ENTREPRENEURSHIP CASE:DAVID PERLMAN

This case was prepared by Greg Ehrlich under the direction of Professor William Bygrave.

 Copyright Babson College, 1999. Funding provided by Ewing Marion Kauffman Foundation.

All rights reserved.

David Pearlman

David Pearlman was just about to finish his first full week of business. He

already had two offices, the basement of his parents’ house and the back seat of his 1973

Chevy Grand Prix. It was unclear which was more spacious, but the rents in both were

quite favorable. It was Friday afternoon and David was busy in the basement office.

The summons was hand delivered to the house on Friday afternoon. I

had never had any legal problems before, and had certainly never been

served a summons before. My previous employer was suing me for

$100,000, breach of fiduciary responsibility and was seeking injunctive

relief.

This was not exactly the storybook beginning for a new business venture, but one that is

becoming more commonplace. Starting a new business is tough enough, but add in a

lawsuit and many would be tempted to throw in the towel. There was no love lost

between David and his former employer and David was not about to roll over and play

dead. He could not bear to give Alvin the satisfaction, and he did not have much to lose.

He had no savings, and did not own a thing except for a 15-year-old car for which he

needed his mother to co-sign the auto loan in order to have the note approved.

David B. Pearlman

David Pearlman grew up in Salem, Massachusetts. His mother taught hearing

impaired students and his father was a Certified Public Accountant. David attended

public schools until high school, when he attended St. Johns Prep in Danvers,

Massachusetts. While in high school David worked at MVP sporting goods, Eastern

Mountain Sports and Hilton Tent City. He loved to sell and thrived on his ability to

explain his knowledge of products to customers to help them make the correct purchasing

decision based on their needs and price range. While working in these retail positions,

David was keenly aware of the salesman who regularly came in to the stores to meet with

the managers. They did not all appear to do a great job, but every one of them appeared

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to be making plenty of money. David did not know a lot about what these salesmen did,

but felt pretty confident that he could do that job.

Following high school graduation in 1983, David attended the University of

Massachusetts at Amherst. He initially was interested in becoming a veterinarian, but

after a year of cleaning out farm stables, he decided to major in history. David was an

average student and was not very motivated by school. He stretched out the four-year

undergraduate program into five years, hoping to find his calling. He thought he might be

interested in the law. He worked at the District Attorney’s Office of North Hampton,

Massachusetts during his senior year and although he found it interesting, he knew that

law was not going to be the right career for him. David graduated in the spring of 1988

with the same dilemma most history majors have—what type of job can you get with a

history degree?

Birth of a Salesman

David’s first job as a college graduate was in 1988. After graduation he joined a

manufacturer’s representative—as sub-representative—of winter sporting goods (skis and

snowboards) within the six New England states. He worked with this company for about

six months and did a lot of traveling, much more than he wanted to do and the financial

rewards were far smaller than he felt his time contribution to be worth. An opportunity

came along for another sales position and he took it. He was now selling children’s

clothing for a man who represented London Fog. He did that for about six months but

didn’t enjoy it. He did not enjoy the products and he felt that liking the product you sold

was very important to being successful in sales.

David then contacted a headhunter to help him find a sales job. In the process of

inquiring if the agency placed people in sales positions, he ended up accepting a sales

position with that particular employment agency. The agency did not place clients in the

sales field but in the banking and accounting fields. He found the training he received at

this job to be invaluable. “They train you to sell as well as you possibly can. I didn’t

make a lot of money, but I learned a lot.”

