Chapter C2

Chapter C2

Rule 2 - Planning defense

“Everyone has a plan”, the great boxing legend Mike Tyson once said, “till they get hit”. This is above all true of litigation. We know that litigation is a double-edged sword. For every blow you strike your enemy, you may get one back. In going to court, you may have a plan to hurt your enemy but he has a plan to hurt you back. Where will the balance sheet meet its bottom line? If you think about it, wars are as much about endurance and survival as they are about triumph and victory. Cases have a way of rebounding, causing you damage, sometimes damage so serious you are unable to fight any longer forcing you to admit defeat.

From a purely practical standpoint, it follows that for you, victory always has to be your second lower priority. As a litigating party, your primary job – indeed duty – is to ensure at all costs that whether or not you win, you must not lose. When you start your war preparations, you first have to figure out how to make absolutely certain that you do not lose. If there is such a thing as invincibility, you must focus completely on getting to that point, before you start planning on hurting your enemy.

Naturally, to do this well, you have to be ruthlessly practical, driven by a great understanding of the reality facing you. You will recognize that there is no such thing as absolute unconquerability, complete invincibility. You have to ask yourself how much damage you are capable of suffering. Indeed, you will ask yourself how much damage you are willing to suffer before it begins to really hurt.  Then again, you would ask yourself what is the likelihood that you will absorb such loss or damage. If you should decide that there is fair chance that you will take a lot of damage, or that you are not truly capable of absorbing a lot of damage, you would plan to protect yourself a great deal and become unconquerable.

But then, how are you going to ensure that you are not defeated? How will you make yourself unconquerable?

In essence, this is a process of analysis. To begin with, you must start by identifying all your weaknesses. You must literally make a laundry list of all your known vulnerabilities. In this you must be comprehensive. You would not only be looking at weakness that prevent you from winning, but you should also look at weakness that can lead you to a debacle. Let me illustrate my point with some examples:

• Your weakness may flow from your fatally flawed business structure. A typical example of such a weakness is a case where you own your business but does not control it. This is pretty common in joint family businesses where every member is a part owner but one brother or uncle practically controls everything. In this situation, you cannot control your own business entity leave alone attack your cousins or uncles.
• Your weakness may flow from your business organization being structured in a way where it cannot be seen to be litigating. A good example of such an entity is a Private Equity Investment Fund. Typically, such Funds source their money globally, invest them in certain categories of businesses, help grow those businesses and then exit at a profit. They have to be friendly and amicable if they are to have access to any investment avenues at all. Once inside these companies, they have access to a great deal of information. They have to be seen to be reliable and very conservative. When it’s time to exit, they need to get out quietly and with dignity. If their exit generates controversy, it erodes the value of their investment and defeats their own objectives. At all times then, they have to be seen to be friendly with the companies they invest in. They moment the market perceives them as quarrelsome, the market will shy away from dealing with such an investor. That apart, if they start legal wars, those that invest in these Funds see them as throwing good money after bad, money that should be invested in new ventures rather than invested in unpredictable litigation in old ventures.
• A third weakness may be found in businesses that are highly employee dependent. This is probably true of a lot of specialized businesses, good examples being software services, stock trading companies, IT enabled services or even consultancy service companies. All these businesses are very dependent on the high technically qualifications of their employees. Now consider a situation where a gifted employee is undermining the company, or moonlighting on the side, or planning to steal clients and exit the business. If the owner sets out to sue his own employee, he erodes his own shareholders value in the very process of trying to protect his business. Basically, it’s a case of heads the employer loses and tails the employee wins.
• Something similar occurs in businesses where the agendas of owners and employees collide. Owners take a medium to long-term view of the future of their business as a business: they like to preserve and promote value to secure the continuing good health of the business. Conversely, employees take a short to medium view of their salaries and perks as the whole purpose of the business. Rarely if ever do employees cooperate with measures that protect the long-term sustainability of the business but do nothing to benefit to employees. Such a situation is common in businesses where key employees have large revenue pegged remunerations. Employees in such businesses engage in short term profit maximization while owners prefer sustainability. In such a situation, if the owner starts a legal war with a third party which has the potential to eat short term profit, he gets no support from his employees, indeed may end up with an employee exodus.
• Your weakness may also flow from the fact that you built a business that doesn’t need to spend energy in fighting legal wars. This is often true of the smaller technology driven companies. Any number of fairly large businesses are also like that. Think about a company selling specialized packaging, where it is the only supplier of its own packaging raw material. Such a company would almost never have a dispute with its customer, or distributor, or vendor. It’s not just that such businesses don’t maintain a proper legal department, it’s that no one in the business has any skill in dealing with the litigation world, and no one seems to know what to do if a legal war comes knocking at the door.
• Your weakness may flow from financial precariousness, meaning you don’t have the money to sustain litigation for very long, nor are you willing to raise or commit substantial resources to warring with your enemies. Have you noticed that highly profitable companies are always more willing to get into a legal brawl than those that are not? You can end up with similar results in a case where the owner is just trying to get out of the company and wants to collect what money he can rather than raise new potential liabilities.
• Finally, to take one final example, your weakness may also flow from the generic social and cultural environment in which you operate. If you a foreign company trying to set up a hydro dam in a remote Himalayan valley, you will face a lot of prejudice. You will face a similar weakness if you operate a business which collides with local moral standards. This is as true of a dance bar in Gujarat as it is true of a massage parlor in Ayodhya. In none of these cases would you expect to find much sympathy for your case if you litigate in a local court.

