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Consider the irony. The last couple of years had been difficult for Toys “R” Us, despite wild consumer spending amid the economic boom. It lost its place as the nation’s number one toy seller to the Bentonville, Ark.-based Wal-Mart Stores Inc. two years ago. Just last year, it got dubbed “The E-Grinch Who Stole Christmas” and was fined by the federal government for promising, but failing, to deliver online-ordered toys in time for the big day. Then, at the beginning of 2001, when analysts were predicting a general retail slowdown and Federal Reserve chairman Alan Greenspan mused publicly about a recession, Goldman Sachs upgraded Toys “R” Us, Inc.’s stock from “market performer” to “buy.” No wonder. Toys “R” Us had a surprisingly strong holiday season. Its online sales more than tripled to $124 million from $39 million the year before. And its overall sales during the Christmas season 2000 reached $4.2 billion. From a low in January 2000 of about $10 a share, the stock more than doubled to about $26 in January 2001. Still, it’s far from its all-time high of more than $40 in 1993. Toys “R” Us’ recent success is being credited to new strategies carried out by John Eyler. Recruited from FAO Schwartz in January 2000, Eyler is the third chief executive officer hired to fix the company since founder Charles Lazarus retired in 1994. Eyler’s mission: to regain customer goodwill and win back that number one spot from Wal-Mart. To help, this August Eyler called in longtime friend and golfing buddy Christopher Kay as his chief lawyer. Much as it hurt Kay to leave his home in Isleworth, Fla., a suburb of Orlando, (where he’d met Eyler) and the law firm he had helped found — Kay, Gronek & Latham — Kay couldn’t resist being a part of the core management team charged with revitalizing the 148th company on the Fortune 500 list. Kay, who carries the titles of executive vice president, general counsel, and corporate secretary, brings to the task the business acumen gained in his experience as outside general counsel to Universal Studios, Inc., and Universal Studios Florida. (Other clients included Cape Canaveral Hospital, Darden Restaurants, Inc., First USA, Inc., and MCA Television, Ltd.) His familiarity with theme parks will come in handy. Many of Eyler’s initiatives are designed to make shopping at Toys “R” Us a blast. Its bare-bones, warehouse-like stores are being refashioned into playgrounds. And coming soon: a flagship toy store in New York that will include a Ferris wheel and a 30-foot-tall dinosaur. But Kay’s life at Toys “R” Us won’t be all business and no law. Although a partnering contract with Amazon.com was signed before Kay arrived, it’ll need fine-tuning, like so much in the world of e-tailing. And Kay’s considerable litigation experience should serve the company well in the fallout from its disastrous Christmas 1999 season. Among his many wins as a private firm litigator, there’s one of the largest judgments in the history of the Florida state judicial system and reputedly the second-highest ever awarded against any state: He got a $188 million refund in 1993 for a class of more than 500,000 Florida taxpayers forced to pay a $295 “impact fee” when registering their cars in Florida. Kay graduated in 1978 from Duke University School of Law, where he was moot court champion. He’s been a partner at Shughart Thomson and Kilroy (1978-83), Swann & Haddock (1984-90), and Foley & Lardner (1990-96). Corporate Counsel talked with Kay before the Christmas 2000 season in his still-undecorated office overlooking the Paramus Park Mall parking lot and then again by telephone in January. He was bursting with enthusiasm for Toys “R” Us’ innovations and future prospects. What follows is an edited transcript of our talks. � On the difference between private practice and being general counsel at Toys “R” Us: For one thing, I let myself be photographed on the floor with stuffed animals! As I was sitting there, I was thinking, “Nobody in Florida would believe this.” But there’s a whole different expectation when you’re a corporate counsel than when you’re a class action litigator. And that’s why I came up here. There’s a whole different emphasis to my day than before. Now I am one of a handful of people helping to transform a company. So there is a business component unlike what I had in private practice. I served for many years as outside general counsel to Universal Studios in Orlando, which is engaged in some exciting initiatives, including the development of theme parks. There are many creative aspects associated with that and also real estate development. What we’re doing at Toys, particularly with the remodeling of our stores and the development of a distinct product, is similar to what the theme parks have done. Toys “R” Us’ old approach was to have, almost like a grocery, aisle after aisle after aisle. Now when you come into one of our stores, you’re going to have fun. It’s going to be a place where kids can play at a variety of stations. In the year 2000, 166 stores were remodeled along these lines, and we’re now looking at how many stores we’re going to do in 2001. As a result, we’re evaluating all our real estate, whether it be real estate owned or leased. Part of the process of any healthy organization, just like any law firm, is to look at your assets and to see which ones are performing well and which ones aren’t and to take appropriate steps. We also have a new prototype for the Kids “R” Us stores that we’ve been extremely pleased with. We’ll be rolling out a few more of those. We believe we had a great concept for a place for kids several years ago. But as kids have changed, we need to change. So we made it more cool. That involves such changes as putting in racks that are easier for kids to browse. Another initiative is the development of a flagship store in Times Square. When it’s completed, it will be 110,000 square feet, making it one of the largest, if not the largest, toy store in the world. If you know where the ABC [television network] facility is, on Broadway at 44th Street, we’re right across the street, on the north side of 44th. It’s a tremendous location. It’s opening next fall. It’s going to be a great way to draw attention, not only in this country, but throughout the world, to Toys “R” Us. There’s little that’s more