Manufacturer’s Representative in Housewares

After six months of working at the employment agency, David was getting the

itch for change again. A friend of his mother mentioned to David that he had a friend,

Alvin Peters, who ran a manufacturer’s representatives business in housewares in New

England. Peters Associates represented manufacturers, importers and distributors of

houseware appliances, gadgets, cookware and a variety of tabletop items. As a

manufacturer’s representative they served as an intermediary between the parties they

represented and the retail stores and chains. Manufacturer’s representatives did not own

the products they sold, but made a commission of 6-9 percent on all of the sales they

brokered between the parties. Alvin was looking for someone to handle a certain part of

New England. David thought it sounded like an interesting opportunity and he met with

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Alvin. His initial meeting with Alvin piqued his interest. Alvin took him on the road to

meet with a few of his accounts.

He lured me with something that I knew was kind of false at the time.

He said, ‘Well I’m not getting any younger [he was about 55 at the

time] and I have kids that don’t want to get involved in the business,

and who knows, this could all be yours’.

David accepted the position, because it seemed more interesting than what he was

presently doing as a headhunter, and began working for Alvin in January of 1990.

Peters Associates

David was considered an “independent contractor”, not an employee of Peters

Associates. This meant that he was basically self-employed and was responsible for his

own expenses including telephone bills, gas, car repairs, postage, tolls and travel

expenses. David’s title was “sub-representative”, which meant that he wasn’t the primary

representative of the line but was acting on behalf of the primary representative, in this

case Peters Associates. It was a general industry practice that you could work as a sub-

representative covering the lines of a primary representative while also representing lines

of your own, as long as the lines did not present a conflict. For example if you were sub-

representing a line of coffee makers, you were prohibited from representing a competing

line of coffee makers of your own. However, if the company you were acting as the sub-

representative for did not represent a coffee maker, you were free to represent one

yourself. David handled the retailers for Peters Associates in Massachusetts and Rhode

Island while another sub-representative handled Maine, New Hampshire and Vermont

and a third covered Connecticut. David only acted as a sub-representative of the lines,

which were carried by Peters Associates, while the other two sub-representatives also had

lines of their own. Alvin handled most of the larger retail chains throughout all of the

territories and Alvin’s wife ran the office.

Alvin’s wife was mean. She was unpredictable and deceitful. Alvin

was also dishonest and was not up front with me. Between the two of

them they were terrible. They would yell and scream and they were

irrational. They didn’t pay me very well either. I was on straight

commission, but there was a draw against the commission. If they

didn’t think I knew about a sale to one of my accounts, because the

sale was written directly through the office, they wouldn’t pay me a

commission on it. As for the commissions they did pay me, they were

paid on a commission statement such that I couldn’t track anything. I

didn’t feel like I had any recourse. It was basically, if you don’t like it

you can leave.

Aside from the work environment at the office, David thoroughly enjoyed the business

and he felt he was very good at it. He liked the traveling and loved meeting with his retail

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accounts. When they had questions or problems he would seek guidance from Alvin.

Alvin usually told David to talk to the manufacturer or find the answer himself when he

was in the office. This autonomy aided in David’s complete understanding of the

business, as he would handle nearly all functional aspects of the firm. It also helped him

develop relationships with the manufacturers, distributors and importers that Peters

Associates represented.

Tradeshows

There are two major gift shows for the housewares industry each year that David

attended for Peters Associates. The National Manufacturers Housewares Association

Show in Chicago is held every January and the New York Gift show every February. In

1990 David attended both the Chicago and the New York show. The trade shows provide

an opportunity to meet with the manufacturers, importers and distributors as well as the

retailers. The main purpose for these shows is to solidify existing relationships and

develop new ones (i.e. pick up new lines to represent).

In November 1990, David was getting near the end of his rope with Peters Associates.

He had worked with them for almost one year, twice as long as any prior job he had held.

He decided that it was probably time to give law school a shot. While continuing to work

at Peters Associates, he took the LSATs and was getting information on various law

schools in Massachusetts.

In the meantime, he still needed to make a living and was biding his time with Peters

Associates. In late February 1991, David attended the New York Gift Show. On the

night of his arrival at the show he had dinner with Steve Monroe, another sub-

representative of Peters Associates. Steve had been in the business for more than five

years and carried some of his own lines in addition to the ones that he acted as the sub-

representative for Peters Associates.

