How to Get Even with Goliath
Written by Stephanie B. Goldberg
September 10, 2003 - Reported in [BusinessWeek.com]. How to Get Even with Goliath Most people cave when a big corporation pushes them around. Louis Saia pushed back--and took away $25 million.
The day couldn't have gone better if he had scripted it himself, mused Louis P. Saia III. It was May 17, 1995, and the CEO of 12-employee Pallet Reefer Co. in Houma, La., had completed a long but productive meeting in Menlo Park, Calif., with his joint-venture partners and their biggest client. Afterward, they had all chatted amiably over dinner at an Italian restaurant.
Saia was confident that his patented invention called the "pallet reefer" would make him and his wife, Cindy, multimillionaires. The "reefer" is a stackable shipping container, cooled with a compressor like a refrigerator. Saia believed it would revolutionize the trucking industry because it can be used to ship small loads of perishables alongside other cargo. In the daylong meeting with the client, Con-Way Transportation Services, it seemed they had cleared up to Con-Way's satisfaction how certain design flaws could be corrected. Now, surely, thought Saia, his joint-venture partners--the big truck manufacturer Grumman Allied Industries--would finally jump-start the project, which had stalled in 1994 when the parent company, Grumman Corp., merged with Northrop Industries. Little did he know he was standing on the edge of an abyss.
There in the Con-Way parking lot at twilight, Saia stopped his Grumman Allied partners as they were leaving. James McConnell, CEO of Grumman Allied and its representative in Allied Transportation Products--the entity created by Grumman for the joint venture in 1992--rolled down his window. "I said, 'Hey, fellas, what do you think? Have you reached a decision?"' recalls Saia. Yes, said McConnell. They wanted to proceed with the Pallet Reefer--just not with Saia. Stunned, Saia begged them to reconsider. "That was the moment I realized they were trying to muscle me out of my company," says Saia, now 45. He had reason to think so: McConnell would admit later in legal proceedings he didn't like Saia, was irritated by the man's emotional personality, and had decided earlier Saia had to go.
That September, Saia made a wrenching decision--to sue his corporate partner for breach of contract. The ensuing legal battle would drive him and his wife to near-bankruptcy, imperil their marriage, and engulf him in anxiety. Yet, the couple later realized, it would have been far worse to give up without a fight. "If Grumman won," says Cindy Saia, 39, a chemical engineer and vice-president of the company, "it would mean our hard work was for nothing and there was no justice. In my heart, I knew that wasn't so." Saia's own father, a wealthy Louisiana trucker, scoffed at the notion that his son could beat Goliath. "He told me I had a better chance of winning the lottery," says Saia.
How often does a big company breach a contract--as in Saia's case--or not pay a vendor, or push a small rival out of the market, or try to acquire an inventor's technology on the cheap? Surely often enough to generate horror stories in every industry. But usually entrepreneurs surrender quietly and move on. The reason is simple: "The chance of a small business being able to outlast a large business in litigation is practically nil," says Bob Meade, senior vice-president of the American Arbitration Assn. To pursue a lawsuit, "you almost have to be a little loony," says Richard M. Leisner, a Tampa lawyer and former chair of the American Business Assn.'s small-business subcommittee. "You have to be a driven-CEO type who's going to make the lawsuit your baby."
The cost alone is daunting. Litigators capable of taking on a big corporation charge around $400 an hour, and a patent case that goes to trial can cost more than $500,000, says Inventors' Digest. So most entrepreneurs need a lawyer willing to work for a contingency fee. But that means you'll lose 25% to 40% of any recovery, plus expenses. Even then, lawyers frequently demand clients share the ongoing costs of a suit. That's assuming you can find one. "I reject about 90% of the cases offered to me," says Raymond P. Niro Sr., a Chicago lawyer renowned in intellectual property circles as a giant-slayer. And many top litigators will take a case on contingency only if they expect to earn millions.
What's more, the emotional stress and time consumed by litigation can be overwhelming. "We had no idea what it was going to take," says San Francisco architect Glenn A. Storek, whose battle against a Citigroup real estate subsidiary has dragged on for eight years. Last year, he and his brother Richard, also an architect, won $41.8 million after convincing a jury that they had been pushed into bankruptcy by Citicorp Real Estate Inc., which served as bond agent on an Oakland (Calif.) project. But the case isn't over. Citicorp attorney R. Paul Wickes says he's confident his client will prevail on appeal. "An enormous amount of time has gone into keeping the lawsuit going," laments Richard Storek. "In the process, we lost our homes and our personal possessions."
Builders, telecom resellers, convenience stores--no small business is immune to a face-off with a giant. The companies most at risk are ones that share information with prospective backers or clients, lawyers say. "The big company makes promises to compensate them. Then when they get their hands on the idea, they cut the little guys loose," says Niro, one of the few lawyers who specializes in David vs. Goliath suits.
