The settlement of the Eaton v. Frisby litigation last week was not a surprise. The case went quiet after Eaton got its clock cleaned last year at the Mississippi Supreme Court, which is a reliable indicator of advanced settlement negotiations. I suspect that the case has been basically settled for months.

Here is Alison Grant’s story on the settlement in the Plain Dealer. The article notes:

The case spawned more than 2,400 docket entries in Hinds County Circuit Court in Mississippi — where Eaton sued Frisby in 2004, alleging that six former Eaton engineers who took jobs at Frisby stole valuable trade secrets used to make hydraulic pumps and motors for aircraft. Those same six engineers now will divide more than $12 million as part of the settlement, a Triumph spokesman said.

What a win for the Frisby-six. They went from facing jail time in a federal criminal prosecution to dividing $12 million. Federal criminal defendants are almost never acquitted, much less end up making money. Other than the politically motivated sham prosecution of Justice Oliver Diaz, I can’t think of another federal prosecution in Mississippi that did not end in a conviction.

Eaton went from a billion dollar claim to paying $147.5 million to end the litigation. The result should be a lesson to all corporations on how important it is to have in-house lawyers who are competent and ethical. In contrast, the Eaton in-house lawyers seemed straight from the Dilbert comic strip.

Eaton spent millions of dollars trying to dig out of the hole dug by its in-house lawyers and original outside attorneys. But despite the efforts of some of the brightest legal minds in (or outside) Mississippi, the damage done by the original lawyers who wanted to cheat was too much to overcome.

The settlement ends that biggest civil action in Mississippi over the last decade. It will probably be a long time before Mississippi ever sees a case of this magnitude.

I’m not sure what I expected from Bobby DeLaughter’s interview on WAPT news last week. But it made a big impression.

My big takeaway from the interview was that Bobby DeLaughter looked happy. He smiled. He had the bemused twinkle in his eye of a man who has been out of the legal profession for a few years.

I’m not surprised that DeLaughter was pitching a book. The title: Inside the Labyrinth: A Bo Landry Exotic Thriller. I don’t know if it’s any good yet. But the title smells like money.

DeLaughter is a good writer. So it wouldn’t surprise me if he does well in his writing career.

He sure looks better than the last time we saw him.

There have been a few recent developments in the Eaton v. Frisby litigation.

The case case appears to be bogged down and headed back to the Mississippi Supreme Court for another appeal. You can view a recent agreed order regarding the appeal record here: Order regarding appeal.

Given how things were for Eaton when it last went before the Supreme Court, another pre-trial appeal is likely a delay tactic. Eaton really needs to slow down Frisby’s momentum–even if it takes another losing appeal to do it.

On February 4, 2014, Wayne Drinkwater with Bradley Arant entered an appearance for Eaton. Here is that pleading: Drinkwater appearance.

It will be interesting to see if Drinkwater’s role is limited to the appeal or if he is active in the Circuit Court litigation. Eaton’s legal team is already huge. It’s hard to imagine that switching jockeys at this point is going to change much in the case.

Last week Eaton got around to disclosing the Frisby mess in its 10-k filed with the SEC. Here is a link.

Here is what the disclosure says:

Frisby Corporation, now known as Triumph Actuation Systems, LLC, and other claimants (collectively, the Frisby Parties) asserted claims alleging, among other things, unfair competition, defamation, malicious prosecution, deprivation of civil rights, and antitrust in the Hinds County Circuit Court of Mississippi in 2004 and in the Federal District Court of North Carolina in 2011. Eaton had asserted claims against the Frisby Parties regarding improper use of trade secrets and these claims were dismissed by the Hinds County Circuit Court. On September 25, 2013, the Mississippi Supreme Court issued an order that stayed all proceedings in the Hinds County Circuit Court pending further order of the Mississippi Supreme Court. On November 21, 2013, the Mississippi Supreme Court upheld the dismissal of Eaton’s claims but did not lift the stay on all proceedings in the Hinds County Circuit Court. Prior to the stay, the Frisby Parties submitted various expert damage designations related to their claims to the Hinds County Circuit Court, claiming damages of at least $376 . Eaton disputes liability to the Frisby Parties and Eaton’s experts dispute the amount of damages claimed by the experts for the Frisby Parties. An estimate of any potential loss related to this action cannot be made at this time.

