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Building a strong legal strategy
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Legal Horizons
Building a Strong Legal Strategy Frederick D. Sturdivant and Charles H. Green 11 F r e d e r i c k D. S t u r d i v a n t is M. Riklis Professor of Business and Its E n v i r o n m e n t at Ohio State University. He currently is on leave a n d serving as a vice president in the Chicago office of Management Analysis Center, Inc. Charles H. Green is director of h u m a n resources for Management Analysis Center, Cambridge, Massachusetts.
Legal advisors can play major roles in an organization's success or failure, yet too often the relationship between manager and counsel is not all that it should be. The authors use a "legal envelope" concept to explain how the relationship should function. rustration, dissatisfaction, role of legal counsel in corporate and even cynicism too often strategy is frequently ambiguous. characterize the relationship We h o p e i n this article to reinbetween executives and their legal force the argument that sensitivity counselors. While there are certain- to legal issues must be a central ly examples of highly effective element of corporate strategy, demanager/lawyer relationships, they velop a backdrop for understanding are far less c o m m o n than one might the complexities of managing this imagine. process, and provide a framework Questionnaires on the subject of for making the process more mancorporate strategy and legal counsel ageable. were sent to 600 selected executives, in-house lawyers, and outside attorneys. Two hundred thirty re- Environmental Necessity sponded, as follows: executives, 65; he idea that there is a link in-house lawyers, 76; outside lawbetween corporate strategy yers, 89. The survey points to a and environmental factors is complex set of underlying issues: hardly a new one. Astute managers (1) when formulating and imple- and students of business planning menting strategy, it is necessary to have long recognized the threats take a close look at the legal ramifi- and opportunities associated with cations; (2) organizational con- competitive, economic, social, pofusion often surrounds the process litical, technological, and legal of ,getting legal advice; (3) cultural conflicts, reflecting differences in 1. For useful ideas on how to improve the training, perspective, language, and efficiency of this relationship, see A. tL Chayes, B. C. Greenwald, and M. P. Winig, "Managing values, can create a rift between Your Lawyers," Harvard Business Review, lawyers and managers; and (4) the January-February 1983: 84-91.
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Business Horizons / MayoJunc 1985
"If a manager breaks the envelope, the consequences can be disastrous not only to the company, but to the individuals involved. Yet a manager who never tests the limits of the envelope may well be foregoing significant opportunities or even creating long-term business risks." 12 forces. In recent years, legal issues have exploded in importance. Consider just a few examples: • American. Telephone & Telegraph is broken up when an antitrust suit brought by the Department of Justice is settled. As a consequence, AT&T and the entire telecommunications industry are shaken to their roots. • Product liability cases involving companies such as Firestone, Procter and Gamble, and Ford Motor Company expose companies to huge damages. • Worker health damage claims against Manville result in that corporation's declaring bankruptcy. • Unfriendly tender offers result in prolonged and costly struggles between such giants as Mobil and U. S. Steel, Bendix, Martin Marietta and Allied, and Gulf Oil and its suitors. • -Parker Brothers loses its monopoly on the tradename "Monopoly" because it failed to provide the public with a generic term to describe its classic board game. • Class-action suits for alleged price-fixing expose companies such as Weyerhaeuser, Georgia Pacific, and Mead Corporation to billions of dollars in possible damages. • Deregulation of the airlines and other industries produces an uncertain and far less stable context in which to compete, as evidenced by the actions of Continental Airlines. • Notwithstanding a move. to-
ward a reduced role for government in the private sector, the head of the antitrust division of the Justice Department proposes that all telephone conversations between chief executives should be banned unless they are tape recorded. Executives who are willing to ignore these and other legal realities can create significant threats to the success of their businesses. On the other hand, the legal environment can provide substantial opportunities for those who are creative enough to plot new courses through this changing landscape. To put this legal strategy issue in perspective, executives might consider the test pilot's notion of the "envelope" as described by Tom Wolfe in his best-selling book, The Right Stuff This envelope represents the boundary of what is possible in supersonic aircraft. The pilot who pushes the limits of the envelope-facing the catastrophic risks of puncturing it--is a pilot who, as Wolfe says, has "the right stuff." A pilot who stays fearfully away from the edges of the envelope lacks the right stuff and is fit only for mundane duties like flying transports. Wolfe's concept provides a useful analogy for considering corporate strategy and the law. The law can be viewed as a "legal envelope" to the manager. If a manager breaks the envelope, the consequences can be disastrousnot only to the company, but to
the individuals involved. Yet a manager who never tests the limits of the envelope may well be foregoing significant opportunities or even creating long-term business risks. Testing the limits of the legal envelope can, in fact, pay off. MCI, for example, is a corporate gnat in relation to AT&T. Aggressive legal action on MCI's part has made millions, however, and the company boasts that its biggest R&D expenditure is "Legal R&D," and that its law department is its largest profit center. Most important, by aggressively pursuing its rights in the marketplace, MCI has created substantial growth opportunities for itself and other long-distance providers outside the Bell System. MCrs case may be extreme, but it does highlight the fact that legal considerations should be an integral part of corporate strategy. A recent study by a seminar at the Harvard Law School suggests that it is not u n c o m m o n for lawyers to be "involved in strategic planning.'2 In our survey of executives and lawyers, 86 percent agreed that attorneys should be an important resource in formulating strategy; 75 percent thought that they should play an important role in implementing strategy. However, executives are not likely to deal as systematically as they might with either legal threats or opportunities 2. " A New Corporate Powerhouse: The Legal Department," Business Week, April 9, 1984: 67.
Building a Strong Legal Strategy
unless they understand the organizational, cultural, and role ambiguity problems that generally get in the way of using legal counsel effectively. Organizational Confusion rganizations, because they ,are made up of people, are normally less tidy than the nicely drawn charts with boxes and solid or broken lines would suggest. The special case of organizing for the effective use of legal advice can be especially messy. The organizational process is marked by the usual line and staff concerns and conflicts. There is the added complexity that most companies use the services of outside as well as inside counsel. Furthermore, general counsel, whether inside or outside, is frequently a member of the board of directors. Line/Staff Roles. Although the issue of line versus staff roles will not be explored in depth, the potential for confusion and conflict should at least be noted. For example, one of the CEOs who responded to the survey suggested that the role of lawyers was like "other s t a f f - s t a f f supports decision-making processes of managers by opening up choices, helping to evaluate choices, and formulating a value system." In short, the staff advises and the line makes decisions. The line possesses ultimate power. At the other end of the spectrum, others expressed concern .about lawyers "controlling and limiting decision alternatives." This second view suggests far greater power for the lawyers]staff. Inside vs. Outside Counsel. Organizational complexity is compounded b y the question of whether to seek legal advice from internal or outside counsel. It is a classic form of the " m a k e / b u y " decision. When do we rely on in-house counsel? Under what circumstances do we go outside? When do we need some combination of the two? What are their comparative advan-
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tages in terms of expertise and house counsel and end up becoming cost? Does the outside counsel re- an essential part o f management-port to the head of our internal very often running the company. legal staff or directly to senior Outside counsel are "defensive" by management? Our survey produced nature-that is the function o f the no consensus on these questions. In law firm--that is where "no" lawgeneral, the respondents said, "It yers are found. These are two entirely different roles to be filled: depends on . . . . " In response to questions con- house counsel are for creativity, cerning the relative advantages of management, and planning. Law in-house versus outside counsel, the firms are for defense, trials . . . . A partner from a large Denver following differences of opinions law firm offered a different view: were expressed: Inside counsel have an advan• Seventy-five percent of the executives and 94 percent of the tage [with respect to knowledge o f the company], but the much greatin-house lawyers agreed with the statement, "In-house lawyers have a er disadvantage o f subservience and major advantage over outside couno f receiving less resp ec t. The president of a large division sel because of their greater familiarity with the c o m p a n y and its of a major aerospace company expeople." Only 45 percent of the pressed this concern: I believe we go to outside counoutside lawyers agreed. • The statement, "Outside coun- sel too often (and at needless exsel are generally a better source of pense) to reassure ourselves on deciadvice for managers than inside sions made internally by lawyers lawyers because of their wider ex- and management. There has been a significant perience and objectivity," drew a positive response from only 32 per- move b y companies to bring more cent of executives and 13 percent legal work inside. 