That evening David told Steve that he was fed up with Peter Associates and was planning

to leave. Steve suggested to David that if he was so dissatisfied he should try to pick up

some lines on his own. David had not really given this option too much thought in the

past, as he was only 25 years old and thought of himself as relatively inexperienced.

Steve’s comments that night did a great job building up his ego, but David was still intent

on going to law school.

Mr. Pepper

The next morning David attended the gift show. He started off the day helping

one of Peters Associates manufacturer’s, Mr. Pepper run their booth. Mr. Pepper is one

of the largest manufacturers and distributors of peppermills in the world. They carry

about 100 models at any given time. The present owner’s father had started the business,

but it was his son who had carried it to another sales level. They have distributors in

about 70-75 different countries.

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David ran the booth with Mr. Pepper’s National Sales Manager, Sharon Stengel, helping

her write up orders for retailers. He had developed a nice working relationship with

Sharon over the past year, and she had recognized the growth in the business in David’s

territory. David planned on helping out at this booth for a few hours and then going to

help a couple of other Peters Associates manufacturers with their booths afterwards.

While working with Sharon at the booth, she told him that Mr. Pepper was going to be

letting Alvin go as the representative for their line. She told him that when he heard

about this from Alvin, she wanted him to know that it had nothing to do with him. She

told him that he had always done a nice job for Mr. Pepper. David spent the rest of the

day working the other booths as he had planned, but in the front of his mind he was now

giving some serious thought about going out on his own.

The next morning David went back the Mr. Pepper’s booth and told Sharon that he was

going to be going out on his own. He asked her if Mr. Pepper had already decided on

who would be representing their line in New England. She said that a decision had not

been made but that the issue would be discussed over the next few weeks. She asked

David if he had put together a group yet, and he informed her that he was in the process

of building one. He asked her if she would consider him to represent the Mr. Pepper line

and she said that she would.

David had to act quickly. He talked to several people he knew in an effort to put together

a team that could handle the Mr. Pepper line if they offered it to him. On March 14, 1991

Sharon called David to tell him that Mr. Pepper was going to ask him to become the new

representative of Mr. Pepper for New England on a six month trial basis. David could

feel his heart pounding with excitement. He assured Sharon that she would be making

the right choice and that he would do a great job. He told her that after six months if they

were not completely satisfied, they would not have to fire him because he would resign.

Four days later, Mr. Pepper informed Alvin that they were terminating their relationship

with Peters Associates. David continued working for Peters Associates until he resigned

on March 23, 1991. On Monday, March 25, 1991 Mr. Pepper officially offered David the

New England territory and he accepted.

David knew that it would not be long before Alvin heard that he was the new

representative for Mr. Pepper. He decided that the best thing to do would be to call Alvin

and tell him personally, rather than let him hear it from the “street”. On Monday, exactly

one week after he had started representing Mr. Pepper, David placed the call to Alvin.

Before David could say anything, Alvin told him that he had heard that David was

representing Mr. Pepper and said: “You will be hearing from me.”

Four days later, David “heard from Alvin” in the form of a hand delivered summons to

his parents’ house. David was uncomfortable as he was charting some unfamiliar

territory. He had never been served with a summons before. Alvin’s summons included

three separate requests. It was seeking injunctive relief to prevent David from

representing Mr. Pepper until the entire lawsuit was adjudicated, it claimed that David

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had committed a breach of fiduciary responsibility, and it was asking for treble damages

totaling $90,000 which was three times the lost annual commissions which Peter’s

Associates would forgo by losing the Mr. Pepper line.

I knew the lawsuit was coming. A few days before I had received the

summons, Alvin had called Mr. Pepper and told them that he was

suing me. He told them that he did not want to involve them and that

if they let me go now it would not go that far.