Examples of weakness can be multiplied endlessly. It is enough for me to move on with the observation that your assessment of your weakness must be comprehensive and ruthlessly honest. Once you have identified these weaknesses, you must then proceed to address them and decide how you will compensate for them. Thus, if you find that your business structure is fundamentally flawed in its ability to fight a legal war, you must restructure your business before you go off picking a fight with your enemy. If litigation is alien to the character of your business, you must either change the character of your business or refuse to fight a legal war. If you find yourself dependent on key employees to carry your war when clearly such a war will hurt them, you first have to convince them that the coming war will be good for them in one way or another. If you don’t have manpower to run your litigation for you, you must find the people to do it. Finally, if financial precariousness or adverse social and cultural environments are your bane, it will be best if you simply drop the whole idea of getting into a legal war.

Here is an example of a case where ‘invincibility analysis’ was used to decide if the client was to get embroiled in a legal war.

The ‘Call Me’ case

          In 1998, the Department of Telecommunications, commonly called DOT, started offering Premium Price Telephone Services in India. These were generally charged at Rs. 20 for a three-minute call (which at the time was a lot of money!) and this revenue was shared between DOT and its customer. The way this worked, DOT set up dedicated lines to the customers premises. The customer then offered premium priced telephone services a customer was happy to pay for. Now you may ask yourself: what kind of telephone calls would most customers be most happy to pay premium prices for?

Although most businesses started out with good intentions, Rs. 20 was a great deal of money to pay for a three-minute call and DOT’s revenue share was arguably too high for the business to be viable.  In time, service providers gravitated to offering telephone sex and similar services. The whole industry acquired a reputation for sleaze. By the turn of the century, the back page of most city supplements displayed a dozen blaze’ advertisements for telephone sex, all under the baleful eye of a very morally upright government telecom department with its eyes wide shut!

 That’s not to say that all businesses had the same appetite for a fast buck. Call Me was one of many companies offering premium services, and as far as I now, its offerings were entirely legitimate. They had an astrology advisory line, an agony aunt help line, a business advisory service and a gaming show where prizes were given away for successfully answering a series of quiz questions of increasing complexity. It didn’t help though because the company was a saint in sinner’s clothing!

It is a common experience in India that when something is perceived as being at the edge of middle-class decency, a multitude of instrumentalities of state – police, telephone company staffers, urban planning land use authorities, tax inspectors and utility inspectors – all move in for a shake down. Call Me found itself under relentless pressure to pay off one and all or face harassment. Call Me had the distinct feeling that DOT staff wanted to join the shakedown party.

Under the contract, the payment cycle was way too long. The person calling in would typically receive a bill for calls made up to two months after he made the call. He then had some three weeks to pay it. DOT thereafter had three months to reconcile its account and pay the companies operating these lines. In the event of a dispute, DOT had no obligation to pay anything till the dispute was resolved by arbitration held before someone nominated by DOT. Basically, under the contract, Dot didn’t have to pay these companies for six months after a call was made. After that, if it claimed that 3 calls had been made in a billing cycle instead of 30,000 as had actually been made, it only had to pay for three and the dispute about the other 29997 calls would be decided when the DOT appointed arbitrator decided to decide it. Basically, operators were lambs for the slaughter waiting their turn.