3 While there are of inside lawyers, while 90 percent clear cost advantages, the trend is of outside lawyers believed this was b o u n d to be controversial because of the question of relative expertise tru e. All three types of respondents and objectivity. Board Membership. The comdid agree that inside and outside plexity of these organizational matcounsel are different. A majority of each type affirmed that the two ters very often reaches the board sources of legal advice "bring to level. A nationally known partner bear significantly different perspec- in a prestigious Washington law tives when issues of corporate firm noted: My own experience is that the strategy are at stake." The complexity of these organi- most practical use o f outside counzational issues is captured in the sel is to have principal contact comments of survey participants. through inside counsel This may The president of a financial services vary from company to company, c o m p a n y listed on the NYSE of- especially where outside counsel are fered a view concerning the relative directors or where there is a close merits of inside and outside coun- relationship with the chief execusel, and also touched on a com- tive officer. monly voiced criticism of the role In many companies it appears lawyers play in offering advice: that the ultimate source of legal The most valued lawyer is a sensitivity and guidance is assumed "yes" lawyer, one who helps his to be housed in the board of client accomplish his objectives. directors in the form of one or lawyer-directors. Another These are limited to 5 percent o f more the total Most are "no" lawyers: Washington lawyer offered a slmrp"You can't because . . . "" The 3. Ibid. "yes" lawyers generally become
ly contrasting rule of thumb: A lawyer who gives (or whose firm gives) regular corporate advice should not be on the board. He expressed concern over an inherent conflict of interest. These sources of organizational confusion suggest the difficulty of managing the legal aspects of corporate activities. At a minimum, it is critical that the responsibility for legal affairs and the process by which they are to be managed be made as explicit as possible. 14 Cultural Issues hatever the organizational relationships between lawyers and managers, there seems to be a cultural barrier that often blocks teamwork. These cultural conflicts may be rooted in the,differences in training, perspective, language, and values (87 percent of the respondents thought lawyers are generally more conservative and less willing to take risks). Lawyers are often the brunt of managers' jokes, doubtless inspired early in life from reading Shakespeare's exhortation to "kill all the lawyers." It is well known that humor often masks fear or hostility with respect to "outsiders," as is true of ethnic jokes. For whatever reason, the view that
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lawyers are somehow different seems to prevail. That view can keep managers from forming effective working relationships with their legal advisors. Perhaps lawyers lack what Peters and Waterman call "believability and excitement," two attributes of executives found to be critical by them in their search for excellently managed companies: On the first count, believability, we find that our value-infused topperforming companies are led by those who grew up in the core o f the business . . . . The star performers are seldom led by accountants or lawyers. On the second count, excitement, Howard Head, investor and entrepreneur, father o f the Head ski and the Prince tennis racket, exhorts: "You have to believe in the impossible. '~ Even some lawyers feel they lack certain of these qualities. "The role of lawyers in formulating and implementing corporate strategy," argued one of the attorney respondents, "is not as key a role as most of us think it is. The b o t t o m line is we simply are not generally creative enough." Clearly, attitudes of managers toward lawyers play a very large role in this process as do 4. T. J. Peters and 1L H. Waterman, Jr., In Search o f Excellence (New York: Harper and Row, 1983): 84.
attorneys' attitudes and self-perceptions. A respondent from a major Chicago law firm summed up the working relationship between lawyers and managers nicely: The nature o f the relationship depends on personalities and, to a large extent, attitudes toward lawyers o f the senior management, which affect attitudes o f the critical middle management group. The senior vice president and general counsel for a Washington, D.C.-based trade association reflected a view held by many survey participants concerning the sins on both sides of the relationship: All too frequently lawyers are perceived by managers as hurdles, naysayers. This is a problem f o r lawyers to overcome. Both lawyers and managers have an opportunity for constructive interchange, and can benefit from each other's perspective and insight if both give it a try in an atmosphere o f mutual respect. Sometimes lawyers are too. dogmatic (they employ the mystique, "It is so because I say so"). Apparently, some attorneys work at building this image. The president of a manufacturing company with a three-lawyer in-house legal staff suggested that "outside lawyers have more influence because they are not underfoot, and they do work harder in maintaining a mystique." Role Confusion. One of the most significant consequences of factors such as "mystique," value conflicts, and differing perceptions is confusion about the role lawyers should play in shaping and implementing corporate strategy. One of the statements in the survey that produced a remarkable level of agreement was: "Companies tend to experience legal problems because managers fail to consult with their lawyers before making decisions." Eighty-six percent of the executives, 91 percent of in-house lawyers, and 93 percent of outside attorneys agreed. And yet questions about the specific nature of the role
Building a Strong Legal Strategy
tO be played--that is, how lawyers should be u s e d - p r o d u c e d far less agreement. Unfortunately, there was agreement on a negative dimension of the role lawyers play. When we stated, "Executives have a good point when they complain, 'I wish the lawyers would stop telling me what I can't do and start telling me h o w to do what I want,'" 83 percent of the respondents agreed. Harvard political scientist J o h n Steinbrenner notes this problem among staff advisors in general: "It is inherently easier to develop a negative argument than to advance a constructive one." He recalls that Secretary of State Dean Acheson once said to an advisor to President Truman, " Y o u think Presidents should be warned. You're wrong. Presidents should be given confidence. ''s To some extent this role ambiguity and conflict is both natural and inevitable. A lawyer's primary function is to give legal advice-often cautionary or protective in nature--while a manager is usually aggressive and innovative. It appears, however, that this seemingly fundamental conflict is over5. J. D. Steinbrenner, The Cybernetic Theory of Decision (Princeton, N.J.: Princeton University Press, 1974): 328-32.
emphasized, for it implies an inability on the part of managers and their counsel to agree on what counsel's strategic role really is. This is not a trivial problem; there are countless examples of corporations that recklessly failed either to heed or explore the limits of the legal envelope. However, many companies have significantly improved their performance by correctly linking their legal stance and corporate strategy. What seems to be needed is a conceptual framework for linking business strategy and corporate legal strategy. When should a company pursue an aggressive legal strategy? For what companaes should the legal budget be directed primarily at protecting the firm's legal rights? This article is designed to provide some practical insights to a variety of corporate legal/ strategic alternatives. Legal Strategy Framework rom a strategic perspective, it is possible to identify three basic types of stances a company can assume in its legal program. As shown in the Figure, these postures may be labeled as creative, preventive, and enforcive. A company will use a mixture of these strategies; the important issue is
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whether the overall mix is strategically correct for that company. A preventive strategy is the most common. It is viewed b y 74 percent of the respondents as a significant role for counsel. This strategy focuses on reviewing contracts, instituting document retention programs, reviewing sales pract i c e s - i n short, the kinds of activities that prevent a disastrous puncturing of the legal envelope. Antitrust law, in particular, implies the need for preventive strategies--companies with reason to be concerned 15 about antitrust issues will likely weight their legal strategy toward preventive actions. As the term implies, however, a preventive stance is taken to avoid problems, not to address them head-on. A more active legal strategy is one of enforcement. Because laws exist not only to punish the guilty but also to protect the innocent, corporations are entitled to protect their rights through vigorous application and enforcement of the law. Examples include patent-infringement suits, private antitrust actions, and breach-of-contract litigation. Not all legal activity, of course, involves litigation. A strategy of legal enforcement is also appropriate for firms with brand names in danger of being classified as generic terms. A friendly reminder
Types of Legal Strategies Preven tire
Crea tire Objective
Identify strategic alternatives with optimal benefits and acceptable legal risks.
Examples
* Takeovers: - - Offensive - - Defensive * Identification of "loopholes" * Getting the law modified
Lawyer's/ Manager's Perspec tire
Lawyer attempts to view the world principally through the manager's eyes.
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Enforcive
Implement company s t r a t e in a way that avoids legal problems.
Protect the legalrights of the company against competitive and other t h r e a t s .