David was afraid that Mr. Pepper would not want to get embroiled in his fight with Alvin.

If they backed out now he would have understood. Luckily, they became defensive when

threatened by Alvin and decided to stand behind David. David viewed Sharon Stengel,

who was just a few years his senior, and the owner of Mr. Pepper as gutsy people. The

owner was somewhat of a rebel and an entrepreneur himself and was not going to be

bullied. He told Alvin “sue away and we’ll see where it goes.”

Motion for Injunction

I told one of my best friends, Morris Porter, about the summons.

Morris slapped me on the back and said ‘Boy, I wouldn’t want to be in

your position’. So that’s how the lawsuit started. Friday night I got it.

I didn’t sleep very well that weekend. I didn’t have any money to lose

and I was not concerned with him taking what I had. The biggest

concern I had was the injunction he was seeking to prevent me from

representing the line. That was the biggest concern I had. I was not

concerned about the money. I was not concerned about anything else

except for the injunction. I knew exactly what he was doing. I called

Mr. Pepper and I said I understand you got a copy of the lawsuit. They

are trying to stop me from selling your line, if the injunction goes

through, I obviously can not represent the line, so I will resign. They

understood the situation and were supportive.

On Monday David called an attorney to represent him. Unfortunately, Uncle Bob was in

the process of retiring, and he did not want to take the case. He recommended David call

the firm of Kraft and Hall, and talk to David’s cousin Phillip Kraft, Esq. Phillip was a

Harvard Law School graduate and had worked for a few large Boston firms before

starting his own firm with his father.

I didn’t really know Phillip very well. I called him and explained the

situation. I told him I really don’t have a lot of money. He said don’t

worry, I’ll give you the cousin’s discount. He charged me only half his

normal hourly rate and let me pay as much as I could when I was able

to.

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The hearing for injunctive relief would be held two weeks later. In the meantime, David

was free to continue selling Mr. Pepper’s line. This should have been comforting to him,

but he ran into operational problems he had not foreseen.

Within one week of receiving the summons, I had my car stolen in

Connecticut. It had all my samples and everything inside of it. I slept

in a hotel and when I came out in the morning the car was gone and

there was glass all over the ground. I had all of my orders in the car. It

was crazy. The case was going on, the injunctive hearing had not yet

taken place, and I wondered how could it get any worse. I drove back

300 miles through the state of Connecticut picking up the back-up

copies of the orders from all of my customers and re-writing them so

that I could place the orders with Mr. Pepper. I had Mr. Pepper over-

night me new samples. The car was found a few days later. All the

samples were gone. But there were pink fuzzy dice hanging from the

rear view mirror. I thought that was very odd at the time. Two years

later I saw Alvin Peter’s wife driving her car with pink fuzzy dice

hanging from the rear view mirror. I’m not saying there is any

connection, but . . .

The hearing for injunctive relief was held in Salem District Court. Prior to the hearing

both parties filed their motions. The plaintiff’s attorney, Harvey Hilo, filed a five-page

motion entitled “Brief of Plaintiff in Support of Request for Preliminary Restraining

Order”. David’s attorney filed a thirteen-page motion entitled “Defendant’s

Memorandum in Opposition to Plaintiff’s Prayer for Injunctive Relief”. David felt he had

a good case and was confident, but all that changed as soon as Attorney Hilo began

speaking.

[Attorney Hilo] said ‘this young guy steals the business from this man

who is getting ready to retire’. Every other word out of his mouth was

‘steal’, and each time he said it he was a little louder. I put my hand on

my head. I thought that I was sunk. My cousin spoke second. He said

contrary to what my ‘brother’ has said, this is the nature of the

business. He then produced an affidavit from the national sales

manager from Mr. Pepper stating that Alvin would have been fired

with or without David, and that helped quite a bit (see Exhibit 1).