regulated than New York City real estate. But the reason I’m involved in that project is not just because of the legal aspect. One of the attractive aspects of this job, and one of the reasons why I think I was offered this job, is because I can think and act strategically. � Tie-ins to movies haven’t been meeting with the same success they have in the past. “Star Wars” toys sat on shelves and got severely discounted. Kay, whose company will be marketing the Spielberg “E.T.” toys next year, talks about the different approach Toys “R” Us will take: If you look at the “Star Wars” situation, there were a number of products available at an incredible number of distribution outlet points. We’re going to be the exclusive distributor for “E.T.” products. That’s one difference. We’re also trying to develop our own, exclusive products and in that fashion differentiate ourselves from others in this business. One of the things we did at Universal was develop a number of very healthy strategic alliances. We’re doing the same thing at Toys. With Scholastic. With Major League Baseball. With Spielberg. � On the seasonal rhythm of specialty retail: Clearly the prize is Christmas. But Wall Street looks at every quarter. So, for example, we sell a lot of outdoor equipment, swing sets, gym sets, and so forth. And so one of the things [CEO John] Eyler did was have us pump up to make sure we had a lot of gym sets available for sale immediately after Christmas in our southeastern and southwestern markets. � Acting as corporate secretary: One of the other differences from my life in private practice is that I’m working much more closely with a given board of directors than I ever did before. As a firm lawyer, I typically worked with the CEOs of companies. As secretary of the board, I obviously organize all the meetings, making sure everybody has an agenda and knows how to get to the meeting. More importantly, I’m helping the CEO and the chairman of the board develop the agenda, and I’m communicating with the board members beforehand so that if there are certain topics that are going to be discussed, they are briefed ahead of time. So the interesting aspect of the job is to make sure everybody understands the various growth initiatives that are in place or in process and the results we’ve obtained to date. � Kay intends to have his law department outsource less: We’re one of the largest companies in the world, and we have a relatively small legal department. We’re not anywhere close to spending even 40 percent of our legal budget on in-house counsel. The legal department has 14 lawyers now, including me. But I am looking to hire. I have already interviewed a number of lawyers, and will continue to do so. I think we’ll be adding at least three lawyers to the team by June. They’ll have anywhere from the high side of 10 to 15 years, down to three to five years on the low side. [Editor's note: On February 2 Kay shared the names of two of his new hires, due to start by March: David Schwartz, a partner in New York's Anderson Kill & Olick, and Steven Behar, an associate in New York's Milbank. Both of them specialize in corporate law.] What we’re trying to do is develop internally the expertise to handle a number of our matters and to serve as business partners for the company’s other divisions and departments. It doesn’t mean we’re not going to use outside counsel. But there are a number of opportunities where we may be able to do it as well. � The company’s changing relationship with outside counsel: One of the things I’m going to do is ask whether it make sense for us to have a relationship with a given firm for all or almost all of our activities. I’m not sure it does. I’ve worked for the last 23 years around the country, and so I know that there are good people in a number of firms all over the map. I’m not yet convinced, for example, that some work needs to be performed by firms in the New York City area. They may very well be performed by firms in other cities. � How outside counsel should approach him: The smartest thing would be to send me a brochure of your firm, with a cover letter that indicates an area of particular expertise that the lawyers think their firm can provide to us. Offer the one-page r�sum�s of all of the lawyers in that area. And just ask for an opportunity to sit down and talk. � The current Toys “R” Us litigation docket: We have those basic lawsuits a company like ours is always going to have. We have many pieces of real estate, so, for example, there are disputes over common area maintenance charges. You also are going to have some EEOC [U.S. Equal Employment Opportunity Commission] issues when you employ 85,000-100,000 people. The more notable suits right now include employment cases over whether we should have paid certain assistant managers and managers as if they were hourly employees and paid them overtime. There are about 10 or 12 pending right now; at least six or seven have been resolved. There is a lawsuit involving last year’s Christmas. Plaintiffs’ counsel is Robins, Kaplan, Miller & Ciresi in Minneapolis. The question is to what extent people were injured or allegedly injured as a result of the fact that there was an inability to get certain products to them by Christmas. And then there’s the Coremetrics case, a class action involving privacy issues. Coremetrics [a Web data-gathering company with which Toys "R" Us had a relationship] provided certain composite information of those that visited our Web site. � How to reduce litigation expenses: From personal experience, I can tell you that the sooner you assess a case and try to dispose of it, the better off you are. Cases don’t normally change that much as they move along; they usually just get more expensive. � Kay’s management approach: Part of what I’d like to do is help our lawyers in our department grow professionally and be recognized for their accomplishments and for their expertise and to bring in additional people to do the same. I get a kick out of trying to provide that type of mentoring and trying to provide that type of opportunity for people. But the thing that is so intriguing about this job is the ability to be one of the people that helps run the company. And, in that regard, I’m not a teacher, I’m a student. I’m learning how to contribute to a business.

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