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Colt GC Has Hands Full With Compliance Issues
The Connecticut Law Tribune
The nation's gun industry has never been under greater scrutiny than now, in the wake of the Newtown school shootings. Just a few miles from the Connecticut state Capitol, where Connecticut's lawmakers are considering serious gun control reforms, business is booming in West Hartford for Colt firearms.
It's really two privately held companies now. The company that makes handguns is called Colt's Manufacturing. The sister company that makes assault-style rifles for police and military worldwide is Colt Defense LLC.
For the past two years, general counsel Jeffrey G. Grody has been helping Colt Defense shift the company's product mix to feature the M16-based rifle for the consumer market as well. Despite the challenges, Grody doesn't seem ruffled by today's new atmosphere of scrutiny. For the past eight years, he's been handling the rifle company's legal and regulatory compliance, and he seems to relish it.
Last week, on a gray and rainy morning, the Colt factory parking lot was packed, a sign of robust production and prosperity. Is this a Newtown boom?
"To some extent," Grody answers matter-of-factly. "When the market perceives a threat to their ability to buy guns and ammunition, they go out and buy guns and ammunition."
Any rush of orders creates its own tensions, Grody said: "You have the dynamic of those who are focused on getting things done and out the door, and those who are primarily focused on doing it right.
"The doing-it-right people are the finance people and the safety people and the legal people. And so you have to strike a balance in a company. That's something you witness daily as an in-house lawyer something you don't see when you're outside counsel.
"People come to me and they say, 'Well, we have to get things out the door!' I say, 'I don't care you have to get it out the door, and do it the right way. That's just the way it is, and that isn't going to change." He adds with a smile: "And it doesn't mean that you bend the goddamn rules, OK?"
From Ties To Timberland
Grody looked different nearly a decade ago. Back in 2004, when he was chair of Day, Berry & Howard's business department, he wore impeccable suits and sharp ties. When he offered a reporter a tour of Colt last week, he was wearing a blue plaid shirt, chinos and a gray Timberland vest.
Back when he was a "suit," Grody learned a lot about Colt by representing its creditors in a bankruptcy which culminated in 1994. For the next decade, he was a business law generalist at Connecticut's largest law firm.
"I did asset-based lending early on, bankruptcy work, corporate work," Grody said. "I did emerging companies work. But it turned out there's no market for that skillset for the well-rounded lawyer among sophisticated clients these days."
It's usually a deep compliment when a former legal opponent wants to hire you. In mid-summer of 2005, Grody was offered the general counsel job of Colt Defense. The move required him to become even more of a legal generalist and keep a good eye for retaining the right legal specialists.
"I'm a sophisticated client now," he said, "and when I buy legal services, if I have to go outside the company, I want somebody who's really good at the narrow area where I have the problem."
Grody had much to learn about the foreign corrupt practices act, employment law, anti-trust work, Occupational Safety and Health Administration law and export compliance. "Almost everything we do here is subject to the international traffic in arms regulations act, or the ITAR, " he said. "The ITAR governs exports of military equipment and technology.
That technology includes the blueprints and the know-how in people's heads. Colt Defense, which in 2011 did $208 million in sales, ships to about 50 different countries every year.
"Every shipment is subject to export regulation from the [U.S.] State Department, since military exports are handled by the State Department, not the Commerce Department," said Grody. "I knew nothing about this when I came here."
Much of what he does is craft agreements to keep Colt's trade secrets and processes proprietary. "A lot of it is the properties of the raw materials," Grody said. "We have a metallurgical lab onsite." If the company used an outside lab, "you don't have control of the technicians," Grody noted.
At times, the intellectual property is more like a secret recipe: "Everything's made of metal, and when it's heat treated, and it's cooked too much or not enough, you're going to have problems."
When Colt's Manufacturing spun off Colt Defense in June 2003, the Defense mission was to sell rifles and carbines to law enforcement and military worldwide. "We have no rights to sell any product into the consumer market," Grody explained. Colt Defense can sell Colt-branded handguns to military customers, but Colt's Manufacturing has the rights to sell handguns to law enforcement.
The Defense company can sell other brands, as well. "We can sell Joe Blow's rifles anywhere we want, but people don't want that, they want Colt rifles," said Grody.
More recently, the lines between the companies have been blurred. By 2011, the Army had stopped buying up Colt Defense rifle output. And so the company looked for new customers. It wasn't easy, as competitors had gobbled up the domestic consumer market for what Grody calls "the modern sporting rifle."
The market is huge, he said, "But we weren't in it, because we [had been] making guns for more serious purposes."
In 2011 and 2012, Colt Defense began to sell consumer versions of the military M-16 rifles to the civilian market, through Colt's Manufacturing. The rifle, marketed as the AR-15, is not used for deer hunting, but it's popular for recreational shooting, and hunting prarie dogs and other varmints.
