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David Dunn recalls a classroom scene from his first year of law school. The students were discussing a 1930s case involving a railroad company, and the professor asked them to name the rule of the case.
People came up with all sorts of exotic answers,” recounts Dunn, a litigation partner at Hogan & Hartson. “And after about 15 minutes the professor turned, pounded on the table and said, ‘No, the rule in this case is that in the 1930s the railroad always loses.’” In May, California’s East West Bank faced what it feared would be a similar fate–that in the early years of this century, the bank always loses.
It faced a lawsuit for allegedly contributing to the collapse of Ocean Fresh Trading Inc. Several siblings ran the company, and one of them, Jimmie Dang, had grown disgruntled and in 2005 left to set up his own competing company.
He took with him Ocean Fresh’s customers, employees and other assets, including several crates of seafood, and eventually ran Ocean Fresh out of business. East West had been serving as Ocean Fresh’s bank for about five years at this point. So when it surfaced that one of its loan officers who worked with Ocean Fresh had given Dang a loan to get his new–and, the siblings alleged, illegally formed–company, the remaining siblings at Ocean Fresh took Dang and the bank to court.
In Ocean Fresh Trading Inc. v. Jimmie Dang et al., the plaintiffs accused East West of scheming with Dang to take down Ocean Fresh, with the bank loan officer’s wife even securing employment in Dang’s new company. Plaintiffs colored this as a bribe to the loan officer and hence an indirect bribe to the bank. In any event, all sides agreed it was an unacceptable conflict of interest.
The bank’s general counsel called in Skip Miller, a partner at Miller Barondess, who knew he faced an uphill battle.
“Right now financial institutions are really struggling,” Miller says. “Every time you read the news, you see banks writing off billions of dollars in debts and people losing their homes and being foreclosed. Everybody’s had their issues with banks–it’s even doubly difficult now.”
Baggage and Bias
In May East West Bank was able to convince a jury that it was not responsible for the downfall of Ocean Fresh Seafood, despite the jury’s finding that Dang had engaged in wrongdoing. But it wasn’t easy–and not just for the facts of the case.
“Today, I think from moment to moment you have [the railroad dilemma] when representing utilities, oil companies, banks–wherever you have companies that for one reason or another are suffering from a shortage of public esteem,” Dunn says.
Factoring in the loan officer’s actions, Ocean Fresh seemed so open and shut that plaintiffs would not even counter the bank’s multimillion-dollar settlement offers. Miller had encountered the problem of negative public perception before when he represented a company that manufactured products in China, some of which it sold through Wal-Mart. Both facts had stirred up bias among some potential jurors.
“That is just a fact you have to deal with,” Dunn says. “Be cognizant of the general public perception of your client’s company, in particular the business your client is in and the environment or market in which your client functions. Those are all factors and pieces of baggage a juror brings to the jury room.”
That’s why Miller contends that when facing a jury, voir dire is “the single most important phase of a trial.” When he goes through the jury selection process, his strategy is to even out the playing field in terms of juror bias as much as possible, employing a jury consultant when necessary. But Dunn points out that jury selection is hard to predict: “Every jury is different, and juries are very hard to fathom in terms of the dynamic that is likely to develop between them.”
Once the jury is in place, “The number one thing you have to understand is how this particular issue is going to be perceived,” says Daniel Diermeier, a professor at Northwestern University’s Kellogg School of Management. Diermeier lectures on crisis management. “If it is a very technical issue, it will be very difficult, sometimes impossible, to convince the general public. It’s not that they don’t believe you–though that may be true as well. The main problem is that they don’t understand.”
That was true in Ocean Fresh, for example, the facts of which dealt with sometimes complex accounting issues and business practices. Miller overcame this by crafting a basic theme to present. The plaintiffs, conversely, relied on a complex theme involving financial ratios and insiders’ lingo that could easily confuse a jury.
“Basically my theme was, ‘We’re just a bank,’” Miller says. “‘We can give loans to competitors. We’re not responsible for what our borrowers do or don’t do to one another. We’re just a bank.’”
It’s also important to get the jury to understand that even within a large institution, a lawyer represents people. “Debunk the myth” of the deep-pocketed institutional defendant, Dunn says. Witnesses should come across as likeable, and corporations should choose a “face” of the company–a real corporate representative with whom the jury can come to identify.
“It’s very important to personify the company, to make the jury understand that these are real people like them who are doing their best on a day-to-day basis to do their jobs,” Dunn says. “Enron is the poster child for this decade of a company that wound up with a bad persona. The participants in the business were viewed as not being out for the social good.”
Part of that humanization is being clear that nobody is perfect, but that your company will not put up with misconduct. Since it seemed unlikely that the loan officer whose wife worked for Dang’s new company was completely ignorant of the origins of Dang’s business, Miller decided to come clean in his opening statement, admitting to the mistake and later having the officer take the stand to apologize and explain he wasn’t aware of Dang’s misconduct. The honesty contributed to the rebuilding of a trustworthy image of East West.
Particularly for companies that deal directly with consumers, that rebuilding process is vital. Depending on how severe the situation is, this may require the help of a crisis management expert. “If you are, for example, a financial services company, anything having to do with a conflict of interest and protecting clients is really critical because the business is so based on trust,” Diermeier says. “Even an issue that may look small or isolated can have a tremendous reputational impact.”
Of course, companies should not wait until litigation arises before protecting their reputations, especially in these days in which cynicism toward corporations is high and trust is continuing to diminish. Critical situations require going beyond the specific facts of one case to show more generally that a business has processes and values in place to make problems as unlikely as possible. So don’t just place blame on a rogue employee, Diermeier says. When it comes to situations that threaten a business’ ability to function, the company should be able to demonstrate that the behavior is inconceivable to its employees and that, if issues do arise, general managers can quickly detect them and act on them.
If a matter arises, document that you have dealt with it promptly and appropriately, so that if down the line it becomes a legal issue, bases are already covered. If an employee has engaged in wrongdoing, use proper discipline, which clearly separates the company from the employee involved in the questionable activity. For instance, East West deprived the loan officer of several thousand dollars in bonuses.
“I see so many cases where there’s a slap on the wrist or nothing done for a conflict of interest or some other mistake, and then a year or two later, it goes to court and boy, it looks bad,” Miller says.
Following such steps will result in a smoother recovery should litigation occur. “Companies are more actively understanding that reputation is a core asset, but more importantly that doing nothing wrong or being in compliance is usually not going to be enough,” Diermeier says. “Reputation is something that needs to be actively managed.”