Falling Merchandise - Business Week - 7-3-00

Wal-Mart: Why an Apology Made Sense

Business Week: July 3, 2000
Department: Legal Affairs: Litigation


Byline: By Wendy Zellner in Bentonville, Ark.

In 1996, Donna Meissner was on her way to buy diapers at a Beaumont (Tex.) Wal-Mart store when she was kidnapped in the parking lot and raped. After she sued Wal-Mart for providing inadequate security, her lawyers asked the retailer for a copy of any studies it had conducted about prior criminal attacks on store property--a garden variety pretrial discovery request.

Turns out, Wal-Mart Stores Inc. had a document that fit the bill: a summary of a 1993 survey indicating that 80% of all criminal incidents other than shoplifting took place in the parking lots or around store perimeters. That would have been valuable evidence for Meissner's lawyers, who needed to show that the retailer might have foreseen such assaults.

But even though Wal-Mart was legally obligated to turn over the study, Meissner's attorneys never got a copy. Instead, they heard about it from other lawyers--and immediately accused Wal-Mart of covering up critical evidence. Texas state court Judge James Mehaffy agreed. In April, 1999, he threatened to fine the company $18 million and charged that Wal-Mart had a "corporate policy of deliberately obstructing and thwarting the legitimate ends of the discovery process."

DISCOVERY ABUSE. Initially, Wal-Mart denied Judge Mehaffy's accusations and vowed to fight any sanctions. But on May 25, Assistant General Counsel Ronald A. Williams stood before the judge in a Beaumont courtroom and made a stunning public apology. Admitting that "a sanction was merited" in the Meissner case, he promised that the Bentonville (Ark.) retailer would now be "engaging in a searching reevaluation of the litigation processes which have led the parties to this courtroom on this day."

Is the change of heart for real? Many plaintiffs' lawyers are skeptical. The company has achieved a reputation as one of the toughest litigants in Corporate America. Since 1997, judges have sanctioned Wal-Mart for discovery abuse 60 times. "It's not even what one calls hardball discovery litigation tactics," says Denver lawyer Jeffrey A. Hyman, who has handled numerous cases against the retailer. "It's simply a refusal to comply with the discovery process that we have in the United States."

But new Wal-Mart Chief Executive H. Lee Scott Jr. insists the change is genuine. "I'm embarrassed" by the sanctions record, says Scott. "I don't think we should allow the public to think we would ever have done something that wasn't honest or true."

The job of fighting those perceptions will fall to General Counsel Robert K. Rhoads, who started with Wal-Mart's law department in 1979, fresh from University of Arkansas law school. Like other top executives, he frequently quotes company founder Sam Walton to explain the company's business philosophy. "Mr. Sam didn't say, `Win at all costs.' What he said was, `Fight a fair battle if we've done nothing wrong,' and we believe that."

Rhoads argues that the problems in the Meissner case are an aberration. Noting that the mammoth company has 10,000 cases pending at a time and handles 100 discovery requests a week, he argues that Wal-Mart is sanctioned in fewer than 1% of its cases--and the number has been dropping in recent years. "We have our fair share of litigation, and when you look at the numbers, it just happens incredibly rarely," Rhoads says.

Vowing to avoid sanctions in the future, Wal-Mart says it plans to put its outside lawyers on a tighter leash. For example, if plaintiffs make any motions to compel discovery, outside lawyers must now alert Wal-Mart. And the company is beefing up a special in-house discovery unit that now includes one in-house lawyer and five assistants. Wal-Mart also has hired the national law firm Jones, Day, Reavis & Pogue to comb through its discovery processes and suggest improvements.

PENNY-PINCHING. But some think alarms should have rung sooner. Although the retailer receives discovery sanctions only a small percentage of the time, "most companies' percentage is zero," says William B. Lytton, general counsel of International Paper Co. and a member of the board of directors of the American Corporate Counsel Assn.