Attorney Hilo argued that David could sell Mr. Pepper to any accounts he wanted as long

as they were not Alvin’s accounts. Basically, this would mean that David could not

represent Mr. Pepper as those consisted of most of the major accounts in New England.

He then argued that David should be allowed to sell to all the other accounts until the

lawsuit has been ruled on. David’s cousin explained how that would effectively put

David out of business. The entire meeting lasted a couple of hours.

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About a week and a half later both parties returned to Salem District Court. David felt

butterflies in his stomach. His fists were clenched and he gritted his teeth as he awaited

the ruling from the judge. The judge announced [in the case of Alvin Peter’s Associates

v. David B. Pearlman] “motion for injunctive relief denied”. It was music to David’s

ears.

Once the injunction was denied I was excited and I worked hard. I was

on the road five days a week. I worked 18, 19 hours a day. I didn’t

sleep. My office was in my parent’s basement. I sent faxes at three in

the morning. It was the greatest and the toughest year of my life. Here

I was starting what I called an ‘empire’ but was more like an anthill. It

was mine and I never had so much success in my life. I had nothing to

lose and everything to gain. Not only did I have the challenge of

starting the business but I had the lawsuit [still looming] and that made

the challenge greater and more stimulating.

A Two Pronged Attack

Alvin’s other tactic was to spread rumors about David. He was telling people

David had an affair with the Mr. Pepper’s sales manager in order to get the line. “He was

very nasty. I must have had five people ask me if I really slept with her. Alvin never

gave up, he pursued it up to the end.”

Alvin quietly spread rumors about David any chance he got. His rumors were effective in

keeping David from selling to two of the larger New England retail chains. David first

became aware of what was happening when he was attempting to pick up another line.

The manufacturer was doing a reference check on David. They were getting some nice

recommendations until they called on one of their largest retail accounts, Table Tops

Plus. The buyer said that he knew David had stolen a line from Alvin. He told the

manufacturer that he did not want to deal with David and that he would only deal directly

with the manufacturer. The manufacturer told David that they would hire him to

represent their line in New England, but Table Tops Plus would be a house account

because the buyer did not want to deal with him.

That was the first time it hit me what Alvin was doing. This was a

major account that I was not able to sell to. I immediately wrote a

letter to the buyer of Table Tops Plus which basically said: ‘I’m 25

years old. I just started the biggest undertaking of my life. Against all

odds I started this business. I work many hours and all I ask is that I’m

treated fairly and given an audience with every buyer who could sell

my product. If you never buy from me I will not be insulted, but if you

don’t allow me to come in, then you could put me out of business.

And that is not right. If you truly know Alvin and he is truly a friend

of yours, then you must know that what happened to Alvin was not my

fault’. I sent that letter and called him a week later. He took my call

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right away. He was clearly embarrassed when we talked. He said ‘it’s

not that I don’t want to deal with you’. I said ‘great, when can we

meet’? We met three weeks later. Now he’s one of my biggest

accounts.

A similar problem occurred at Lechmere. For over a year the buyer, who was a good

friend of Alvin, would not buy a thing from David. He would take his calls but never

bought anything.

After about a year and a half I called and said ‘I hope you don’t mind, I

call you a lot and you never buy anything.’ He said you have more

energy than anyone I deal with, keep calling and eventually you’ll have

something that I’ll buy. Ultimately I ended up doing a great business

with them.

Pearlman Associates First Year

Every October business normally slows down. But I kept writing orders. I

opened about 171 new accounts for Mr. Pepper in New England that first

year. They already had 600 New England accounts. There weren’t

anymore to be had. There was no stopping me. I went through the entire

customer list. I activated inactive accounts and sold to customers who had

never bought before. I won the award that year at the National Sales

meeting held in Chicago for the rep. who opened the most new accounts,

and they gave me a big plaque. I picked up another line which is now one

of my best companies. They started with $48,000 in annual sales in New

England. I did $75,000 with them my first year. I was their number one

salesman. 1991 was the best year of my life. It was a year I will never

forget. I made $60,000 that year. That was more money than I had ever

made. I was happy.