Here is a document that discusses when companies have to disclose pending litigation. Here is a law review article on the issue. Garden variety lawsuits do not have to be disclosed.

My Take:

Eaton probably should have disclosed the Frisby case in its SEC filings years ago. The handwriting has been on the wall for a long time.

But I guess as long as its appeal was alive in the Mississippi Supreme Court, Eaton’s management felt like it could still beat off Frisby’s counter-claim. That seems like an example of willful blindness if there ever was one.

Let’s not forget though, Eaton might win on the Frisby counter-claim. Frisby could get over confident and over-play its hand. There are a few dynamics in the case that make that a larger risk than in most cases.

Meanwhile, it appears that the Frisby litigation has had no impact on Eaton’s stock price, which has gone from under $20 to $75 a share since 2009. Here is a chart:

With a chart like this the mood is probably pretty good in Eaton’s executive suite regardless of the Frisby litigation.

Here’s the latest from Eaton v. Frisby. On September 6 Judge Weill entered an Opinion and Order Regarding a August 21, 2013 Special Master Report. Here is Judge Weill’s Order.

The order lists some interesting communications between Ed Peters, Michael Schaalman and Vic Leo:

On October 25, 2007, e-mails concerning the trial date were exchanged between Michael Schaalman, Ed Peters and Vic Leo. Schaalman told Peters that Eaton’s goal is to ‘keep the August 4 trial date’ and ‘to propose to the defendants [certain] changes to the scheduling order.’…This email was sent four (4) days prior to DeLaughter’s sua sponte removal of Jack Dunbar as Special Master….

Later on October 25, 2007, Schaalman e-mailed Vic Leo, presupposing an ‘August [trial] date,’ despite the language of the June 7th, 2007 Scheduling Order and stating ‘[i]f we act promptly Ed tells me that the court administrator would switch the August date for a September one.’

During November 1-2, 2007 Schaalman and Leo exchanged several e-mails concerning the trial date. Leo indicated that he wanted the judge to ‘just assign Sept. 18th’ without seeking Frisby’s agreement. Schaalman responded ‘I hope you mean August 18 and apparently he feels that he [DeLaughter] assigned the trial to August 4 over the protest of the defendants and is reluctant to move the date which he feels could draw further protest.’…

The Order also refers to litigation review meetings held between Leo, McGuire (General Counsel) and Cutler (CEO). The trial date–which Eaton was trying to have Ed Peters set on an ex parte basis with DeLaughter–was on the agenda at the meetings.

I don’t fully understand the importance of the trial date, but it was a big deal. I believe that its importance hinged on the then-pending criminal charges against the former Eaton employees. In any event, Leo knew Eaton was cheating in the litigation, which means Eaton knew it under basic principal-agent law.

Also on the docket is a motion for recusal that Eaton apparently filed on August 28. This is at least Eaton’s third attempt to get Judge Weill off the case. Here is my post from the last time.

I haven’t seen the latest motion, but I assume it’s a “motion to recuse because we keep losing.” Expect this one to be denied as well.

Last week in this post I linked former Eaton in-house attorney Sharon O’Flaherty’s lawsuit against Eaton, its CEO, General Counsel, and the Latham and Watkins law firm. What a bombshell.

To review, the Hinds County Circuit Court has already found Eaton to have committed fraud at least three times:

1. by Judge Swan Yerger in 2006 for not disclosing that it was paying a witness. This one cost Eaton a $1.56 million sanction.
2. by Judge Yerger in 2010 for hiring Ed Peters to improperly influence ex-Judge Bobby DeLaughter. This one is where Yerger dismissed Eaton’s billion dollar lawsuit; and
3. by Judge Jeff Weill in 2012 for intentionally not producing relevant documents to Frisby Corp. that showed Eaton’s improper actions with respect to Ed Peters.