Between the sleazy reputation of the business and the structure of the contract, Call Me soon found itself receiving a thinly veiled succession of extortion demands from DOT payment facilitators (should we call them consultants?). Kick backs were quoted at fantastic percentages. Even as these companies did their best to ignore the threats, DOT slowed down its payments to a trickle within the year of launching the service. Call Me was not in a dubious business and didn’t want to pay these kickbacks. It tried to explain itself to DOT but who was listening? Approaching superiors didn’t help either. Was everyone on the take?

Call Me went looking for a lawyer. It even issued a mild-mannered legal notice, almost apologetic, more to raise a claim of ten million rupees with no intention of going to court. I suppose Call Me wanted to communicate its seriousness and test the waters.

Meanwhile, DOT discontinued the service. Call Me found itself owed some ten million rupees. It had spent another half a million in advertising already. It had expanded staff, expended more funds on capex and was generally gearing up for a substantial rollout of new services. Losses looked like they were going to touch twenty million. Call Me proposed litigation.

Call Me’s case was simple. The license was not terminable at will. It had a substantial investment in its business. It wanted the service to continue and it wanted to be paid its outstanding. It seemed like a good case for a civil writ.

The lawyers couldn’t convince themselves to do it. Call Me operated a clean service, but the whole industry had a dubious air about it. It was a case of guilt by association and besides, how do you combat the argument that an agony aunt service is only an invitation to engage in dirty talk? How much sympathy does one expect from a judge? How could a judge protect Call Me’s totally legal business without also being seen to have a sneaking sympathy for the sleaze in the industry? Lawyers decided it was not possible to become invincible and Call Me was persuaded not to litigate.

 

Call Me is a classic example of a litigant who is inherently vulnerable. Its business segment, its operating environment, its regulators, its compatriots, all have a certain vulnerability to them. The establishment doesn’t support people like this and this weakness all too obvious. Such a person cannot expect any sympathy from the Justice Machine and makes for a poor case. In such circumstances, asking the Justice Machine for help is dangerous, frequently counter productive. When such a business files a case, it in effect becomes an investigation into the character of the business. In the confusion that follows, the simple legal dispute is lost and the issues get obscured.

The real problem here though was that there was no way to get past the weakness, to remedy the vulnerability. If people see you as part of the paid sex industry, what can you possibly do to change that perception?  But there may be other cases where an analysis of the problem does allow a solution to present itself. There are even cases where an analysis of the problem presents solutions that become the greatest strength of the case. Let us now look at a case which provides an instructive lesson on achieving invulnerability by addressing vulnerability.

The Metro Cable case

Satellite TV crept into Indian homes in 1991 long before either business or government perceived the enormity of the revolution then underway. Almost without warning, Star TV was up in the sky and consumers wanted it. It was a simple system in those days, one dish antenna, one front-end converter, some cable running down through the roof to the floors below and a color TV on the other end.

Even so, many could not afford to install these systems. This is when Indian ingenuity had another of its eureka moments. Every colony, every building, indeed every slum cluster suddenly sprouted a local cable operator. In time, this cottage industry then started to improvise. It was a time when the Video Cassette Recorder ruled the entertainment world! Cable operators started to offer multiple channels, many showing the latest bootleg movies on ‘local cable’ channels. The quality sucked but the novelty of movies at home hit the spot. Cinema halls started to go empty.

Then events queered the pitch again. Given its deep penetration into Indian homes, Satellite TV became the favored target of a vast amounts of advertising revenue in a way that cinema could never have. Sat TV channels were awash with cash. Every business house and their uncles set out to become TV Mughals. Channels followed channels and in no time, there were some 50 Satellite channels of rubbish on the TV to choose from. No one watched those bootleg movies on the VCR channel anymore because these Satellite TV stations now had the money to legally buy and show the latest Bollywood masala movies to a much better quality-standard soon after they were released.

 These changes decimated the cottage industry cable operators. Each operator now needed to create a technologically advanced Head End and control room, complete with half a dozen dish antennae pointing at various satellite TV stations and an equal proliferation of down stream equipment. To pay for all this equipment, operators now needed to service a much larger consumer base across many colonies, which meant the cables had to cross roads and parks and rivers too. That also required the cooperation of a variety of municipal, police and administrative departments. Investments became substantial and the economies of scale rendered small operators unviable. The big players moved in.

