Hiring A Fox...

By Eric Roston

Sulzer Medica was one of those quietly successful Swiss firms that make steady money and precision products--in its case, medical implants from teeth to knees. But then Medica burst into the news in the worst way. In December it recalled 40,000 titanium hip replacements that had been tainted during manufacture with a thin film of oil--just enough to prevent some patients' bones from bonding to them. The recall forced more than 2,500 to endure a second painful operation to replace faulty implanted joints; 2,000 more are expected. Most are in the U.S., so of course the result was a 1,000-lawsuit avalanche.

In February, with Sulzer Medica facing possible bankruptcy, one of its U.S. executives rang his buddy Joe Cunningham, a physician prominent in Texas, to brainstorm. "My basic idea," Cunningham says, "was to get somebody who thinks like a plaintiff and see how they would respond to this." He called Richard Scruggs, the Pascagoula, Miss., trial lawyer whose efforts forced big tobacco into a $246 billion settlement in 1998 and who is working with Cunningham in a crusade against managed-care companies. Though Scruggs styles himself an advocate for the little guy, he is also a sucker for big, gnarly cases, and to everyone's surprise, he agreed to help Medica find a way to compensate its victims without going bankrupt.

Thus began Medica's six-month crash course in U.S. legal, corporate and media customs--the sort of tutorial that more and more global companies must take in countries where they do business. The irony in this case is that a staid Swiss firm has learned the U.S. class-action game well enough to sidestep the punitive damages that have knocked down other businesses--think asbestos--like dominoes. Medica's bold, novel defense may set a precedent for other lawsuit-plagued industries, including tobacco.

In mid-March, Sulzer Medica executives flew Scruggs to their headquarters in Winterthur, Switzerland. "Does everybody know what the IRS is?" Scruggs drawled before the stone-faced suits. "Well, I feel like an IRS agent who says he's here to help." He didn't get so much as a grin.

Medica faced internal conflicts before it could evaluate legal advice. Some executives in Winterthur blamed their counterparts in Austin, Texas, where the joints were made, and the Austin executives looked to headquarters for direction. Says CEO Stephan Rietiker: "My first task was to bring people together and create team spirit."

New management, led by chairman Max Link and Rietiker, assembled in June and told Scruggs to pursue a deal. He crafted a creative solution in which a trust would be created for the victims and guaranteed by a lien on all company assets. Of each year's profits--$113 million in 2000--Medica's management could use about half to run the company. The other half would go to the injured patients, who would receive expenses and as much as $97,500 in cash and equity. Those who elected not to join in the settlement could still sue but couldn't win any money until the lien dissolved--in 2008 at the earliest.

Some victims were horrified at the prospect of holding stock in the company that caused them trauma, but, Medica argued, that might be the only way to generate enough money to compensate them. Investors felt saved. Sulzer Medica shares jumped 19% on Aug. 29, the day after a U.S. district judge gave the $780 million plan a preliminary nod. "If it holds, it will be replicated," says John Aldock, a Washington corporate defense attorney. Don't worry about Scruggs putting himself out of business. If the deal holds, he could receive as much as $25 million.

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