
The lawyers estimate that the cost of the trial will be on the order of $3 million. The company thus faces a simple choice: pay $3 million, go through the agony of a trial, and face the possibility of losing $120 million or, pay $4 million, deny that you have done anything wrong (as your shareholders ask, "Why are they paying?") and walk away with a guaranteed result.
Half of the member companies of the American Electronics Association have been sued in this manner. All but 4 percent of that group have chosen to settle, primarily because the terms of the settlement agreement were designed to force settlement as a "good business decision."
Although modest relative to their demand, the proposed settlement is large enough to pay the plaintiffs' lawyers millions of dollars, and a handsome bounty to the token shareholders.
In our case, two of the three token shareholders had been involved in several class-action lawsuits and the third, Frederick Rand, had been a plaintiff in 18 class-action lawsuits. One would think that an investor so colossally inept as to have been defrauded 18 times would get out of the business.
In a class-action suit against computer-maker Silicon Graphics, the token shareholder was actually the college-aged daughter of the stockbroker of the class-action lawyer who sued the company!
Finding inspiration from a bumper sticker
Unfortunately for the lawyers who attacked us, Cypress has one of the fighting 4 percent CEOs, not one of the 96 percent capitulating CEOs. On my way to work one morning, I traveled behind a beat-up pickup truck, which apparently belonged to an NRA member. The bumper sticker stated, "They will take my gun away from me when they pry it from my cold, dead fingers."
Shortly after I arrived at work, the inevitable offer to settle came through. The plaintiffs indicated that they had the memo that would do us in, but that they were generously prepared to negotiate. I sent my response back through our lawyers: "The plaintiffs will get their first nickel out of me when they pry it out of my cold, dead fingers." I refused even to meet with the class-action lawyers, whom I consider to be a low-life form, somewhere below pond scum.
For those who make the mistake of rejecting "reasonable" offers for settlement and insulting class-action lawyers in general, the next step is to endure corporal punishment administered during the deposition process.
In a recent three-week trial against TI, which involved 25 patent issues for judgment, I spent only two days in depositions. The depositions in our class-action suit, on the other hand, related only to a series of memos, but took three full days.
On one day, I was presented with a 36-page document which I had written. I was asked to state under oath that the document was completely true. The plaintiff's lawyer demanded that I go through the large document line-by-line to authenticate its contents.
He later tried the same stunt on my 350-page book, by threatening to make me go through it line by line. That absurdity was ended by a call to the magistrate, who told Yourman to ask relevant questions or to terminate his deposition. Yourman also questioned me on my net worth, a grade school ploy to scare me into believing he might bankrupt me personally.
The last major legal battle prior to the trial itself was over our motion asking the judge to grant a "summary judgment" dismissing the case. The criteria for dismissal are very rigorous: Your attorneys must show that there are no disputed facts between the defendant and plaintiff and that the facts to which the parties agree do not constitute fraud in any way. Our judge threw the case out with the following commentary:
"No reasonable jury could find that any of Cypress's statements were false or misleading . . . . Defendants' motion for summary judgment (to dismiss the case) is GRANTED in its entirety."
Yourman's next step is to appeal. For $50,000, he can play the lottery one more time for the $120 million jackpot. I believe Yourman's appeal will fail. By that time Cypress shareholders will have spent $4 million and lost countless management hours defending a lawsuit that had no merit when it was filed. It will then be payback time: We will initiate legal action to recover the damages inflicted on Cypress shareholders by Yourman's prosecution.
We will spend a few more million dollars and lose more management time, but it doesn't matter. It's time to clean up the pond.
-T.J. Rodgers is president and CEO of Cypress Semiconductor Corp. He wrote this article for Perspective
Courtesy The San Jose Mercury News