The big players had the money to put up the Head End with its expensive equipment and technical support resource base but they could not possibly feed, control and support every nook and cranny of the last mile. They needed localized management to support them, someone with a stake in the local level business, someone who knew the customers, more or less like your press wallah. Collecting those modest monthly cable bills from Individual housewives and keeping an eye on every cable connector and splitter was too much of a headache. Why not let the cottage industry cable operator keep their local operation for a cut of the take but save them the trouble of making huge investments by providing them multi-channel TV feeds?  It was a great idea but how were these big boys to get the last mile cable operator to sign up with them?

This back ground now brings us to the case at hand. Metro Cable was already a large Indian cable company with interests across half the country. It was able to do this because it was able to consolidate large networks in a great many cities and make local cable operators sign up with them. It did this by identifying local strongmen in every area to effectively implement the consolidation. It was the local dada’s job to collar the variety of local operators and get them to sign on the dotted line. They did this by running a protection racket, cutting cables of operators who refused to sign up, intimidating repair crew and so forth. They couldn’t do this without help from the local cop station. This was a dirty job and it required strong-arm tactics. That this was achieved seamlessly is one of Indian’s untold stories of the good, the bad but mainly the ugly.

Metro found a structure to reward these “consolidators”. It created local joint venture companies, of which Metro controlling 51% of the equity with the rest being held by the consolidator and his family. Each of these Joint Venture Companies leased a ready-built Head End from Metro and operated it. The TV signal from this Head End was distributed to last mile Cable Operators. Cable Operators in turn managed the last mile, kept their cable network operational, collected monthly charges from end users and shared this revenue with the JV Company. In turn, JV Company revenues were employed to pay lease rental on the Head End at an agreed price. Any excess revenue collected by the JV over its costs was profit and was to be declared as dividend.

While this model served to consolidate the industry across India, it created a complete mess in the medium term. Metro could not be everywhere. While it had the controlling equity in these JV Companies, their management was in practice left to the consolidators who were also usually the Managing Directors of these JV Companies. The Managing Director had the run of the place. They knew all the Cable Operators, they understood the revenue stream (most of which came in cash!) and, because these consolidators WERE Mr. Metro Cable in the territory, they acquired enormous local influence.

How did the consolidators end up with so much local influence? In the main, I would say two reasons. First, only the consolidator knew how many households each Cable Operator actually connected to his network. It was a cash business. Cable Operators under-declared their connectivity to the JV Company, and the Managing Director of the JV further under-declared his connectivity to Metro. If the Managing Director needed extra money at short notice for whatever reason, he took ten of his henchmen and raided the Cable Operator territory, unearthing undeclared connections to households. A compromise was generally arrived at in due course whereby the Cable Operator paid spot cash to the Managing Director! This money never found its way into the coffers of the JV Company. The Managing Directors grew richer, the JV Companies continued to bleed and Metro received little if anything by way of lease rentals for the Head End. What was there in it for Metro?

Metro viewed the whole thing as interim misery. They believed that in due course, the cable industry would be the vehicle by which the whole converged access-information-entertainment-marketing industry would find its consumer. It was a matter of occupying the segment and they had the money to support the losses. With the benefit of hindsight, we know now that Metro was wrong. but that’s another story!

Managing Directors of JV Companies also acquired another unanticipated kind of muscle. Most Head Ends also ran two or more local channels. One of these would typically be a local news channel, the TV equivalent of a provincial rag. The other local channel run at the Head End would show pirated movies, little locally produced documentaries on friendly neighborhood rising stars and so forth. It was a great place to project politicians and the politicians made sure that the Head End didn’t get raided for airing bootleg movies. As the years went by, a whole politician-police-Head End- Cable Operator nexus ruled the roost.

This was exactly the situation Metro’s lawyers were expected to confront when they were called in advice Metro on the fate of Metro’s Hyderabad based JV Company AP Cable. AP Cable had a peculiar problem. The Managing Director of this Company, a local henchman called Sai Reddy, had failed to collect revenues from Cable Operators for some six months. He had also purchased two cars employing AP Cable funds in his name and practically emptied all bank accounts of cash. Substantial defalcation of money was suspected. He was now talking to Metro’s competitor and had offered to move all of AP Cable’s Cable Operators to the competition in exchange for a substantial sum of money. Metro was under pressure to forestall impending doom.