* Document review and retention * Program reviews for legal implications * Antitrust compliance program * Providing FTC advertising substitution d a t a
* Patent infringement * Trademark protection * Litigation when necessary -- Private antitrust suits - Bait and switch litigation
Manager attempts to view the world through the lawyer's eyes and to sensitize others to possible legal problems,
Lawyer draws principally on legal training and capabilities with strategic guidance from m an a g e r .
gies
"Preventive legal strategies are unique in at least one respect they gain notoriety only when they fail. If properly executed, a preventive strategy never makes the headlines." 16 to members of the media that a Chiefs of Staff need to understand farm implements. It sells through a name is a registered trademark and the overall mission, share the Presi- network of company stores and is not to be used generically may dent's perspective, and assure him independent dealers. As a result of well be sufficient. In spite of its of a full understanding of the mili- a change in marketing strategy, J. I. apparent importance, only 52 per- tary resources available to achieve Case launched a program designed cent of the survey respondents saw the mission. to appeal to owner-managers o f enforcement as a major role for To continue the metaphor, the large farms. This promotional procouosel. preventive role of the military is to gram was designed to increase Finally, there is the creative counsel the President on the appro- Case's market share in large-horselegal posture, which is more aggres- priate level of defense needed to power tractors. Company stores sive. At its best, this stance involves deter aggression by others. The and larger dealers tended to have using legal knowledge as a creative essence of this role may be cap- among their customers a disproporelement in formulating c o r p o r a t e - ) t u r e d by the term "preparedness." tionate number of larger farmers. In The objective is to avoid the use of 1978, several smaller dealers alleged strategy. It is, above all, active military might. rather than reactive and sometimes that the promotional campaign disWhen such weapons are em- criminated against them and was in even involves efforts to change the law. It was the role that lawyers ployed in order to enforce U. S. violation of the Robinson-Patman rights, the military should seek to Act. There was danger of a classmost favored: 82 percent of the win its objectives within the bounds action suit, but the cases were resp6ndents expressed the opinion established by the President. This ultimately brought individually. that lawyers should devote their extreme form of policy is to be efforts to creative strategies. While Case escaped with minor A useful metaphor in consider- avoided, but when necessary it damages, it was highly vulnerable to ing the nature of these three strate- brings to bear the special expertise a class action. In retrospect, Case gic postures is the relationship be- of the military, and these experts needed a more effective preventive tween the President and his military should be given far greater weight strategy. A key element of such a advisors. In formulating foreign in determining overall strategy. strategy is a simple, but formal, policy, the President certainly review process by counsel of all needs to consider the military Preventive Strategies major marketing programs. A reaspects of international relations. Preventive legal strategies are view process probably would have U. S. policy in the Middle East is unique in at least one respect--they identified the risk in time to anaaimed at achieving a peaceful reso- gain notoriety only when they fail. lyze whether any dealers would lution to ancient disputes. Yet this If properly executed, a preventive have sufficient grounds to bring a policy aimed at peace involves the strategy never makes the headlines. class-action suit and to make any creative use of military power, It follows that most well-known necessary changes to the program. whether it be as a participant in a examples in this area derive from Another example of insufficient multinational force in Lebanon or failures. A major division of preventive effort involves General in providing AWACS to Saudi Tenneco provides one such ex- Foods. In 1963 the FTC charged Arabia. In such cases, the Presi- ample. General Foods with violation of dent's strategy is multifaceted and The J. I. Case Division of Ten- Section 7 of the Clayton Act for its not essentially military. To serve neco is a major manufacturer of 1957 acquisition of S. O. S., Inc., the President effectively, the Joint light construction equipment and maker of S. O. S. steel wool soap
Building a Strong Legal Strategy
pads. The FTC charged that the acquisition gave General Foods undue power over the "household steel wool" market. Thus defined, S. O. S. held a 50 percent market share. This narrow definition of the market was crucial to the FTC's case, for it excluded plastic scrubbers and products for cleaning ceramic or Teflon-coated pots and pans. Unfortunately for General Foods, the FTC supported its market definition with citations of instances in which General Foods itself had behaved as if this were the market. The FTC cited a preacquisition study done by General Foods, as well as marketing studies prepared by outside firms, all of which referred to the "steel wool soap pad market." The acquisition study concluded S. O. S. would give GF '~a dominant position in a tight little specialty market." The company's own analysis referred to plastic scrubbers as "complementary rather than competitive." Arguing in court for a broader market definition, therefore, GF found itself in the unenviable position of pushing for the inclusion of competitors of which GF's own general manager admittedly was unaware. General Foods lost the case. This case shows the need for a preventive strategy that includes document review and retention. Internal planning materials or marketing research studies proclaiming " m a r k e t dominance" or reflecting unusually high market-share figures should be appraised in terms of whether these conclusions are based on a realistic definition of market boundaries or whether they are filled with puffery. This is not an argument for distortion or concealment. A preventive legal strategy assesses the accuracy of the data contained in these documents and their implications. The S. O. S. case may appear dated. In 1981, however, a subsidiary of the Pillsbury Company was sued by a small competitor for
monopolizing the cake-decorating supply and equipment market. As evidence, the small company cited five-year plans stating seemingly precise and remarkably large market shares in a narrowly defined market. Pillsbury argued during the trial that the planning documents were inaccurate and the market definition was too narrow, but its position obviously was difficult. Pillsbury, too, lost its case and paid $5 million in damages. Besides being most evident when they are absent, preventive legal strategies have one other distinguishing characteristic. Because they so often involve reviewing internal documents such as contracts and plans and their retention, they require extensive interaction of counsel with a number of managers in the company. This interaction, in turn, may make preventive strategies better suited to the in-house legal staff than to outside counsel. The company's legal department is far more likely than outside counsel to have the breadth of contacts, exposure to daily business decisions, and understanding of the organization's culture, all of which are important to the implementation of preventive strategies. Enforcement Strategies
Unlike preventive strategies, effective enforcement strategies are often highly visible; in fact, visibility is very often an important part of their success, since part of the strategy is to "send a message." U. S. Pioneer, for i n s t a n c e - a leader in the field of high-fidelity equipm e n t - d e m o n s t r a t e d that it would not sit meekly by while retailers exploited its name. A large retailer in the Midwest was found to be engaged in the practice of bait-andswitch techniques, using U. S. Pioneer products as the bait. A1thot~gh U. S. Pioneer products were heavily advertised at attractive prices by the retailer, sales clerks for the retailer allegedly made disparaging remarks about the quality
of Pioneer products and frequently succeeded in switching customers to competing products with higher profit margins. U. S. Pioneer enforced its rights by bringing action, under state law, against the retailer. It not only won a substantial settlement but also, as a result of extensive trade press coverage of the trial, sent an important message to other retailers throughout the country. Suits involving patents are perhaps the clearest examples of enforcement strategies. The stakes can 17 be high. In 1976, for example, Kodak introduced a " m e - t o o " instant camera and film to compete with Polaroid's SX-70. After five years of legal scuffling and unsuccessful negotiations, Polaroid went to court in 1981 to charge Kodak with patent infringement. Kodak argued that Polaroid's patents were trivial. Polaroid countered by quoting Kodak itself as hailing the SX-70 as "a masterpiece of engineering." If Polaroid's enforcement strategy turns out to have been well-planned, it stands to gain tens of millions in royalties. If not, it can expect more competition. As Harvard Law School Professor Phillip Areeda has noted in a Wall Street Journal article concerning patent infringement cases, "There is a lot of litigation that is filed for strategic purposes.' '6 Enforcement strategies need not involve litigation. Trademark protection, for instance, is frequently pursued outside formal legal channels. A good example is provided by Rohm & Haas, makers of Plexiglas acrylic sheet. Its lawyers routinely scan store advertisements for mention of "Plexiglas." When they find one, undercover shoppers visit the store and send the purchased product to the Rohm & Haas laboratory. If testing shows the product is not Plexiglas, Rohm & Haas issues a warning to the retailer. If the warning does not 6. The
1981: 27.