O’Flaherty’s Complaint alleges a fourth round of fraud on the Court in response to Judge Weill’s findings related to Eaton’s third round of fraud.

In May 2012 Judge Weill ordered Eaton CEO Sandy Cutler and others to explain why Eaton did not previously produce emails from Ed Peters discussing his communications with Bobby DeLaughter. In response, Eaton filed affidavits and submitted a report from outside counsel Latham & Watkins that basically said that it was an accident that Eaton had not previously produced the emails due to inadvertence by O’Flaherty.

Not true–according to O’Flaherty:

166. Cutler, McGuire [general counsel] and/or Brandt [Latham & Watkins] decided, at or before the May 15 meeting, to defraud the Mississippi Court and the Frisby Defendants/ Counterclaim Plaintiffs by claiming that the reason the two emails had not been produced was inadvertence on O’Flaherty’s part.

167. Cutler [et al.] decided, at or before the May 15 meeting, to defraud the Mississippi Court and the Frisby Defendants/ Counterclaim Plaintiffs by claiming that Eaton, through L&W, had investigated the circumstances that led to the failure to produce the two emails, and found no ‘evidence of a deliberate attempt to hide’ the two emails.

180. Despite knowledge to the contrary, the Latham Report states, ‘Latham did not find evidence of a deliberate attempt to hide the March 23 or October 16 emails during discovery in the Peters Inquiry.’

So what really happened? According to O’Flaherty, in 2008 Eaton in-house lawyer Vic Leo deep-sixed the two emails, which she printed and gave to Leo, and told Eaton IT to not search the in-house lawyers’ hard drives for emails.

In paragraphs 59-102 O’Flaherty explains in detail how in 2008 she printed the two emails and instructed IT to search hard drives, only to have Leo go behind or back and trash the hard copies and tell IT to not search the hard drives.

O”Flaherty then reveals a May 10, 2012 meeting with Latham & Watkins lawyers in which a L&W attorney stated that she suspected that Leo had deliberately attempted to hide the two emails:

149. Barton [L&W] asked O’Flaherty whether Leo could have removed the two emails because Barton had reason to suspect that Leo had made a deliberate attempt to hide the two emails during discovery in the Peters/DeLaughter inquiry.

150. O’Flaherty did not know that Leo had insisted that hard drive images not be searched for emails, and she was unaware of other facts known to Barton, and therefore she had no reason to suspect that Leo had made a deliberate attempt to hide the two emails during discovery in the Peters/DeLaughter inquiry.

My Take:

Looks like Eaton didn’t listen to the advice from Ken Feinberg about no more cover-ups. Just in, I have a picture of the guy who has been pulling the strings for Eaton.

Do I have to say it? Eaton is in big even bigger trouble. Trouble so big that all its prior troubles can fondly be looked back upon as “the good ole days.”

Can Eaton really ever go back before Judge Weill? No, they can’t.

But how can they not go back before Judge Weill?

I’m guessing that Frisby’s settlement demand went up last week. Way up. At this point, Frisby’s demand is probably: “how much you got?”

This case was going south for Eaton as early as 2006 when Judge Yerger sanctioned Eaton $1.56 for providing inaccurate and misleading discovery responses related to its paying a witness in the case. Judge Yerger later threw out the case due to Peters’ conduct.

Then in 2012, Judge Weill found that in 2008, Eaton tried to cover up its communications with Peters about DeLaughter.

Now in 2013, one of two Eaton in-house attorneys working on the case alleges a new cover-up by Eaton: in 2012 in response to getting caught covering up in 2008. A cover-up of the cover-up so to speak. Or is it a cover-up of the cover-up of the cover-up? It’s confusing.

So not only did Eaton hire Peters to improperly influence DeLaughter, it has now been found or alleged to have intentionally concealed evidence, what? Three times? I’m losing count.

