Sunday, July 29, 2007

Interview With The Legal Blog "Law and More"

I recently did an interview with Jane Genova for here blog "Law and More" . As far as I am concerned Jane's blog is at the forefront of anything lead paint. Interested parties could easily spend an entire day there educating themselves on the lead paint and public nuisance areas of law. Our interview focused on the investing aspects of the litigation on companies like Sherwin Williams (SHW), DuPont (DD) and NL Industries (NL). The full text is below and can be read on her blog here. The interview was also referenced by Walter Olson at the Manhattan Institutes's blog "Point of Law".

It's the stock price, stupid - along with hits to brandname, the distraction from operations, and the actual legal expenses of being ensnared in a lawsuit. These are the reasons business in the U.S. and increasingly now in Europe factor in liability risk into everything from their accounting to where they will locate a new facility [think Nissan and Toyota's eventual decision to build plants in a tort-reformed Mississippi].

Because of the importance of this matter, I am providing readers with an exclusive interview with financial-markets expert Todd Sullivan. In addition to being a frequent commentator on this blog, Sullivan contributes his financial assessments to, among others, THE WALL STREET JOURNAL and FORBES. He publishes VALUE PLAYS, which is morphing into the go-to site for investors and the investment community.

JG: In myriad ways, the threat of litigation itself costs public companies. Do you know how some of these costs can be reduced? Does settling rather than going to court tend to put a lid on those costs?

TS: When the federal government is involved, it seems that settling may be the only option if for no other reason than the limitless pockets and the ability to pursue the litigation from all angles until it is exhausted. When we drop to the state government and individual plaintiffs, the only recourse is to fight.

Had the lead paint litigation happened prior to the asbestos cases, we may have avoided bankruptcies at USG, Owens Corning, WR Grace and dozens of others due to that litigation. The resources of state government and private plaintiffs can be exhausted or future litigation can be discouraged by the ferocity of the fight by defendants. This is what we are seeing currently with lead paint. After the Rhode Island victory it would seem that the plaintiffs had a false sense of future victories and that the defendants stiffened their resolve, as well as learned from their defeat and honed their strategies. As I assess the lead paint public nuisance litigation situation, I see that the tide has turned.

JG: As a value investor, are you attracted to or turned off by public companies which have a record for settling?

TS: Had the lead paint defendants even broached the word "settlement," an avalanche of suits would have followed that would have bankrupted them. I have no doubt about that. The ferocity of their fight has essentially discouraged additional suits being filed and has lead to several localities dropping suits.

Jane, settling local or private litigation is an admission of guilt in the eyes of the public. The only time settling is acceptable is to stop federal charges as there is really no limit to how far the government can push a case. In this instance, settling is not seen as an admission of guilt but as "a cost of doing business" because, as a group, the government seems to be trusted less than business.

Many people have had dealings with federal, state or local government over myriad issues and settling usually seems to be the best resource for most individuals. For business it is no different. There is a sense of being powerlessness against the government when it decides you are guilty. So, businesses are usually not penalized in public perception for acting in a way that depicts these feelings and putting the issue to bed, so to speak.

JG: In your opinion, how was Sherwin-Williams able to protect its share price during the prolonged lead paint public nuisance litigation?

TS: Sherwin-Williams separated its situation from the tobacco and asbestos mass tort cases. Comparisons were drawn immediately by the investment community and Sherwin-Williams was careful to distance itself from that litigation. It did so by educating the public about the differences in the kinds of litigation. Moreover, it explained in detail and kept reinforcing the local government's roles in the "nuisance." In addition, it downplayed the potential significance of the litigation.

Sherwin-Williams was careful in its earnings calls to ever so briefly summarize the litigation and then continue on to its results and plans for the future which included expansion and growth. There was no talk of "setting aside reserves" for the litigation of anything that would have lead people to believe they anticipated either ultimately losing or settling. At no time did Sherwin-Williams act as a company which even believed for a minute it may ultimately be liable.

JG: What advice would you give public companies about preventing being sued or what to do when sued?

TS: Fight, fight, fight. The tide is slowly turning against mass tort litigation and the longer and harder the fight, the odds are greater that other potential litigates will stay away.

Read more about Jane Genova here

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