Wall Street Journal, October 21,
work, the company may sue. Xerox, which faces a similar situation, chooses to enforce its trademark in large part through a letterwriting campaign admonishing those who misuse the Xerox trademark in p r i n t The Coca-Cola Company has been noted for its aggressive enforcement of its rights to the name "Coke." Parker Brothers learned a lesson in not providing a generic alternative to describe its famous "Monopoly" game. 18
Creative Strategies Perhaps the most challenging circumstances are those requiring what we have termed management's creative use of legal resources. Because they often do not reach the courtroom, such examples tend to be forgotten b y managers and lawyers alike. Yet these types of situatior~s are frequent and have significant consequences. One of the survey respondents captured the nature of creative strategy especially well. The vice president and general counsel of a Fortune 500 company wrote: The minimum role o f lawyers is to assist management to formulate and implement strategies which are legally permissible and do not crea[e unforeseen legal liabilities. To fulfill his function, the lawyer should be innovative in finding new courses within the law by which management can accomplish its objectives. To be effective, the innovativeness should enable management to accomplish its objectives with fewer legal constraints or more legal flexibility than other companies under similar circumstances. When Federal Express launched its revolutionary small package delivery system in 1973, for example, it purchased small jet aircraft, not because they were more efficient, but because it allowed the company to qualify as an air taxi operator. Had its planes been larger, Federal Express would have been under CAB control and subject to numerous regulations. Subsequently, the company lobbied successfully
to get the law changed. It then was able to fly the largest planes available. Takeover situations afford many examples of creative legal strategies. In 1981, Ryder System, the truck leasing company, announced it had acquired 4.9 percent of Frank B. Hall & Co., an international insurance brokerage firm, and would seek to acquire more. Hall, like m a n y companies facing acquisition, preferred its independence. A few weeks later, Hall announced that it had for some time been seeking a way to reduce its effective tax rate by investing in a capital-intensive company, and that it had found such a company, Jartran, which happened to be in the truck leasing business. Hall's acquisition of Jartran, of course, erected substantial antitrust barriers to any further acquisition efforts that Ryder could make on Hall. Defensive acquisition is not the only creative legal strategy available to takeover targets. In 1978, for instance, Occidental Petroleum made an offer for the Mead Corporation. Four months later, Occidental withdrew, citing the "ferocity of Mead management's opposition." In this case, ferocity was the mother of invention. Mead and its legal defense team developed a number of creative legal strategies. The process had begun years earlier, when Mead retained Joe Flom of Skadden, Arps, Meagher, Slate and Flom as insurance against just this sort of takeover° Mead's battle was launched with a detailed, carefullywritten letter to shareholders, spelling out Occidental's financial and legal difficulties; the letters were also provided to the press. Mead contrasted its reputation for corporate citizenship with that of its suitor. Both of Dayton's newspapers editorialized that Mead management had been a corporate good neighbor. Mead uncovered a management practice used by Occidental-requiring Occidental direc-
tors to submit signed, undated resignation letters-that would create SEC problems for Occidental. Mead's lawyers also won a ruling permitting them to review Occidental's sensitive payment files. The Ohio Division of Securities ruled that Occidental's information provision was inadequate. When it was all over, Mead's multifaceted creative strategy succeeded. Creative offensive strategies also reap rewards. Indeed, in a number of instances a new product concept depends on what can be termed a creative modification of the legal environment. Merrill Lynch and the creation of its Cash Management Account product is a good example. Critical to the development of this product was the ability of Merrill Lynch to provide certain banking services (checking accounts and debit cards). Given the existing b o d y of law covering banking services in this country, Merrill Lynch appeared to be precluded from such a venture. But contractual relation, ship with Banc One of Columbus, supported by communications satellites and sophisticated computer technologies, enabled the large brokerage firm to offer Cash Management Accounts and their banking-related features throughout the United States. J o h n Fisher, senior vice president of Banc One, described this joint venture as "a synergistic effort which skillfully guided Merrill Lynch and Banc One around the SEC and various banking laws." The Right Mix he preceding examples illustrate alternative types of legal strategies. Because managers seldom think strategically about the use of legal counsel, this framework provides the basis for at least beginning to structure their thinking in this area. Clearly, no company can afford to limit its legal thinking to any one strategy. Varying circumstances require it to mix strategies.
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Building a Strong Legal Strategy
"All else being equal, the greater the degree of environmental change, the more critical will be creative legal strategies." 19 Change and Visibility The mixture of legal strategies is influenced primarily by two factors: the degree of environmental change facing a. company, and the level of corporate visibility. Environrnental change--such as shifting industry structure, technology, social trends, changing business economics, and sudden shifts in strategy by one or another competitor--can pose a fundamental threat or opportunity. In the previous examples, MCI, S. O. S., U. S. Pioneer, Merrill Lynch, and Federal Express all faced environments that were significantly changing (or that they were causing to change) in some way. The other factor, corporate visibility, includes such indices as market share, brand image, degree of channel power, degree of consumer awareness, and use of the product. (For example, product failures of drugs or commercial aircraft are more "visible" than those of fasteners or pencils.) In this sense, both Pillsbury and Polaroid are highly visible companies. Each of these factors carries implications for legal strategy. All else being equal, the g e a t e r the degree of environmental change, the more critical will be creative legal strategies. When technologies are shifting, cost factors changing, new competitors entering, or tender offers being proposed, a company is faced with more threats and opportunities than in a stable environ-
ment. Just as they demand new business approaches, new threats and opportunities require new legal approaches. MCI and Merrill Lynch both saw opportunities in changing their legal environment and tailored their strategies accordingly. Mead and Hall, faced with a significant threat from a changed environmental factor, developed defensive creative strategies. By contrast, a firm facing a low degree of environmental change has a vested interest in retaining the system-unless it wants to change the environment radically by changing its business strategy. The principal legal strategy for such a firm may be one of e n f o r c e m e n t using the law to keep customers, competitors, and new entrants from introducing change into the environment. Rohm & Haas and Polaroid are examples of enforcement strategies aimed at retaining the status quo. The degree of corporate visibility has an impact primarily on the need for a strong preventive strategy. The more visible a firm, the more important is the legal "insurance" provided by a strong preventive strategy. AT&T was far more vulnerable to potential antitrust charges than MCI was. Had J. I. Case been an insignificant factox in the tractor business, it might not have needed to worry about class-action suits. Had Pillsbury's cake-decorating subsidiary been independent, a lawsuit might
not have looked as attractive as it did with a "rich" parent. Implications The notion of a mix of legal strategies has several implications. The most obvious is that it provides a framework for discussion between managers and their legal counsel, a framework that too often is lacking. The model also carries implications for human resource allocation in a corporation's legal effort. If management and counsel believe they need more efforts in prevention strategy, that decision may suggest a shift in legal resources toward in-house counsel, given the extensive contact required between executives and counsel by that strategy. Conversely, a company facing a changing environment needs highly creative, aggressive counsel, whether in-house or outside. The case of highly visible companies in rapidly changing environments is particularly challenging. Such a company needs to emphasize both preventive and creative strategies. These strategies require different mind sets. It is a rare lawyer who can think with equal facility in preventive, cautionary terms and in creative, aggressive terms. One mind set requires avoiding the envelope's limits, and one requires testing them. For such companies, it may make sense to "specialize" legal
"It is a rare lawyer who can think with equal facility in preventive, cautionary terms and in creative, aggressive terms. One mind set requires avoiding the envelope's limits, and one requires testing them." 20 resources by strategic focus. Lawyers would be assessed on the basis of whether they are best equipped for creative,, preventive, or enforcive r o l e s - a n d that probably has more to do with personality and attitude than with which law school they attended. Some individuals seem inherently more creative. Others enjoy the meticulous detail work associated with prevention. Still others are likely to enjoy the more aggressive posture of "chief enforcement officer." In sum, legal advisors need to be selected on the basis of competence and their fit with the client's mix of legal/strategic requirements. Perhaps the most demanding situation represented by the model is that of companies experiencing a dramatic shift in their environment. As the AT&T restructuring process is implemented, for example, many have suggested that local phone rates may increase dramatically. If i this happens, a Bell operating com~pany will be transformed from a relatively stable, benign, low-visibility firm to a highly visible entity thrust into a dynamic environment. Previously such a company would have spent a great deal of legal effort in an enforcement mode; for example, negotiating with utility commissions. Its new situation would demand a shift to preventive and creative strategies-a rather dramatic change. All of this discussion of legal strategy presumes, of course, a managerial culture that promotes
teamwork with counsel. In a per- only when criminal laws are apsonal interview with a leading anti- plicable. A n effective principle for a trust lawyer, the opinion was of- lawyer's guidance is that business fered that "the most creative legal corporations do not have legal ideas can be stifled in a corporate problems; they have business probenvironment where you dare not lems in which legal considerations make mistakes. In effect, they force may be more or less important, you to take the safe, often sub- depending on the circumstances. optimal path." One of the survey Through it all, the lawyer must respondents, an attorney with 31 maintain and help management years of experience and a member maintain high standards o f ethics of a firm with over 270 lawyers, an d fairn ess. wa'ote in a similar vein: itigation and other legal matters Legal strategy varies according ve become a central aspect of to the requirements o f the client.. contemporary management. • . [Critical to this process are] the ] It is necessary, therefore, to give astuteness and open mindedness o f considerable attention to the legal management; the interrelationships l environment in formulating and imbetween senior management and plementing strategy. The concept other managers; their perception o f lawyers as "counsel" or as h i r e d of a legal "envelope" suggests a guns . . . . Some managers continue i balanced approach; its boundaries to have (1) a dim view o f all~ must be sometimes avoided, at lawyers, (2) a dim view o f h o u s e other times tested. To decide which counsel, or (3) a perception that all times are which, management and lawyers, because they are licensed, counsel need to adopt a jointly are interchangeable for all purposes. acceptable model of the role of An in-house counsel offered legal counsel in corporate strategy. Today's implicit model, which similar advice to lawyers: The lawyer must, by example, pits management and counsel on demonstrate that he is on the same opposite sides of the legal "enteam as the manager• His advice and velope" issue, is inefficient , shortservice must be business oriented, sighted, and dangerous on both cast in an action framework. He legal and business grounds. By sortmust assist the manager in finding ing the environment into distinct opportunities to be more effective situations and identifying approthan his competitor. A t the same priate legal strategies, a framework time, he must remember that all for dialogue can be established that business decisions are for the man- leads to coordinated and effective ager to make and that legal con- use of legal talent in the corporate siderations infrequently override environment. V--1 business considerations-ordinarily
Legal Horizons
Building a Strong Legal Strategy Frederick D. Sturdivant and Charles H. Green 11 F r e d e r i c k D. S t u r d i v a n t is M. Riklis Professor of Business and Its E n v i r o n m e n t at Ohio State University. He currently is on leave a n d serving as a vice president in the Chicago office of Management Analysis Center, Inc. Charles H. Green is director of h u m a n resources for Management Analysis Center, Cambridge, Massachusetts.