It’s easy to say now that Eaton should have gotten Leo off the case in 2006 when Eaton was first sanctioned. And it would have been easy to say in 2006. You can’t pin this decision on outside counsel–they answered to Leo and couldn’t really tell him to fire himself from the case.

McGuire or whoever was general counsel at the time should have re-assigned the case within Eaton’s legal department no later than 2006. But according to O’Flaherty, Leo stayed in charge of the case until 2012. Eaton didn’t even reassign the case when Judge Yerger dismissed Eaton’s claims.

Instead of getting Leo off the case, Eaton left him in a position to actively try to conceal Eaton’s misconduct that Leo spearheaded. That’s about the worst job of general counseling I’ve ever heard about. It’s amazing that McGuire still has his job–just like it was amazing that Leo did between 2010 and 2012.

You always had to wonder if Leo kept his job because he knew that McGuire knew about Peters. Now those questions move up to whether McGuire is keeping his job because he knows that Cutler knew about Peters.

O’Flaherty’s Complaint doesn’t help Cutler on these questions:

49. Throughout the Frisby litigation, Leo met regularly or periodically with the General Counsel and the CEO to discuss the Frisby litigation; O’Flaherty was not included in those meetings.

Stay tuned. It’s not over. As always, it can still get worse for Eaton. And Eaton is re-loading its gun as we speak. Coming soon to a courthouse near you: “Eaton Cover-up V– This Time You Really Can Trust Us. Seriously.”

Here is former Eaton in-house attorney Sharon O’Flaherty’s complaint against Eaton and others.

I will comment on the Complaint next week.

My initial reaction was the same as Bluto’s reaction when Flounder shot Neidemeyer’s horse in Dean Werner’s office in Animal House.

Judge Weill is not going to be happy.

Alison Grant with Plain Dealer reports on a major bombshell in Eaton v. Frisby. Former Eaton in-house lawyer Sharon O’Flahtery is suing Eaton for blaming its problems in the Mississippi lawsuit on O’Flaherty.

Excerpts from the article include:

Former Eaton in-house lawyer Sharon O’Flaherty, 57, of Concord Township in Lake County, says in the lawsuit that [Eaton CEO Alexander] Cutler, Eaton general counsel Mark McGuire and other lawyers made her take the fall for their missteps in a rancorous, nearly decade-long legal battle between Eaton and rival Frisby Aerospace….

In fact, the suit says, Eaton terminated O’Flaherty to defraud the court about why it failed to produce relevant emails, and because O’Flaherty, “unlike others in the Eaton legal department,” had preserved damaging evidence and tried to comply with the court’s order…..

Eaton, Cutler, McGuire, O’Flaherty’s former supervisor Vic Leo, outside law firm Latham & Watkins, as well as its New York managing partner, James Brandt, are named as defendants in the lawsuit.

Cutler, McGuire and several other lawyers met with James Brandt of Latham & Watkins, which was hired to help Eaton get to the bottom of the lapses.

“Eaton, Cutler, McGuire and/or Brandt” had reason to suspect that Leo had intentionally removed two emails from the folder O’Flaherty gave him, her suit alleges.

They also had knowledge that Leo specifically instructed the IT department not to have computer hard drives searched, her suit claims.

“Cutler, McGuire and/or Brandt” decided at a May 15 meeting or earlier to fire O’Flaherty and Leo and to defraud the Mississippi court and Frisby by claiming the email mistake was due to inadvertence on O’Flaherty’s part, the suit says.

My Take:

In this post from last year giving my take on Judge Weill’s opinion, I stated:

Every time something else happens in this case I say to myself that Eaton has to make it go away now. But they never do. And it just keeps getting worse.

Don’t think that it can’t get worse for Eaton here. It can. People on the Eaton side can start talking about who knew what.

And so they have. It’s hard to imagine a scenario where this case ends up working out for Eaton. Typically parties settle litigation when the case can’t get better, but can get worse. But that’s not how Eaton rolls.

If someone like 60 Minutes picks up this story it’s going to be hard for Cutler to survive as Eaton CEO.