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CASE TYPE: BREACH OF CONTRACT CASE: General Electric Capital Corp. v. DirecTV Inc., No. 3:97CB0901 (PCB) (D. Conn.) PLAINTIFFS’ ATTORNEYS: Robert L. Byman, Barbara S. Steiner, James Thompson and Terry Truax of Chicago’s Jenner & Block DEFENSE ATTORNEYS: Michael Baumann, Eric Liebler and Melissa Ingalls of the Los Angeles office of Chicago’s Kirkland & Ellis JURY AWARD: $133 million, increased to $181 million In 1995, DirecTV Inc., the satellite TV broadcaster, was “looking for a way to finance getting equipment to consumers,” said General Electric Capital Corp. attorney Robert L. Byman. To establish its share of the market, Byman said, DirecTV estimated it would need about 1 million to 3 million customers and about $3 billion to $5 billion in equipment. The other major satellite television companies, Prime Star and Echo Star, he said, “had decided to buy the equipment themselves and lease it. But DirecTV wanted to put the cost onto the consumer,” he said, and decided to enable its customers to buy the satellite dish equipment directly from dealers. At that time, each dish and converter-box setup cost $1,000 to $1,500 to buy and install, Byman said. This meant that consumers would need easy access to financing to purchase the equipment, he added. DirecTV entered into a contract with GE Capital to provide the financing packages for the DirecTV customers. The contract provided that these were “full recourse” loans, Byman said. This meant, he said, that GE Capital “loans the money, but if the consumer defaults, DirecTV owes us.” SIGNING UP THE MASSES DirecTV began signing up large numbers of new customers, not all of whom were good credit risks, Byman said. Also, the price of satellite dishes was falling, causing extensive “buyers’ remorse,” he said. “People would sign these $1,500 loans, then two weeks later see the same thing sold at $400,” he said. “People thought they were being defrauded.” As a result, the loans started to default. “The losses were staggering.” The financing program ran from August 1995 to August 1996; $210 million was loaned with $170 million in losses, Byman said. By the end of 1996, DirecTV had paid $20 million to $30 million to GE Capital in defaulted loans. “Then they said they weren’t going to pay any more,” Byman said. In October 1997, GE Capital sued DirecTV and its parent, Hughes Electronics Corp., charging breach of contract. DirecTV filed a counterclaim against GE Capital, charging fraud, negligence and breach of fiduciary duty. DirecTV claimed that GE Capital had promised to help keep losses down but had failed to assess credit risks properly, said defense attorney Michael Baumann. GE Capital had established a credit risk scoring system, Baumann said, but did not follow its own standards. GE Capital, for example, gave an “A” grade to numerous buyers of the satellite dishes, assessing these buyers as minimal risks, he said. “They estimated the loss rate for these people would be under 2 percent,” Mr. Baumann said. “The loss rate was 60 percent for those people.” Overall, he said, “78 percent of the loans went into default.” To negate DirecTV’s charge that GE Capital violated its own rules — and to bolster GE Capital’s contention that DirecTV breached the contract — GE Capital stressed the same theme: In developing credit standards for the program, GE Capital had followed the direction of DirecTV. In order to maximize the number of subscribers, Byman said, “DirecTV insisted we give loans to people who weren’t credit-worthy.” To test this and other themes before trial, GE Capital ran several mock jury trials with the help of DecisionQuest. The first mock trials used what Byman calls “clopenings,” just the opening and closing statements for both sides. A second round of mock trials included videotaped depositions of key witnesses, to “see how individual witnesses played.” The mock trials “helped us refine things.” Before trial, DirecTV had offered to settle “for a lot of money,” he said. But the mock jurors were willing to award GE Capital far more. “The mock trials helped us have the heart to go to trial.” On July 21, a New Haven, Conn., jury rejected the counterclaims and awarded GE Capital $133 million. DirecTV filed motions to set aside the verdict, but these were denied on Oct 20. Prejudgment interest was added at that time, raising the judgment to $181 million. DirecTV has appealed.

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