Legal advisors can play major roles in an organization's success or failure, yet too often the relationship between manager and counsel is not all that it should be. The authors use a "legal envelope" concept to explain how the relationship should function. rustration, dissatisfaction, role of legal counsel in corporate and even cynicism too often strategy is frequently ambiguous. characterize the relationship We h o p e i n this article to reinbetween executives and their legal force the argument that sensitivity counselors. While there are certain- to legal issues must be a central ly examples of highly effective element of corporate strategy, demanager/lawyer relationships, they velop a backdrop for understanding are far less c o m m o n than one might the complexities of managing this imagine. process, and provide a framework Questionnaires on the subject of for making the process more mancorporate strategy and legal counsel ageable. were sent to 600 selected executives, in-house lawyers, and outside attorneys. Two hundred thirty re- Environmental Necessity sponded, as follows: executives, 65; he idea that there is a link in-house lawyers, 76; outside lawbetween corporate strategy yers, 89. The survey points to a and environmental factors is complex set of underlying issues: hardly a new one. Astute managers (1) when formulating and imple- and students of business planning menting strategy, it is necessary to have long recognized the threats take a close look at the legal ramifi- and opportunities associated with cations; (2) organizational con- competitive, economic, social, pofusion often surrounds the process litical, technological, and legal of ,getting legal advice; (3) cultural conflicts, reflecting differences in 1. For useful ideas on how to improve the training, perspective, language, and efficiency of this relationship, see A. tL Chayes, B. C. Greenwald, and M. P. Winig, "Managing values, can create a rift between Your Lawyers," Harvard Business Review, lawyers and managers; and (4) the January-February 1983: 84-91.
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Business Horizons / MayoJunc 1985
"If a manager breaks the envelope, the consequences can be disastrous not only to the company, but to the individuals involved. Yet a manager who never tests the limits of the envelope may well be foregoing significant opportunities or even creating long-term business risks." 12 forces. In recent years, legal issues have exploded in importance. Consider just a few examples: • American. Telephone & Telegraph is broken up when an antitrust suit brought by the Department of Justice is settled. As a consequence, AT&T and the entire telecommunications industry are shaken to their roots. • Product liability cases involving companies such as Firestone, Procter and Gamble, and Ford Motor Company expose companies to huge damages. • Worker health damage claims against Manville result in that corporation's declaring bankruptcy. • Unfriendly tender offers result in prolonged and costly struggles between such giants as Mobil and U. S. Steel, Bendix, Martin Marietta and Allied, and Gulf Oil and its suitors. • -Parker Brothers loses its monopoly on the tradename "Monopoly" because it failed to provide the public with a generic term to describe its classic board game. • Class-action suits for alleged price-fixing expose companies such as Weyerhaeuser, Georgia Pacific, and Mead Corporation to billions of dollars in possible damages. • Deregulation of the airlines and other industries produces an uncertain and far less stable context in which to compete, as evidenced by the actions of Continental Airlines. • Notwithstanding a move. to-
ward a reduced role for government in the private sector, the head of the antitrust division of the Justice Department proposes that all telephone conversations between chief executives should be banned unless they are tape recorded. Executives who are willing to ignore these and other legal realities can create significant threats to the success of their businesses. On the other hand, the legal environment can provide substantial opportunities for those who are creative enough to plot new courses through this changing landscape. To put this legal strategy issue in perspective, executives might consider the test pilot's notion of the "envelope" as described by Tom Wolfe in his best-selling book, The Right Stuff This envelope represents the boundary of what is possible in supersonic aircraft. The pilot who pushes the limits of the envelope-facing the catastrophic risks of puncturing it--is a pilot who, as Wolfe says, has "the right stuff." A pilot who stays fearfully away from the edges of the envelope lacks the right stuff and is fit only for mundane duties like flying transports. Wolfe's concept provides a useful analogy for considering corporate strategy and the law. The law can be viewed as a "legal envelope" to the manager. If a manager breaks the envelope, the consequences can be disastrousnot only to the company, but to
the individuals involved. Yet a manager who never tests the limits of the envelope may well be foregoing significant opportunities or even creating long-term business risks. Testing the limits of the legal envelope can, in fact, pay off. MCI, for example, is a corporate gnat in relation to AT&T. Aggressive legal action on MCI's part has made millions, however, and the company boasts that its biggest R&D expenditure is "Legal R&D," and that its law department is its largest profit center. Most important, by aggressively pursuing its rights in the marketplace, MCI has created substantial growth opportunities for itself and other long-distance providers outside the Bell System. MCrs case may be extreme, but it does highlight the fact that legal considerations should be an integral part of corporate strategy. A recent study by a seminar at the Harvard Law School suggests that it is not u n c o m m o n for lawyers to be "involved in strategic planning.'2 In our survey of executives and lawyers, 86 percent agreed that attorneys should be an important resource in formulating strategy; 75 percent thought that they should play an important role in implementing strategy. However, executives are not likely to deal as systematically as they might with either legal threats or opportunities 2. " A New Corporate Powerhouse: The Legal Department," Business Week, April 9, 1984: 67.
Building a Strong Legal Strategy
unless they understand the organizational, cultural, and role ambiguity problems that generally get in the way of using legal counsel effectively. Organizational Confusion rganizations, because they ,are made up of people, are normally less tidy than the nicely drawn charts with boxes and solid or broken lines would suggest. The special case of organizing for the effective use of legal advice can be especially messy. The organizational process is marked by the usual line and staff concerns and conflicts. There is the added complexity that most companies use the services of outside as well as inside counsel. Furthermore, general counsel, whether inside or outside, is frequently a member of the board of directors. Line/Staff Roles. Although the issue of line versus staff roles will not be explored in depth, the potential for confusion and conflict should at least be noted. For example, one of the CEOs who responded to the survey suggested that the role of lawyers was like "other s t a f f - s t a f f supports decision-making processes of managers by opening up choices, helping to evaluate choices, and formulating a value system." In short, the staff advises and the line makes decisions. The line possesses ultimate power. At the other end of the spectrum, others expressed concern .about lawyers "controlling and limiting decision alternatives." This second view suggests far greater power for the lawyers]staff. Inside vs. Outside Counsel. Organizational complexity is compounded b y the question of whether to seek legal advice from internal or outside counsel. It is a classic form of the " m a k e / b u y " decision. When do we rely on in-house counsel? Under what circumstances do we go outside? When do we need some combination of the two? What are their comparative advan-
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tages in terms of expertise and house counsel and end up becoming cost? Does the outside counsel re- an essential part o f management-port to the head of our internal very often running the company. legal staff or directly to senior Outside counsel are "defensive" by management? Our survey produced nature-that is the function o f the no consensus on these questions. In law firm--that is where "no" lawgeneral, the respondents said, "It yers are found. These are two entirely different roles to be filled: depends on . . . . " In response to questions con- house counsel are for creativity, cerning the relative advantages of management, and planning. Law in-house versus outside counsel, the firms are for defense, trials . . . . A partner from a large Denver following differences of opinions law firm offered a different view: were expressed: Inside counsel have an advan• Seventy-five percent of the executives and 94 percent of the tage [with respect to knowledge o f the company], but the much greatin-house lawyers agreed with the statement, "In-house lawyers have a er disadvantage o f subservience and major advantage over outside couno f receiving less resp ec t. The president of a large division sel because of their greater familiarity with the c o m p a n y and its of a major aerospace company expeople." Only 45 percent of the pressed this concern: I believe we go to outside counoutside lawyers agreed. • The statement, "Outside coun- sel too often (and at needless exsel are generally a better source of pense) to reassure ourselves on deciadvice for managers than inside sions made internally by lawyers lawyers because of their wider ex- and management. There has been a significant perience and objectivity," drew a positive response from only 32 per- move b y companies to bring more cent of executives and 13 percent legal work inside. 