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Exhibit 1

COMMONWEALTH OF MASSACHUSETTS

ESSEX, SS. SUPERIOR COURT

CIVIL ACTION NO: 91-2146

ALVIN PETERS ASSOCIATES, INC., )

)

Plaintiff )

) AFFIDAVIT OF

V. ) SHARON STENGEL

)

DAVID B. PEARLMAN )

)

Defendant )

I, Sharon Stengel, state of my own personal knowledge the following:

1. I am the National Sales Manager for Mr. Pepper Inc. (“the

Company”). My business address is 145 Flatwood Avenue, San Francisco,

California. I hold a bachelor’s degree from Stanford University and I have

been with the Company for the past four and a half years.

2. The Plaintiff Alvin Peters Associates, Inc. (“Peters” or “Peters

Associates”) has represented the Company in New England for the past nine

years. For the last several years, we have had discussions within the

Company about dropping Peters and hiring another representative. Among

other things, the Company was displeased with Peters’ lack of cooperation

with us, especially as regards to his response time to the Company. More

specifically, there was a period of time when he would not return calls to our

Vice President, Ron Petrocelli. In addition, we were never pleased with his

failure to call on our target customers, nor the fact that two key accounts

(Zarron’s and Lechmere’s) were lost in 1990.

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3. In late January, 1991, the Company, after considerable

discussion, determined to terminate its arrangement with Peters and to seek

other representation. The Company’s decision to hire a new representative

had nothing to do with the Defendant David B. Pearlman. It was based

solely on the Company’s increasing dissatisfaction with Peters Associates.

4. I attended the New York Gift Show in New York from February

24, 1991, through February 28, 1991. At the show I manned the Company

booth. By the time of the gift show, the Company had already decided to

terminate Peters but had not yet notified him of the termination. This

termination would have taken place at the gift show, however, Alvin Peters

was only at the show one day, and we were very busy, since it was the

opening day of the show.

5. In the course of the gift show, I saw and spoke with the

Defendant David B. Pearlman who was, at the time, working as an

independent contractor for Peters. David was the “sub-rep” on the “Mr.

Pepper” product line manufactured by the Company. David had always done

an excellent job for the Company. He knew the product line well and had an

outstanding manner in dealing with customers.

6. In my discussions with David during the gift show, I informed

him that the Company had decided to terminate its relationship with Peters

Associates, before I knew David was starting his own group. I told David

directly because he had worked the line the hardest, and spent tremendous

effort to grow Mr. Pepper sales. I was disappointed that we were losing good

sub-reps by making this change and felt obligated to tell David directly since

he had worked our line the hardest. Later in the show, David said that he

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was thinking of going out on his own. I made no offer or assurance to him of

any kind regarding his taking over the representation of the Company.

7. While David expressed to me he was personally dissatisfied with

his job, he made no critical comments about how Peters Associates handled

the Mr. Pepper line. David neither impugned the Plaintiff’s business nor did

he suggest or request that the Company terminate Peters and turn the

business over to him instead.

8. I returned to the home office in California after the gift show

and had further discussions within the Company, this time as to whom to

hire. We were considering hiring another group but finally decided to ask

David to become our new rep.

9. I first notified Alvin Peters on March 18 that the Company was

letting him go. I then notified David on March 25 that we wished to hire him

as the new rep. David continued to write numerous orders through the

Plaintiff’s office up until the very day he resigned from the Plaintiff on March

23.

10. Even if the Company had never had any dealings with the

Defendant, the Company would have terminated the Plaintiff as its New

England representative. The Defendant in no way, caused, contributed to, or

hastened the Company’s decision.

FURTHER YOUR AFFIANT SAYETH NOT.

Signed under the penalties of perjury this 15th day of April, 1991.

____________________

Sharon Stengel