Indeed, critics insist that the problem goes deeper than a lean legal staff overwhelmed by discovery requests. They blame a penny- pinching, sales-driven culture that seeks to deter suits with scorched-earth tactics. One former executive believes Wal-Mart has had an antagonistic relationship with plaintiffs' lawyers because it has been afraid of seeming too eager to settle. "The philosophy was, you set yourself up as a bigger target" if you made a deal with trial lawyers, this executive said.

It clearly has seemed implausible to many judges that a company with such massive resources could prove so bungling so often in litigation. In the case of an Illinois teenager who was shot in a store by another teen using one of Wal-Mart's air rifles, a judge was incredulous that Wal-Mart had taken seven months to produce its contract with the gunmaker. And then key parts were unreadable.

Wal-Mart's massive size is no excuse, says New York attorney Louis S. Ederer. "Just because you're big doesn't mean you don't have the same obligations to produce documents or comply with court orders," says Ederer, who has represented such big apparel makers as Nautica Apparel Inc. and Tommy Hilfiger Corp. in trademark-infringement cases against Wal-Mart.

In the case involving Nautica, Wal-Mart was sanctioned in March by a federal judge for failing to produce sales data for goods purchased at the store level. The company insisted that its computers simply couldn't recover the information for the period required. But the plaintiff's lawyers persisted and, a year later, deposed an information-systems manager who revealed that much more data had been available at the time it was requested. But it was no longer stored. As a result of that information, the judge gave Ederer's team the unusual right to conduct an on-site inspection of Wal-Mart's computer records and forced the company to pay for the other side's attorneys' fees and expenses, which could top $200,000. In awarding sanctions, the judge further noted Wal-Mart's "poor" track record on compliance with discovery requests in this and several other cases.

Judges aren't the only ones taking note of Wal-Mart's growing notoriety. With the Internet, plaintiffs and their lawyers are able to share information much more rapidly and broadly. Nashville lawyer Lewis L. Laska has set up the Wal-Mart Litigation Project and a Web site to gather--and even sell--information about lawsuits against Wal- Mart. The site bills itself as an effort to "level the playing field" so plaintiffs have a better chance of winning suits against the retail goliath. Another Web site, walmartsurvivor.com, includes court rulings against Wal-Mart and a list of plaintiff's attorneys who have successfully sued the retailer.

All this trouble might help explain Wal-Mart's sudden apparent focus on discovery issues. But if the retailer doesn't follow its apology with real action, "the plaintiff's bar is going to find that out and use it against them," warns New York University Law School Professor Stephen Gillers. Memphis lawyer Bruce S. Kramer, who's handling the case of a customer abducted from a store parking lot and then murdered, insists real change would require nothing less than a court-imposed system for monitoring the company's legal department. "I don't believe anything I hear from Wal-Mart," he says. If the company doesn't stem the tide of legal troubles and bad publicity, it could risk hearing those same words from its customers.

Wal-Mart's Cartful of Legal Woes
The retailer has been sanctioned for abusive
litigation more than 100 times, including:

After a Texas judge found that Wal-Mart had given false answers during discovery in a case involving the abduction and rape of a customer on store property, Wal-Mart in May apologized for its hard-ball courtroom tactics.

In a trademark infringement case, a federal judge in March concluded Wal-Mart misrepresented its ability to produce records demanded by apparel makers. The judge ordered an on-site inspection of Wal-Mart's computers and forced the company to pay for the plaintiff's expenses incurred.

A Texas judge in July, 1997, held that Wal- Mart had "consistently delayed discovery" in a personal-injury case involving falling merchandise. Wal-Mart is ordered to pay $45,000 in attorney's fees.

Accusing the company of hiding or destroying critical photographs, a Las Vegas federal magistrate in 1996 ordered Wal-Mart to pay sanctions of $15,000 and exclude certain testimony for Wal-Mart in a falling- merchandise case. He also found "troubling questions about Wal- Mart's litigation tactics generally."

DATA: Business Week

Copyright © 2000, The Business Week.

Wendy Zellner in Bentonville, Ark.,Wal-Mart: Why an Apology Made Sense,
07-03-2000, pp .


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