The Corporate Art of Creating a Crisis

By all indications, Mark McInnes is a smart cookie.

Currently the Executive Director and Chief Executive Officer of the Australian department store company David Jones Limited, McInnes boasts over 17 years in senior management roles in major stores. David Jones, colloquially known as DJ's, operates 37 department stores across Australia and brought in $A1.8 billion in revenue in 2006. DJ's certainly seems to value McInnes's judgement, as his total remuneration package stood at $A5.286 million in 2006, according to DJ's annual report.

But one has to wonder about the wisdom of DJ's legal action against The Australia Institute (TAI), a centre-left think tank. The company is suing over an October 2006 media release from TAI, titled, "Corporate paedophilia -- sexualising children by advertising and marketing." The case, which opens before a Federal Court of Australia judge in a Sydney courtroom on March 22, is likely to play out as a corporate Goliath trying to squash the dissenting views of a non-profit critic.

It could very well become a major PR crisis created by the company itself on McInnes' watch.

Getting Even by Getting Rich

The conventional wisdom among many public relations practitioners is that suing non-profit groups is doomed to backfire on corporate litigants, irrespective of the case's legal merits. When addressing a mining industry audience on how to handle the "outrage" they felt towards their critics, crisis management guru Peter Sandman rhetorically asked: "Do you want to get even or get rich?"

Some companies decide they want to get even, PR backlash and lawyers' costs be damned. CEOs call in their lawyers, who may see the courts as a way to punish -- or even silence -- critics. Angry PR advisers might also advocate legal threats and actions. Yet, history shows that legal actions against critics often only succeed in turning a low-level issue into a full-blown public image crisis.

A good example is McDonald's legal action against environmental campaigners Dave Morris and Helen Steel in Britain, now famous -- or infamous, depending on your point of view -- as the "McLibel" trial. After the dust settled and the court judgment partially vindicated the defendants, it was clear that McDonald's had not only spent a small fortune on lawyers but also further trashed their global reputation. David defeated Goliath, in public debate and in the courts. Even some of McDonald's PR advisers belatedly conceded it had been a dumb strategy.

After McDonald's humiliation, enthusiasm for such legal actions waned, at least amongst large, image-conscious corporations. Companies in Australia and elsewhere retreated from launching what U.S. academics George Pring and Penelope Canan had dubbed "SLAPP" suits, for "Strategic Lawsuits Against Public Participation."

Not SLAPP Happy

In 1991, BHP Petroleum secured a temporary injunction preventing Greenpeace from organising further protests against its oil exploration in whale breeding grounds off the southern Australian coast. BHP Petroleum contemplated filing for a permanent injunction, but concluded it may well win the legal battle but lose the larger reputation war. It dropped the legal action against Greenpeace.

More recently, Schwabe Pharma Australia sought to suppress a report by the AusPharm Consumer Health Watch watchdog group that was critical of the herbal pill Tebonin's marketing. Schwabe persuaded a federal court judge to grant an injunction to bury the report. But a copy of the draft report was forwarded to the Australian drug regulator, which upheld several aspects of the complaint. Critical media coverage of the company's legal moves appeared in Australia, the UK, Germany, and on the Internet. Some pharmacists refused to stock the company's products, in protest.

In the last couple of weeks, the NSW Minerals Council succeeded in forcing the taking down of a website without even having to go to court. The mining industry lobby group, which represents companies such as subsidiaries of BHP-Billiton, took offence at a website that satirized its advertising campaign. Using provisions of copyright legislation, the mining lobby group had Australian web-hosting companies take the website down. But Rising Tide Newcastle, the group behind the spoof, simply moved the website offshore and went public. The resulting media coverage of the miners' bid to muzzle the site drove people to Rising Tide's satirical site in droves. Not surpisingly, Rising Tide enjoyed much higher web traffic than the NSW Minerals Council.

The logging company Gunns -- now notorious in Australia -- has also burned itself. After suing 20 Tasmanian environmentalists for $A6.9 million in damages on a wide range of changes including conspiracy, the company suffered a series of legal humiliations. With over $A1 million spent on legal costs and about as much again likely to be awarded against it in costs, Gunns has been forced to retreat, albeit partially. As a result of the legal actions the company has become synonymous with heavy-handed censorship.

Corporations suing their critics is nothing new. But numerous and increasingly controversial instances of companies trying to muzzle their critics spurred Australian state attorneys general to adopt an amendment disallowing defamation actions by companies with more than 10 employees.

What About the Children?

It may be that DJ's Mark McInnes is totally unaware of earlier instances of corporate legal actions against activists backfiring. Or maybe he has heard of one or more instances and decided that the risks aren't that great. Either way, DJ's appears to be headed for the courtroom on March 22.

DJ's claims that the TAI media release on "corporate paedophilia" has caused the company to "suffer loss or damage." It also wants TAI to remove all references to the company, "including the David Jones advertisements," from the electronic appendix to the think tank's discussion paper and to issue what DJ's terms a "corrective press release."

The original TAI media release states, in part, that "children are increasingly being portrayed in clothing and posed in ways designed to draw attention to adult sexual features that they do not yet possess. ... Children are being eroticised in the interests of the corporate bottom line. It is particularly disturbing that this exploitation of young children appears to be becoming accepted as mainstream. Major retail chains such as David Jones and Myers have jumped on the bandwagon. When family department stories show no conscience on these issues, or are inured to the effects of their behaviour, the situation is very unhealthy." (It is worth noting that Myers hasn't taken legal action or publicly objected in any way to the TAI release or paper.)