Could Metro cable use its 51% shareholding to take over management of the JV Company? A quick review of the reality on the ground revealed many near fatal weaknesses. AP Cable’s Board of Directors had three nominees – Reddy and two Metro nominees – but Reddy had complete authority to run the company as he chose. AP Cable’s accounts were entirely controlled by Reddy. To this end, all Tally statements were held in his personal desktop computer exclusively. If Metro wanted to prove defalcation, it needed access to this stand-alone desktop computer.  

It got worse. The Head End was located in a building he had rented in his personal name and then sub let to Metro for a significant up-side. He physically controlled the Head End. He was the authorized signatory for all Bank accounts.  He had excellent contacts in the city with men of influence, the local administration and the police. He had money, money that belonged to AP Cable. Metro had no control over the Cable Operators (i.e. its revenue source), the Head End (i.e. its manufacturing facility,), the Bank (i.e. corporate funds) or the local environment. To put it bluntly, Metro had no ability to take charge of its own business.

If Metro wanted to take over AP Cable, it needed control at four key points, all of which were its weak points viz (1) Operational control, i.e. control over the Board of the Company; (2) Financial control, i.e. access to its accounts and revenue stream; (3) Market control, i.e. control over Cable Operators and its revenue stream; and (4) Product control i.e. control over its Head End. Metro could not possibly fight a legal war unless it had control over all four key points.  

Metro found no simple way to address these weaknesses. Control cannot be wished into existence: each weakness was a potential court case. Metro would have to find a pre-emptive strategy that would address the weakness, give it control and allow it to them go into a court room. If any of these four weaknesses remained unaddressed, a court case would be unwinnable.

As the battle commenced, Metro opened the first fuselage by calling for a Board Meeting at the local hotel. Reddy came prepared for a long argument. He didn’t realize that the only purpose of calling the Board Meeting was to physically separate him from the Head End. The Board Meeting was amicable. Metro’s nominee directors proceeded in a leisurely manner, slowly taking up each agenda items with frequent breaks for tea, biscuits and local gossip.

Meanwhile, a team of retired army men led by a trusted hand entered the Head End and physically took control of all assets. This team found the computer, backed up the Tally statements and e-mailed them off to the Board meeting venue. They then posted security guards around the parameters of the Head End and prepared an inventory of everything lying in the premises ably supported by a notary public.

Meanwhile, back at the hotel, Metro’s nominee directors now changed tack. They flashed printouts of the Tally statements and accused Reddy of financial skullduggery. Reddy was taken aback. Where had these accounts come from? He tried belligerence but that didn’t help explain the defalcation. Eventually he walked out of the meeting. He was barely out of the room that the Board stripped Reddy of his executive powers, recalled the authority granted to him, appointed a committee to look at all allegations of financial impropriety, co-opted another director to the Board, conferred upon him appropriate executive powers and authorized a change in the procedure for operating bank accounts. Within two hours, Metro had control over the Head End, it had a new Managing Director, and the banks were under control. By the time Reddy reached the Head End, the new Managing Director was seen occupying his chair.

Within minutes, the police were at the door. The new Managing Director was in his office and he had certified extracts of Board Minutes establishing his authority. He also had official documents proving Metro’s majority ownership of AP Cable, documents establishing that all Head End equipment was owned by Metro, and several lawyers ready to argue any point the police wanted clarity on. From a strictly legal standpoint, there was little the police could do.

After the departure of the police, the new Managing Director immediately put together a database of Cable Operator and invited all of them for a meeting the following morning. At the meeting, the new Managing Director asked Cable Operators for part payment of the large outstanding so that he could continue providing the TV signal. Cable Operators in turn advised him that they had indeed made those payments over to Reddy and they were happy to confirm the details in writing. By lunch, the Managing Director had in his hands some 26 letters setting out details of payment of large sums of money to Reddy which he had failed to deposit into AP Cable’s bank account. Metro’s victory was complete.

This was only the beginning of the case of course. We will come back to it later on in this book.

It is obvious that considerable planning went into the strategic rollout in the Metro case. The whole sequence of action was orchestrated, proceedings were rehearsed, dry runs were conducted and each of the 15 or so players in the game were comprehensively briefed on what they must do in all anticipated scenarios. Battle planning was immaculate and that it succeeded is testimony to the effort that went into the planning. The conclusion then is simple. Having a weakness is not in itself a problem. The planning process is capable of converting weaknesses into strengths. Indeed, the best war plans are those which begin by quickly making moves that make weaknesses irrelevant or better still, convert them into incremental strengths.