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Avoid Suicide by Litigation: Learning Lessons from SCO and Intel

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A few months ago I was contacted by one of the firms that brokers analysts and told that we should get ready for a wave of litigation and related expert witness work. During a downturn, people tend to get more concerned about the money that is leaking through the cracks and competitors who appear to be taking unfair advantage. In addition, law firms face a reduction in retainer income and the reality that companies generally cut back on insurance-like services, like legal support and consulting, as their critical needs (keeping the lights on) take up a higher percentage of their declining income. This comes together in the form of increasing litigation between companies and class-action litigation initiated by law firms. I'm not aware of this ending well; it can cripple vendors, destroy companies and careers, and put additional pressure on markets that are currently treading water.

 

SCO and Why Litigation Is a Bad Competitive Tool

 

SCO is a perfect example of why litigation is a bad choice as a competitive weapon in any industry. It has to do with competence. If you were an expert in tennis, for instance, you wouldn't choose to compete in Grecian wrestling. Litigation is a complicated skill and one that requires a high level of expertise. Few CEOs know how to compete with it. Those who do tend to be in the litigation business. SCO was a perfect example of a firm choosing to compete through litigation, though it had no real clue how to do so.

 

Baystar Capital, its biggest investor, tried to get it to shift to a litigation-centric management model and wisely asked for its money back when SCO's executive team refused. This lack of focus resulted in a long string of mistakes that eventually killed the company and made Baystar, in hindsight, look incredibly wise for exiting.

 

The reason litigation looks so attractive is that people focus on the large public settlements, not on the large public failures, and tend to see cases only from their own perspective. This leads to decisions that are incredibly expensive and largely unsuccessful. In litigation, both sides believe strongly that they are right. One side is generally very wrong and doesn't know it. TV helps create an impression that the good guys win and the bad guys lose, and that the entire process is over quickly. The truth is that the outcome is never certain, it always costs more and takes longer than planned, and it is seldom clear to the court who the good guys and bad guys really are. The first storm appears to be surrounding Intel.

Intel's Cross-License Storm

 

Intel appears to be stepping out from under its cross-license agreements, first with AMD and most recently with NVIDIA. It was already engaged with AMD in what Intel has identified as the most expensive litigation of its type in history. Cross licensing is a practice designed to be a defense against excessive litigation. When used properly, it focuses the competitors involved into competing on product and typically takes litigation off the table as either an offensive or defensive competitive weapon. It is a tactic that also focuses the companies involved on the expertise they have and allows them to play the game for which they were trained. When these agreements break down, as they are around Intel, the result is typically massive and complex litigation until either one party fails or management again comes around to the idea that this method of competing is counterstrategic and excessively expensive for the likely benefits achieved. Part of the expense is that instead of focusing the market on the firm's products and/or services, it focuses it on the litigation. At best, it creates a drag on sales. At worst, it can delay product and, should the litigation go in an unexpected direction, result in a long-term adverse effect on image and profitability.

 

Wrapping Up

 

Litigation is a weapon that should largely be used defensively, managed by experts, and only as a final resort. There are few firms that do it offensively well and even the strongest, like Oracle, use it sparingly. Cross licensing has a purpose: assuring the right focus for the firm. Companies that forget this tend to regret it. As economic conditions degrade, litigation will appear more attractive. I'm suggesting that you avoid the seductive call of this seemingly easy path. It's not easy and it could have the exact opposite outcome from the one you want. Just remember SCO effectively committed suicide by litigation.

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