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

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

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

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

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

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

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

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

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

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

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

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

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

He proved this by ambitiously moving into new markets, especially in Eastern Europe and Asia, and expanding its product line through acquisitions like the L&M, Chesterfield, and Lark cigarette brands as well as Nabisco Holdings. Yet at the same time, Bible spent as much as one-third of his time working closely with lawyers to develop a strategy for dealing with the lawsuits. Those working with him say he never lost sight of the fact that his first responsibility was to ensure the survival of the business. Sometimes that meant swallowing a bit of pride.

"By not going into a defensive mode and letting people see that Philip Morris was running scared, like some other cigarette companies have done," says one of the lead lawyers, "Bible was able to assure people that Philip Morris was not in any trouble. That's important for a company to continue to grow, tap capital markets, and hire bright people." The lawyer requested anonymity because of the extensive amount of ongoing litigation the company faces. He adds: "At the same time, Bible kept looking for ways to make the pain of the lawsuits less onerous, to give in where he had to and fight where that was necessary. He has stayed closely involved in all parts of the litigation and made the decisions, which is just what a CEO has to do."

Incidents in late 1996 and 1997 typify Bible's leadership. At the company's annual meeting in 1996, soon after the states individually sued Philip Morris for billions of dollars to cover the costs of treating patients suffering from illnesses believed to be linked to cigarette smoking, Bible was concerned about Philip Morris' weakened stock price and the palpable fear among workers concerning the future of their company. Consequently, he gave an impassioned, tub-thumping speech comparing Philip Morris to the Allies fighting in World War II. "It took them [more than five years] to prevail," Bible said. "It took a lot of smart thinking. We shall fight, fight, fight. When you are right, and you fight, you win."

A year later, though, at the annual meeting, Bible was in a different mood. By then, he had deter-mined that to take on each of the states in court and risk burdensome jury awards, could bankrupt the company. Mindful of this, he held secret meetings with the attorneys general to work out an omnibus settlement. So in the 1997 speech, Bible was more conciliatory, quietly preparing investors and employees for an agreement that would cost quite a bit of money (nearly $250 billion for the entire cigarette industry), while still painting a positive future for Philip Morris. He also planted the idea that a settlement is not a retreat.

But he added in a more defiant tone: "Everything we do is legal. We are committed to the rights of adults to make informed decisions to use, or not to use, our products." Later, Bible told his lawyers that even with all his management training, he was not prepared for the tightrope he has had to walk as CEO--publicly defending his company against litigious attacks, while facing the incongruous notion that he has to capitulate for the good of the business.

Executives at Microsoft have taken whole chapters from Bible's book. The target of U.S. antitrust prosecutors since 1998, the software company was slapped with a court ruling in 2000 that called for the breakup of the company into three separate units. Nearly a year later, Microsoft got much of this decision remanded on appeal. But even with the company in limbo, Microsoft's top executives, Bill Gates, chairman and chief software architect, and CEO Steve Ballmer, have, like Bible, kept the software maker on an extremely aggressive course, as if no litigation was threatening Microsoft at all.

In fact, this year Microsoft thumbed its nose at the government's case by releasing an upgraded version of Windows software called XP that more than ever bundles its operating system with its Internet browser. This is the very activity at the heart of the Justice Department's argument--that Microsoft abuses its monopoly power to keep other companies from offering competing products.

To keep key employees from leaving the company out of fear that Microsoft would be broken up, Ballmer issued new stock options during the last year priced low enough that even if the company's shares fell, workers would not be Out of the money. While its see-no-evil public approach has saved Microsoft from a crippling stock price drop and a wholesale brain drain, privately Gates and Ballmer have been spending an enormous amount of time to remove the yoke of litigation completely. The pair has devoted many hours reading the tons of documents involved in the case and working with their lawyers on a settlement that would leave the company intact while minimally changing its business practices.

The way Rodgers, Bible, Gates, and Ballmer respond to potentially destructive lawsuits shares one critical aspect: Each executive directly manages the company's counterattack. This may seem obvious, but chief executives often take the opposite approach, lawyers say.

Frequently, the first reaction of CEOs is to view a lawsuit as a waste of time because it distracts them from the crucial work of running the company and planning what are perceived as more essential strategies like marketing and research and development. So, instead of steering the handling and an swering of a lawsuit, they delegate it to other executives or turn it over to outside lawyers, who provide the CEOs with ad hoc reports and recommendations that they simply rubberstamp.