The release quotes Dr. Emma Rush, who co-authored the TAI discussion paper, as saying, "We know that paedophiles subscribe not only to child pornography but also to child modelling websites. Advertisers need to take care in how they present child models and how they encourage children to dress and behave."

In response, DJ's insists it "is not responsible for advertising which portrays children in an exploitative way." I can accept that DJ's consider their advertising to be acceptable, but what is viewed as "exploitative" is a subjective judgement that is better debated in public than in the courtroom. DJ's also insists that the company "does not knowingly cause the publication of material which can be used by paedophiles for their sexual gratification." Again, it is possible to accept that DJ's sincerely believes this, but it is not an allegation that TAI specifically makes against the company.

Legal Maneuvering and Fallout

Normally, DJ's wouldn't be able to pursue legal actions against TAI. As a company well above the 10-staff threshold, DJ's can't initiate defamation lawsuits. Sydney Morning Herald legal commentator wryly commented on DJ's writ: "Never doubt that Australia is a clever country, for see how quickly lawyers have found a way around that inhibition."

Instead of suing for defamation, DJ's lawyers are claiming that TAI is a business -- and so subject to Section 52 of the Trade Practice Act that outlaws "false and misleading advertising" -- even though TAI is a non-profit think-tank registered as a charity with the Australian Tax Office. While the provision was originally intended to protect consumers from misleading advertising, DJ's are aiming to use it stifle criticism of their own advertising.

In their statement of claim, DJ's argues that TAI "offers membership services in return for subscription payments," sells reports and books it produces, and conducts "research and analysis for reward"; therefore, TAI "carries on a business." DJ's further claims that the media release it objects to was published by TAI to promote the sale of the discussion paper, as well as other TAI goods and services, and therefore "constituted conduct in trade and commerce."

But, as other companies have discovered the hard way, even a legal win might not benefit DJ's. Here's a sample of the fall-out that could be in store for the company:

• To be able to launch an action against TAI, DJ's needs to persuade the judge that the think tank is in fact a business. If DJ's wins this argument, it will prove that the defamation law changes of 2005 are inadequate and that the Trade Practices Act can be used as a back-door route for a defamation suit. As a result, Australian non-profit advocacy groups that are incorporated under the same laws as TAI may be brought to court simply for venturing an opinion publicly. This will likely result in a substantial public debate over whether corporations should be able to sue non-profit groups for honestly held opinions. The company may well discover that it doesn't take long for their current cleanskin image to morph into that of a corporate bully.
• The court case will be held in Sydney, Australia's media capital. If journalists (especially legal reporters) want to cover a stoush over a big corporation taking on a think tank, not to mention a case that may set a major precedent for non-profit groups, they won't have far to travel. As the legal affairs reporter for The Age, Kenneth Nguyen, noted on coverage of the case to date, "The media has had little choice but to write and broadcast a whole new raft of stories in which the words 'David Jones' and 'corporate pedophilia' appear side by side." He also observed that since first threatening legal action against the think tank, DJ's has been mentioned "five times more often in major newspapers than the other retailer [Myers] in relation to 'corporate pedophilia.'"
• With 37 stores scattered around Australia, DJ's is in a much more commercially vulnerable position than were BHP Petroleum, the NSW Minerals Council or Schwabe Pharma Australia. The longer the case drags on and the more media coverage it gets, the greater the chance that the company will face protests at one or more of its shops.
• How a company handles dissenting public voices is often viewed by customers, shareholders and staff as an indication of how it deals with other management challenges. Investors may worry that long, expensive legal actions may divide the attention of management. Surveys on corporate social responsibility reveal that many customers avoid buying from manufacturers or retailers embroiled in controversy.
• If DJ's wins its case, it will be setting a far-ranging legal precedent. The case will likely crystallise concerns across a broad range of NGO groups and state attorneys general that the 2005 reforms to Australia's defamation law did not go far enough. In subsequent public debates of legal reform, the DJ's case will be prominently referred to, cementing the association of the company with an anti-free speech stance.

Given all these potential negatives, why is DJ's pursuing the case?

At best, DJ's will persuade a federal court judge that TAI's interpretation of the company's colour advertising was misguided. In turn, TAI may be ordered to issue a corrective media release and remove the DJ's ad from the appendix to its report.

DJ's has also indicated that it will seek damages, but proving damages related to the think tank's release won't be easy. Even if DJ's saw a drop in sales around the time of the TAI release, the retailer will have to attribute the slump to the words of the think tank, as distinct from DJ's comments on the matter or news coverage of its threatened legal action. In short, even legal victory for DJ's will likely fall short of being decisive.

No matter the outcome for DJ's, TAI or Australian legal policy, the upcoming case has major implications for corporate PR strategies. A win for DJ's could usher in a new era of corporate combativeness. More likely -- for the reasons cited above -- the DJ's case will become another example of the futility of resorting to legal actions to try and curtail public debate. DJ's legal action may well be the catalyst for further legislative reforms to ensure citizens and non-profit groups can freely participate in public debate without fearing legal threats from corporations.