"A lot of people had seen the Iraq war on television, and there are a lot of recreational shooters," Grody said. "They want the gun that the military guys have. It's easy to shoot, easy to aim and doesn't have a big kick. People like that military feel, and the big magazine to fire off a lot of shots without having to reload. It's a convenience factor."
It began to aggressively win back market share. As a result, the past two years have been highly successful. Specifically? "I can't say, our 10-K isn't out yet," Grody said, referring to a report that publicly owned companies file with the Securities and Exchange Commission.
Grody's GC counterpart in Colt Manufacturing is Joseph Dieso, who was not available for an interview last week.
Inside, the gun factory has the aroma of metal-cutting lubricants, and some corner rooms have the grimy feel of a well-used, small town auto garage. Under harsh fluorescent lighting, women assemble small parts for pistols with the precision of watchmakers.
Inside cages, two giant yellow robots quickly carve parts from flat blocks of aluminum. Their choreographic moves are a cross between ballet and martial arts.
In one part of the factory, scores of heavy cardboard boxes are stacked on pallets, 10-feet high, filled with rifles for the Malaysian Army. In other corners, orders are being filled for tactical rifles that meet stands for sale in California; they require a tool to change magazines. A Connecticut-legal version in Grody's office has a gun barrel tip that is tough to fit with a silencer, and a lever that would make the stock adjustable is non-operative.
Many assume Grody's litigation file must include product liability suits. In fact, he says, the answer is, "Zero. Never. Not one. I've been here since Labor Day 2005, and gun liability issues are not on the diet of the legal department of Colt Defense."
Never a claim of an injury from a misfire? "We have problems with [claims], sure. But do they turn into legal issues that we have to deal with? No. It has to do with our customer base. It's military customers here, and all around the world, and law enforcement. For a variety of different reasons none of this ever turns into litigation. People in the Army, I'm not sure they have a right to sue. It's just not an issue."
Claims of misfiring have turned out to be based on defects in ammunition or the magazine, which Colt does not make. "If the gun doesn't work properly," Grody said, "the problem will always be ascribed initially, by the amateur, to the gun. Our job is to run that to ground."
In Grody's eight years as GC, he's had several run-ins with OSHA.
In 2007, inspectors came in, looked at the premises as a single company's property, ended up doing wall-to-wall inspections on both Colt companies, and found several violations. At that time, Grody was helping both companies with OSHA issues. "We have lots of machines. You have to have guards on the machines, labels on everything, electrical cords have to meet certain specs throughout the factory," he explained.
During another visit, safety inspectors noted a completely different problem. The single biggest health issue is lead dust created in the shooting range. Every rifle that is shipped to a customer is pre-tested with 45 rounds of firings for smooth functioning and barrel consistency. The amount of ammunition expended is prodigious. Cardboard bins six feet across and four feet high are filled with brass shell casings, awaiting the smelter. One by-product of all this is lead dust.
"The air has to get filtered," Grody said, agreeing that OSHA's assessment was right.
The most interesting and challenging area of compliance is the Foreign Corrupt Practices Act. Grody needs to make sure no foreign sales representatives engage in bribery of government officials. Colt belongs to a defense industry trade organization known as Trace International, which has a database to screen potential middlemen. Some are rejected, as Grody did on the basis of his own research last week.
"[Last week], for example, we had an independent representative in a foreign country" who couldn't be retained. He passed through the Trace International vetting, but Grody researched further on the Internet and found "a problem" that disqualified the middleman.
If a middleman engages in bribery, Grody said, "we get in trouble unless we have policed them adequately." Not all run-ins with government regulators have unhappy endings.
There was a major FBI sting targeting Foreign Corrupt Practices Act violations in the gun industry in 2010, with the focus being on the Las Vegas "SHOT Show," the biggest annual expo for the sporting, hunting and outdoor trades. Twenty-two executives and employees of companies presenting their products at the show were arrested, on suspicion of bribing foreign officials, as they arrived at the Las Vegas airport.
The next day, Grody said, "a marshal showed up [at Colt] and gave people a Justice Department subpoena for all of our records in our international sales area for five years."
Those five years that had been under Grody's watch. He retained his former Day, Berry partner, Kevin O'Connor, also a former U.S.Attorney, and Colt got a clean bill of health in the industry scandal.
A graying 57, Grody has a sometimes puckish grin, and doesn't disguise the pleasure he takes in his job. "I love my lawyers," he says of his team of firms from Hartford (Cantor Colburn for IP, Jackson Lewis for employment), New York, Chicago and Washington D.C.
He can't wait for the work day to begin. He logs into his computer from home very early in the morning. "My wife will come down at 7 a.m., and I'll tell her, 'I've got the coolest job! I've already been in touch with people in four different countries while you've been asleep."
Before breakfast, he's already circled the globe, solving quick little issues. He concedes, "It's great. It's a lot of fun."