"This is a big mistake," says Dan Hedges, a partner at Porter & Hedges in Houston. "It's as if they're admitting that the outcome of the lawsuit won't affect their company in a large enough way for them to be involved with handling it. The reality is a CEO'S uniquely broad knowledge of the company's operations, its strengths, weaknesses, plans, and financial condition are exactly what's needed to determine how to proceed in defending against a lawsuit."

Corporate litigation experts recommend that chief executives whose companies have been sued schedule a regular meeting perhaps once a week, when the lawsuit is most demanding, such as during discovery or sensitive settlement talks. Experts suggest at other times CEOs meet once a month with lawyers to keep abreast of the status of the case and consider recommendations on how to proceed.

Ideally, experts say, the sessions should treat the lawsuit as any other important project at the company. That means tracking benchmarks, measuring how well they are being met, and assessing future plans and budgets. By keeping track of the lawsuit and its key issues, CEOs can then pass the day-to-day handling of the litigation's minutiae to another manager. However, that manager would be expected to draw the chief executive in when his input is required.

Even the choice of manager to handle the litigation details is critical, the experts stress. It's important for a CEO to choose someone who does not have a personal stake in the case. The lead engineer who designed a technology that's caught up in an intellectual property dispute would be the wrong person to act as the company's litigation liaison. Another poor choice would be the chief financial officer whose forecasts and performance numbers are under attack from shareholders.

Picking the appropriate go-between is just the first step, the lawyers say. It accomplishes little if the CEO doesn't emphasize how important this job is to the company's future, how high his expectations are that the task will be taken seriously, and that it's not a dead-end lob.

"People at companies are mindful of what will advance their careers and their compensation, and often litigation is viewed as a sinkhole," says Michael Plimack, a lawyer with HellerEhrman in San Francisco, which counts Microsoft among its clients. "But to successfully handle a lawsuit, we need to be able to get the right information quickly that may be buried somewhere in the millions of pieces of data that a company has. Only a person who is told by the CEO that working with us diligently will enhance his or her status at the company will be disciplined enough about following through."

With all the weighty choices and management responsibilities that litigation presents to a CEO, the most vital is deciding whether to attempt to settle the case or fight it even at great expense and staff hours. For many chief executives, this is an easy decision: If the suit has any merit at all, work out a pre-trial deal.

"Any chief executive who says differently isn't a real CEO because they're putting the company and the shareholder at risk," says George Perlegos, chairman and founder of Atmel Corp., a San Jose, CA-based $2 billion maker of semiconductors for consumer and cellular electronics. In less than 20 years in business, Atmel has been involved in 10 intellectual property lawsuits. Early in its history, there were five suits pending at one time. Perlegos says: "You have to have sense enough to determine the value of the lawsuit and then try to negotiate it away through a licensing arrangement or purchasing of the patent or license or some other financial option. Otherwise, fighting these cases will put you out of business."

T.J. Rodgers, not surprisingly, holds a very different view. Rodgers, who proudly boasts that he has never paid a penny to settle a lawsuit during his tenure at Cypress, says his strategy is to send the message that "if you screw with us, we're not going to give you money, we're going to cost you money."

The closest the company has ever come to being beaten in court was a few years ago when Texas Instruments won a case against Cypress. But the verdict was reversed. An appellate court upheld that reversal and the U.S. Supreme Court refused to hear the case. Rodgers won't discuss Cypress' legal costs, except to say that they retain one and a half lawyers in house to protect intellectual property, but neither handles trials.

His combatant attitude comes through loud and clear in a case that began 10 years ago when Cypress was sued in a shareholder class action for alleged fraud and deceit involving the company's financial performance and certain public projections Rodgers had made. The suit apparently had little merit and in 1996, after Cypress spent more than $4 million in its defense, the matter was thrown out before even going to trial. That would have been enough for most CEOs, but Rodgers wasn't satisfied, just angry.

He countersued for malicious prosecution. He lost in the first round, but his appeal is pending. "Ten years later and they still haven't gotten rid of us," Rodgers says. "It's worth the money to stop anyone else from taking us on." Such aggressiveness or stubbornness does not come cheap. And eventually Cypress is sure to lose a case.

While few CEOs are willing to go as far as Rodgers, many likely at least enjoy the daydream of doing so. If nothing else, the fantasy is a welcome break from the very real nightmare that litigation usually brings.