3 While there are of inside lawyers, while 90 percent clear cost advantages, the trend is of outside lawyers believed this was b o u n d to be controversial because of the question of relative expertise tru e. All three types of respondents and objectivity. Board Membership. The comdid agree that inside and outside plexity of these organizational matcounsel are different. A majority of each type affirmed that the two ters very often reaches the board sources of legal advice "bring to level. A nationally known partner bear significantly different perspec- in a prestigious Washington law tives when issues of corporate firm noted: My own experience is that the strategy are at stake." The complexity of these organi- most practical use o f outside counzational issues is captured in the sel is to have principal contact comments of survey participants. through inside counsel This may The president of a financial services vary from company to company, c o m p a n y listed on the NYSE of- especially where outside counsel are fered a view concerning the relative directors or where there is a close merits of inside and outside coun- relationship with the chief execusel, and also touched on a com- tive officer. monly voiced criticism of the role In many companies it appears lawyers play in offering advice: that the ultimate source of legal The most valued lawyer is a sensitivity and guidance is assumed "yes" lawyer, one who helps his to be housed in the board of client accomplish his objectives. directors in the form of one or lawyer-directors. Another These are limited to 5 percent o f more the total Most are "no" lawyers: Washington lawyer offered a slmrp"You can't because . . . "" The 3. Ibid. "yes" lawyers generally become
ly contrasting rule of thumb: A lawyer who gives (or whose firm gives) regular corporate advice should not be on the board. He expressed concern over an inherent conflict of interest. These sources of organizational confusion suggest the difficulty of managing the legal aspects of corporate activities. At a minimum, it is critical that the responsibility for legal affairs and the process by which they are to be managed be made as explicit as possible. 14 Cultural Issues hatever the organizational relationships between lawyers and managers, there seems to be a cultural barrier that often blocks teamwork. These cultural conflicts may be rooted in the,differences in training, perspective, language, and values (87 percent of the respondents thought lawyers are generally more conservative and less willing to take risks). Lawyers are often the brunt of managers' jokes, doubtless inspired early in life from reading Shakespeare's exhortation to "kill all the lawyers." It is well known that humor often masks fear or hostility with respect to "outsiders," as is true of ethnic jokes. For whatever reason, the view that
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lawyers are somehow different seems to prevail. That view can keep managers from forming effective working relationships with their legal advisors. Perhaps lawyers lack what Peters and Waterman call "believability and excitement," two attributes of executives found to be critical by them in their search for excellently managed companies: On the first count, believability, we find that our value-infused topperforming companies are led by those who grew up in the core o f the business . . . . The star performers are seldom led by accountants or lawyers. On the second count, excitement, Howard Head, investor and entrepreneur, father o f the Head ski and the Prince tennis racket, exhorts: "You have to believe in the impossible. '~ Even some lawyers feel they lack certain of these qualities. "The role of lawyers in formulating and implementing corporate strategy," argued one of the attorney respondents, "is not as key a role as most of us think it is. The b o t t o m line is we simply are not generally creative enough." Clearly, attitudes of managers toward lawyers play a very large role in this process as do 4. T. J. Peters and 1L H. Waterman, Jr., In Search o f Excellence (New York: Harper and Row, 1983): 84.
attorneys' attitudes and self-perceptions. A respondent from a major Chicago law firm summed up the working relationship between lawyers and managers nicely: The nature o f the relationship depends on personalities and, to a large extent, attitudes toward lawyers o f the senior management, which affect attitudes o f the critical middle management group. The senior vice president and general counsel for a Washington, D.C.-based trade association reflected a view held by many survey participants concerning the sins on both sides of the relationship: All too frequently lawyers are perceived by managers as hurdles, naysayers. This is a problem f o r lawyers to overcome. Both lawyers and managers have an opportunity for constructive interchange, and can benefit from each other's perspective and insight if both give it a try in an atmosphere o f mutual respect. Sometimes lawyers are too. dogmatic (they employ the mystique, "It is so because I say so"). Apparently, some attorneys work at building this image. The president of a manufacturing company with a three-lawyer in-house legal staff suggested that "outside lawyers have more influence because they are not underfoot, and they do work harder in maintaining a mystique." Role Confusion. One of the most significant consequences of factors such as "mystique," value conflicts, and differing perceptions is confusion about the role lawyers should play in shaping and implementing corporate strategy. One of the statements in the survey that produced a remarkable level of agreement was: "Companies tend to experience legal problems because managers fail to consult with their lawyers before making decisions." Eighty-six percent of the executives, 91 percent of in-house lawyers, and 93 percent of outside attorneys agreed. And yet questions about the specific nature of the role
Building a Strong Legal Strategy
tO be played--that is, how lawyers should be u s e d - p r o d u c e d far less agreement. Unfortunately, there was agreement on a negative dimension of the role lawyers play. When we stated, "Executives have a good point when they complain, 'I wish the lawyers would stop telling me what I can't do and start telling me h o w to do what I want,'" 83 percent of the respondents agreed. Harvard political scientist J o h n Steinbrenner notes this problem among staff advisors in general: "It is inherently easier to develop a negative argument than to advance a constructive one." He recalls that Secretary of State Dean Acheson once said to an advisor to President Truman, " Y o u think Presidents should be warned. You're wrong. Presidents should be given confidence. ''s To some extent this role ambiguity and conflict is both natural and inevitable. A lawyer's primary function is to give legal advice-often cautionary or protective in nature--while a manager is usually aggressive and innovative. It appears, however, that this seemingly fundamental conflict is over5. J. D. Steinbrenner, The Cybernetic Theory of Decision (Princeton, N.J.: Princeton University Press, 1974): 328-32.
emphasized, for it implies an inability on the part of managers and their counsel to agree on what counsel's strategic role really is. This is not a trivial problem; there are countless examples of corporations that recklessly failed either to heed or explore the limits of the legal envelope. However, many companies have significantly improved their performance by correctly linking their legal stance and corporate strategy. What seems to be needed is a conceptual framework for linking business strategy and corporate legal strategy. When should a company pursue an aggressive legal strategy? For what companaes should the legal budget be directed primarily at protecting the firm's legal rights? This article is designed to provide some practical insights to a variety of corporate legal/ strategic alternatives. Legal Strategy Framework rom a strategic perspective, it is possible to identify three basic types of stances a company can assume in its legal program. As shown in the Figure, these postures may be labeled as creative, preventive, and enforcive. A company will use a mixture of these strategies; the important issue is
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whether the overall mix is strategically correct for that company. A preventive strategy is the most common. It is viewed b y 74 percent of the respondents as a significant role for counsel. This strategy focuses on reviewing contracts, instituting document retention programs, reviewing sales pract i c e s - i n short, the kinds of activities that prevent a disastrous puncturing of the legal envelope. Antitrust law, in particular, implies the need for preventive strategies--companies with reason to be concerned 15 about antitrust issues will likely weight their legal strategy toward preventive actions. As the term implies, however, a preventive stance is taken to avoid problems, not to address them head-on. A more active legal strategy is one of enforcement. Because laws exist not only to punish the guilty but also to protect the innocent, corporations are entitled to protect their rights through vigorous application and enforcement of the law. Examples include patent-infringement suits, private antitrust actions, and breach-of-contract litigation. Not all legal activity, of course, involves litigation. A strategy of legal enforcement is also appropriate for firms with brand names in danger of being classified as generic terms. A friendly reminder
Types of Legal Strategies Preven tire
Crea tire Objective
Identify strategic alternatives with optimal benefits and acceptable legal risks.
Examples
* Takeovers: - - Offensive - - Defensive * Identification of "loopholes" * Getting the law modified
Lawyer's/ Manager's Perspec tire
Lawyer attempts to view the world principally through the manager's eyes.
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Enforcive
Implement company s t r a t e in a way that avoids legal problems.
Protect the legalrights of the company against competitive and other t h r e a t s .