Occasionally, though, Goliaths underestimate the mettle--and the fury--of a scorned entrepreneur. Take Joseph Freda, president of C&F Packing Co. in Elk Grove Village, Ill., a 120-employee meatpacker with $40 million in revenues, a Niro client. "I was determined I wasn't going to let anybody destroy what my father had worked his tail off for," says Freda. So in 1993 he sued Pizza Hut Inc., once a major customer, alleging it had stolen his family's sausage recipe and technology and passed it along to the $16.9 billion meat processing giant IBP Inc. He sued IBP, too, and after a seven-year battle, an appeals court last year upheld a $10.9 million judgment against the packer.
And Pizza Hut? In a series of twists and turns typical of high-stakes litigation, Pizza Hut was dismissed from the original suit, then reinstated on appeal. Robert W. Millen, general counsel of Pizza Hut in Dallas, denies all of C&F's charges. The trial is now scheduled for January, 2002--more than eight years after the suit was first filed. "The name of the game is delay, delay, delay," says an exasperated Freda.
There were nights when Louis Saia paced his kitchen floor, popping Valiums that no longer had any effect on him, and wondering if he had made a terrible mistake. Certainly nothing had gone smoothly in the months after the parking lot encounter. He says he had rejected Grumman Allied's offer for a $2 million buyout as an "insult." His personality conflict with McConnell had grown sharper. And in August, Grumman Allied, which had provided much of the capital and manufacturing expertise for the joint venture, largely shut down Pallet Reefer's operations, prompting Saia to file his suit. Later in the legal proceeding, Grumman alleged--and Saia denied--that Saia lost $12 million for the joint venture through mismanagement and by funneling business to a small trucking company he owned.
Then things got worse. In January, 1996, Allied Transportation petitioned a Delaware court to liquidate the company, citing a boardroom deadlock between the Saias and the Grumman Allied representatives. Had Grumman succeeded, speculates Saia, it "would have forced a sale of my patent, which they could have inexpensively acquired." Next, Allied Transportation laid off all of Pallet Reefer's employees, including Saia, leading Con-Way to cancel its contract the next day, according to an arbitrator's findings. McConnell, who now heads up a management spin-off of Grumman Allied, declined comment, noting that his company is no longer part of Northrop Grumman. Northrup Grumman officials also declined comment.
As spring approached, Saia's despair deepened. His lawyers had bailed out in January when he could no longer pay them. He had run through $2 million in assets, and at one point the family checking account held just $60. "I was waking up at night hopeless, broke," says Saia. "My marriage was on the rocks."
There's no question when Saia hit bottom. The day is etched in his memory. On Mar. 16, 1996, he says he had "violent thoughts" about "stalking" Northrop Grumman's executives. "I gave thought to a trip to Los Angeles to pursue my vendetta," he says. But on Mar. 17, as he was out jogging to relieve his despair, Saia says he experienced a vision of the Virgin Mary on the steps of his office. He says she told him "to just have faith in my son," and from that moment on, he felt a sense of peace.
Call it faith or coincidence, but the Saias saw their fortunes improve. That month, New Orleans lawyer Jack M. Alltmont agreed to take the case on contingency. "I frankly thought, 'Well, we'll get into it and we'll settle,"' says Alltmont, who instead spent the next year on the case. Saia also hired a lawyer in Delaware--using borrowed funds--to block the liquidation of the company. Ultimately, the Delaware judge ruled that liquidation wouldn't resolve the breach of contract issue. At that point, both sides agreed to arbitration, which began in New York on June 2. "If we lost, we would have gone bankrupt," says Saia. "But we knew we weren't going to lose."
For a year, as they commuted to New York for monthly hearings, the Saias lived on credit cards and prayer. Finally, on Dec. 2, 1997, the arbitrator awarded Saia $18 million, finding Allied Transportation had breached its contract and rejecting Grumman Allied's allegations against Saia. He had just $2 million left after the lawyers took $4.5 million, and he paid off his creditors. Six months later, he sued Allied Transportation again, charging his ex-partner failed to return his patents on time as ordered by the arbitrator. The result: Allied Transportation settled for $7 million.
Flush with cash, Saia moved quickly to revive his beloved Pallet Reefer. He poured $3 million into the business, including the purchase of an abandoned factory from the local parish for $700,000. His goal: to begin producing 15 pallet reefers a day starting this fall. This time, no outsiders will get any equity.
That's the business. The Saias also gave $700,000 of their winnings to charity. "I feel God has something planned for us, and we don't yet know the end of the story," says Cindy Saia. For now, though, the curtain has come down on their legal drama. And for that, they say: Amen.