* Document review and retention * Program reviews for legal implications * Antitrust compliance program * Providing FTC advertising substitution d a t a
* Patent infringement * Trademark protection * Litigation when necessary -- Private antitrust suits - Bait and switch litigation
Manager attempts to view the world through the lawyer's eyes and to sensitize others to possible legal problems,
Lawyer draws principally on legal training and capabilities with strategic guidance from m an a g e r .
gies
"Preventive legal strategies are unique in at least one respect they gain notoriety only when they fail. If properly executed, a preventive strategy never makes the headlines." 16 to members of the media that a Chiefs of Staff need to understand farm implements. It sells through a name is a registered trademark and the overall mission, share the Presi- network of company stores and is not to be used generically may dent's perspective, and assure him independent dealers. As a result of well be sufficient. In spite of its of a full understanding of the mili- a change in marketing strategy, J. I. apparent importance, only 52 per- tary resources available to achieve Case launched a program designed cent of the survey respondents saw the mission. to appeal to owner-managers o f enforcement as a major role for To continue the metaphor, the large farms. This promotional procouosel. preventive role of the military is to gram was designed to increase Finally, there is the creative counsel the President on the appro- Case's market share in large-horselegal posture, which is more aggres- priate level of defense needed to power tractors. Company stores sive. At its best, this stance involves deter aggression by others. The and larger dealers tended to have using legal knowledge as a creative essence of this role may be cap- among their customers a disproporelement in formulating c o r p o r a t e - ) t u r e d by the term "preparedness." tionate number of larger farmers. In The objective is to avoid the use of 1978, several smaller dealers alleged strategy. It is, above all, active military might. rather than reactive and sometimes that the promotional campaign disWhen such weapons are em- criminated against them and was in even involves efforts to change the law. It was the role that lawyers ployed in order to enforce U. S. violation of the Robinson-Patman rights, the military should seek to Act. There was danger of a classmost favored: 82 percent of the win its objectives within the bounds action suit, but the cases were resp6ndents expressed the opinion established by the President. This ultimately brought individually. that lawyers should devote their extreme form of policy is to be efforts to creative strategies. While Case escaped with minor A useful metaphor in consider- avoided, but when necessary it damages, it was highly vulnerable to ing the nature of these three strate- brings to bear the special expertise a class action. In retrospect, Case gic postures is the relationship be- of the military, and these experts needed a more effective preventive tween the President and his military should be given far greater weight strategy. A key element of such a advisors. In formulating foreign in determining overall strategy. strategy is a simple, but formal, policy, the President certainly review process by counsel of all needs to consider the military Preventive Strategies major marketing programs. A reaspects of international relations. Preventive legal strategies are view process probably would have U. S. policy in the Middle East is unique in at least one respect--they identified the risk in time to anaaimed at achieving a peaceful reso- gain notoriety only when they fail. lyze whether any dealers would lution to ancient disputes. Yet this If properly executed, a preventive have sufficient grounds to bring a policy aimed at peace involves the strategy never makes the headlines. class-action suit and to make any creative use of military power, It follows that most well-known necessary changes to the program. whether it be as a participant in a examples in this area derive from Another example of insufficient multinational force in Lebanon or failures. A major division of preventive effort involves General in providing AWACS to Saudi Tenneco provides one such ex- Foods. In 1963 the FTC charged Arabia. In such cases, the Presi- ample. General Foods with violation of dent's strategy is multifaceted and The J. I. Case Division of Ten- Section 7 of the Clayton Act for its not essentially military. To serve neco is a major manufacturer of 1957 acquisition of S. O. S., Inc., the President effectively, the Joint light construction equipment and maker of S. O. S. steel wool soap
Building a Strong Legal Strategy
pads. The FTC charged that the acquisition gave General Foods undue power over the "household steel wool" market. Thus defined, S. O. S. held a 50 percent market share. This narrow definition of the market was crucial to the FTC's case, for it excluded plastic scrubbers and products for cleaning ceramic or Teflon-coated pots and pans. Unfortunately for General Foods, the FTC supported its market definition with citations of instances in which General Foods itself had behaved as if this were the market. The FTC cited a preacquisition study done by General Foods, as well as marketing studies prepared by outside firms, all of which referred to the "steel wool soap pad market." The acquisition study concluded S. O. S. would give GF '~a dominant position in a tight little specialty market." The company's own analysis referred to plastic scrubbers as "complementary rather than competitive." Arguing in court for a broader market definition, therefore, GF found itself in the unenviable position of pushing for the inclusion of competitors of which GF's own general manager admittedly was unaware. General Foods lost the case. This case shows the need for a preventive strategy that includes document review and retention. Internal planning materials or marketing research studies proclaiming " m a r k e t dominance" or reflecting unusually high market-share figures should be appraised in terms of whether these conclusions are based on a realistic definition of market boundaries or whether they are filled with puffery. This is not an argument for distortion or concealment. A preventive legal strategy assesses the accuracy of the data contained in these documents and their implications. The S. O. S. case may appear dated. In 1981, however, a subsidiary of the Pillsbury Company was sued by a small competitor for
monopolizing the cake-decorating supply and equipment market. As evidence, the small company cited five-year plans stating seemingly precise and remarkably large market shares in a narrowly defined market. Pillsbury argued during the trial that the planning documents were inaccurate and the market definition was too narrow, but its position obviously was difficult. Pillsbury, too, lost its case and paid $5 million in damages. Besides being most evident when they are absent, preventive legal strategies have one other distinguishing characteristic. Because they so often involve reviewing internal documents such as contracts and plans and their retention, they require extensive interaction of counsel with a number of managers in the company. This interaction, in turn, may make preventive strategies better suited to the in-house legal staff than to outside counsel. The company's legal department is far more likely than outside counsel to have the breadth of contacts, exposure to daily business decisions, and understanding of the organization's culture, all of which are important to the implementation of preventive strategies. Enforcement Strategies
Unlike preventive strategies, effective enforcement strategies are often highly visible; in fact, visibility is very often an important part of their success, since part of the strategy is to "send a message." U. S. Pioneer, for i n s t a n c e - a leader in the field of high-fidelity equipm e n t - d e m o n s t r a t e d that it would not sit meekly by while retailers exploited its name. A large retailer in the Midwest was found to be engaged in the practice of bait-andswitch techniques, using U. S. Pioneer products as the bait. A1thot~gh U. S. Pioneer products were heavily advertised at attractive prices by the retailer, sales clerks for the retailer allegedly made disparaging remarks about the quality
of Pioneer products and frequently succeeded in switching customers to competing products with higher profit margins. U. S. Pioneer enforced its rights by bringing action, under state law, against the retailer. It not only won a substantial settlement but also, as a result of extensive trade press coverage of the trial, sent an important message to other retailers throughout the country. Suits involving patents are perhaps the clearest examples of enforcement strategies. The stakes can 17 be high. In 1976, for example, Kodak introduced a " m e - t o o " instant camera and film to compete with Polaroid's SX-70. After five years of legal scuffling and unsuccessful negotiations, Polaroid went to court in 1981 to charge Kodak with patent infringement. Kodak argued that Polaroid's patents were trivial. Polaroid countered by quoting Kodak itself as hailing the SX-70 as "a masterpiece of engineering." If Polaroid's enforcement strategy turns out to have been well-planned, it stands to gain tens of millions in royalties. If not, it can expect more competition. As Harvard Law School Professor Phillip Areeda has noted in a Wall Street Journal article concerning patent infringement cases, "There is a lot of litigation that is filed for strategic purposes.' '6 Enforcement strategies need not involve litigation. Trademark protection, for instance, is frequently pursued outside formal legal channels. A good example is provided by Rohm & Haas, makers of Plexiglas acrylic sheet. Its lawyers routinely scan store advertisements for mention of "Plexiglas." When they find one, undercover shoppers visit the store and send the purchased product to the Rohm & Haas laboratory. If testing shows the product is not Plexiglas, Rohm & Haas issues a warning to the retailer. If the warning does not 6. The
1981: 27.
Wall Street Journal, October 21,
work, the company may sue. Xerox, which faces a similar situation, chooses to enforce its trademark in large part through a letterwriting campaign admonishing those who misuse the Xerox trademark in p r i n t The Coca-Cola Company has been noted for its aggressive enforcement of its rights to the name "Coke." Parker Brothers learned a lesson in not providing a generic alternative to describe its famous "Monopoly" game. 18
Creative Strategies Perhaps the most challenging circumstances are those requiring what we have termed management's creative use of legal resources. Because they often do not reach the courtroom, such examples tend to be forgotten b y managers and lawyers alike. Yet these types of situatior~s are frequent and have significant consequences. One of the survey respondents captured the nature of creative strategy especially well. The vice president and general counsel of a Fortune 500 company wrote: The minimum role o f lawyers is to assist management to formulate and implement strategies which are legally permissible and do not crea[e unforeseen legal liabilities. To fulfill his function, the lawyer should be innovative in finding new courses within the law by which management can accomplish its objectives. To be effective, the innovativeness should enable management to accomplish its objectives with fewer legal constraints or more legal flexibility than other companies under similar circumstances. When Federal Express launched its revolutionary small package delivery system in 1973, for example, it purchased small jet aircraft, not because they were more efficient, but because it allowed the company to qualify as an air taxi operator. Had its planes been larger, Federal Express would have been under CAB control and subject to numerous regulations. Subsequently, the company lobbied successfully
to get the law changed. It then was able to fly the largest planes available. Takeover situations afford many examples of creative legal strategies. In 1981, Ryder System, the truck leasing company, announced it had acquired 4.9 percent of Frank B. Hall & Co., an international insurance brokerage firm, and would seek to acquire more. Hall, like m a n y companies facing acquisition, preferred its independence. A few weeks later, Hall announced that it had for some time been seeking a way to reduce its effective tax rate by investing in a capital-intensive company, and that it had found such a company, Jartran, which happened to be in the truck leasing business. Hall's acquisition of Jartran, of course, erected substantial antitrust barriers to any further acquisition efforts that Ryder could make on Hall. Defensive acquisition is not the only creative legal strategy available to takeover targets. In 1978, for instance, Occidental Petroleum made an offer for the Mead Corporation. Four months later, Occidental withdrew, citing the "ferocity of Mead management's opposition." In this case, ferocity was the mother of invention. Mead and its legal defense team developed a number of creative legal strategies. The process had begun years earlier, when Mead retained Joe Flom of Skadden, Arps, Meagher, Slate and Flom as insurance against just this sort of takeover° Mead's battle was launched with a detailed, carefullywritten letter to shareholders, spelling out Occidental's financial and legal difficulties; the letters were also provided to the press. Mead contrasted its reputation for corporate citizenship with that of its suitor. Both of Dayton's newspapers editorialized that Mead management had been a corporate good neighbor. Mead uncovered a management practice used by Occidental-requiring Occidental direc-
tors to submit signed, undated resignation letters-that would create SEC problems for Occidental. Mead's lawyers also won a ruling permitting them to review Occidental's sensitive payment files. The Ohio Division of Securities ruled that Occidental's information provision was inadequate. When it was all over, Mead's multifaceted creative strategy succeeded. Creative offensive strategies also reap rewards. Indeed, in a number of instances a new product concept depends on what can be termed a creative modification of the legal environment. Merrill Lynch and the creation of its Cash Management Account product is a good example. Critical to the development of this product was the ability of Merrill Lynch to provide certain banking services (checking accounts and debit cards). Given the existing b o d y of law covering banking services in this country, Merrill Lynch appeared to be precluded from such a venture. But contractual relation, ship with Banc One of Columbus, supported by communications satellites and sophisticated computer technologies, enabled the large brokerage firm to offer Cash Management Accounts and their banking-related features throughout the United States. J o h n Fisher, senior vice president of Banc One, described this joint venture as "a synergistic effort which skillfully guided Merrill Lynch and Banc One around the SEC and various banking laws." The Right Mix he preceding examples illustrate alternative types of legal strategies. Because managers seldom think strategically about the use of legal counsel, this framework provides the basis for at least beginning to structure their thinking in this area. Clearly, no company can afford to limit its legal thinking to any one strategy. Varying circumstances require it to mix strategies.
T
Building a Strong Legal Strategy
"All else being equal, the greater the degree of environmental change, the more critical will be creative legal strategies." 19 Change and Visibility The mixture of legal strategies is influenced primarily by two factors: the degree of environmental change facing a. company, and the level of corporate visibility. Environrnental change--such as shifting industry structure, technology, social trends, changing business economics, and sudden shifts in strategy by one or another competitor--can pose a fundamental threat or opportunity. In the previous examples, MCI, S. O. S., U. S. Pioneer, Merrill Lynch, and Federal Express all faced environments that were significantly changing (or that they were causing to change) in some way. The other factor, corporate visibility, includes such indices as market share, brand image, degree of channel power, degree of consumer awareness, and use of the product. (For example, product failures of drugs or commercial aircraft are more "visible" than those of fasteners or pencils.) In this sense, both Pillsbury and Polaroid are highly visible companies. Each of these factors carries implications for legal strategy. All else being equal, the g e a t e r the degree of environmental change, the more critical will be creative legal strategies. When technologies are shifting, cost factors changing, new competitors entering, or tender offers being proposed, a company is faced with more threats and opportunities than in a stable environ-
ment. Just as they demand new business approaches, new threats and opportunities require new legal approaches. MCI and Merrill Lynch both saw opportunities in changing their legal environment and tailored their strategies accordingly. Mead and Hall, faced with a significant threat from a changed environmental factor, developed defensive creative strategies. By contrast, a firm facing a low degree of environmental change has a vested interest in retaining the system-unless it wants to change the environment radically by changing its business strategy. The principal legal strategy for such a firm may be one of e n f o r c e m e n t using the law to keep customers, competitors, and new entrants from introducing change into the environment. Rohm & Haas and Polaroid are examples of enforcement strategies aimed at retaining the status quo. The degree of corporate visibility has an impact primarily on the need for a strong preventive strategy. The more visible a firm, the more important is the legal "insurance" provided by a strong preventive strategy. AT&T was far more vulnerable to potential antitrust charges than MCI was. Had J. I. Case been an insignificant factox in the tractor business, it might not have needed to worry about class-action suits. Had Pillsbury's cake-decorating subsidiary been independent, a lawsuit might
not have looked as attractive as it did with a "rich" parent. Implications The notion of a mix of legal strategies has several implications. The most obvious is that it provides a framework for discussion between managers and their legal counsel, a framework that too often is lacking. The model also carries implications for human resource allocation in a corporation's legal effort. If management and counsel believe they need more efforts in prevention strategy, that decision may suggest a shift in legal resources toward in-house counsel, given the extensive contact required between executives and counsel by that strategy. Conversely, a company facing a changing environment needs highly creative, aggressive counsel, whether in-house or outside. The case of highly visible companies in rapidly changing environments is particularly challenging. Such a company needs to emphasize both preventive and creative strategies. These strategies require different mind sets. It is a rare lawyer who can think with equal facility in preventive, cautionary terms and in creative, aggressive terms. One mind set requires avoiding the envelope's limits, and one requires testing them. For such companies, it may make sense to "specialize" legal
"It is a rare lawyer who can think with equal facility in preventive, cautionary terms and in creative, aggressive terms. One mind set requires avoiding the envelope's limits, and one requires testing them." 20 resources by strategic focus. Lawyers would be assessed on the basis of whether they are best equipped for creative,, preventive, or enforcive r o l e s - a n d that probably has more to do with personality and attitude than with which law school they attended. Some individuals seem inherently more creative. Others enjoy the meticulous detail work associated with prevention. Still others are likely to enjoy the more aggressive posture of "chief enforcement officer." In sum, legal advisors need to be selected on the basis of competence and their fit with the client's mix of legal/strategic requirements. Perhaps the most demanding situation represented by the model is that of companies experiencing a dramatic shift in their environment. As the AT&T restructuring process is implemented, for example, many have suggested that local phone rates may increase dramatically. If i this happens, a Bell operating com~pany will be transformed from a relatively stable, benign, low-visibility firm to a highly visible entity thrust into a dynamic environment. Previously such a company would have spent a great deal of legal effort in an enforcement mode; for example, negotiating with utility commissions. Its new situation would demand a shift to preventive and creative strategies-a rather dramatic change. All of this discussion of legal strategy presumes, of course, a managerial culture that promotes
teamwork with counsel. In a per- only when criminal laws are apsonal interview with a leading anti- plicable. A n effective principle for a trust lawyer, the opinion was of- lawyer's guidance is that business fered that "the most creative legal corporations do not have legal ideas can be stifled in a corporate problems; they have business probenvironment where you dare not lems in which legal considerations make mistakes. In effect, they force may be more or less important, you to take the safe, often sub- depending on the circumstances. optimal path." One of the survey Through it all, the lawyer must respondents, an attorney with 31 maintain and help management years of experience and a member maintain high standards o f ethics of a firm with over 270 lawyers, an d fairn ess. wa'ote in a similar vein: itigation and other legal matters Legal strategy varies according ve become a central aspect of to the requirements o f the client.. contemporary management. • . [Critical to this process are] the ] It is necessary, therefore, to give astuteness and open mindedness o f considerable attention to the legal management; the interrelationships l environment in formulating and imbetween senior management and plementing strategy. The concept other managers; their perception o f lawyers as "counsel" or as h i r e d of a legal "envelope" suggests a guns . . . . Some managers continue i balanced approach; its boundaries to have (1) a dim view o f all~ must be sometimes avoided, at lawyers, (2) a dim view o f h o u s e other times tested. To decide which counsel, or (3) a perception that all times are which, management and lawyers, because they are licensed, counsel need to adopt a jointly are interchangeable for all purposes. acceptable model of the role of An in-house counsel offered legal counsel in corporate strategy. Today's implicit model, which similar advice to lawyers: The lawyer must, by example, pits management and counsel on demonstrate that he is on the same opposite sides of the legal "enteam as the manager• His advice and velope" issue, is inefficient , shortservice must be business oriented, sighted, and dangerous on both cast in an action framework. He legal and business grounds. By sortmust assist the manager in finding ing the environment into distinct opportunities to be more effective situations and identifying approthan his competitor. A t the same priate legal strategies, a framework time, he must remember that all for dialogue can be established that business decisions are for the man- leads to coordinated and effective ager to make and that legal con- use of legal talent in the corporate siderations infrequently override environment. V--1 business considerations-ordinarily