In the view of IBM and its proud engineers, this was stealing—hitching a free ride on decades of hard work and financial investment. But to what extent did copyright law protect IBM’s software? The law wasn’t clear.
In 1983 these two rivals had themselves negotiated a settlement, but within a year it had broken down, destroying any hope of coopera-tion. They were like two spouses in a bitter divorce whose settlement had fallen apart. When IBM discovered that Fujitsu was still poaching, or so it believed, the top brass at IBM exploded. “This time, when we caught Fujitsu copying, our cup boiled over,” recalls Dan Evangelista, former general counsel of IBM. “We assumed that they would behave honorably. From then on, we didn’t trust anything they said or did.”2
Fujitsu, believing it had honored the agreement, was equally enraged by what it viewed as IBM’s disrespectful claims and arrogant demands. Takuma Yamamoto, the CEO of Fujitsu, had been a pilot during World War II and had been assigned to go on a suicide mission just before the Japanese surrendered. He had seen himself as a guardian of Japan’s honor during the war and had transferred these feelings to Fujitsu. Yamamoto had put his trust in IBM in reaching the prior settlement. When IBM refused to work things out in what he understood as a civil manner, he felt Fujitsu had been betrayed. “A betrayal is the worst thing in life,” another Fujitsu executive explained to me recently. Fujitsu “could never trust IBM again. IBM was not simply a competitor, it was an enemy.”3
Jack and I were determined to keep this mutual demonization under strict control during the press conference. As a result, we had orchestrated it down to the smallest detail. There would not be one moment of spontaneity in it.
As we gazed out over the ballroom, we saw grim-faced executives from both sides sitting in stony silence. For their own good, we had put them under a gag order. Left to their own devices, each side would spin the story not simply as a “win” for themselves but as a big loss for their rival. That wouldn’t be accurate: our solution would protect the interests of both firms, not to mention their customers, who needed to know that their business would not be disrupted because these two giants were brawling over the scope of intellectual property law. Therefore, Jack and I would be the only ones speaking at the press conference.
We had hired Burson-Marsteller, one of the biggest public relations firms in the world, to help us hone the message. Because of the significance of the story in Japan, we had arranged to have the event beamed live by satellite to Tokyo (the first such telecast in history) so the news could be reported simultaneously in both countries. We had taken out full-page ads in the Wall Street Journal, the New York Times, and Japan’s leading newspapers, summarizing our decision in our own words so there could be no question about what we were saying. Finally, Jack and I had spent the last three days being drilled by a team of media coaches until our presentation was as sharp as we could make it. (I was not a natural. My coaches kept telling me not to be so professorial. Or perhaps the word was didactic.)
We opened the press conference and explained the key points. We had created a framework—and just a framework, we emphasized—for resolving all past and future disputes between these two companies. With regard to past disputes, we would order Fujitsu to pay IBM a single lump sum—in effect, a “coerced license”—for its previous use of IBM programming materials. In return, Fujitsu and its customers could continue to use all of Fujitsu’s existing software without fear of legal challenges. Going forward, we would establish a set of standards, accompanied by strict and elaborate safeguards, that would define precisely what Fujitsu could do with IBM materials in the future—and the price Fujitsu would pay for it. (We had not yet determined the total dollar amounts, but IBM would collect nearly $1 billion between 1983 and 1995.)
The beauty of this regimen, we thought, was that it would liberate the parties from the realm of ordinary intellectual property law, which wasn’t developed enough to be of much use to them in this conflict. Instead, it empowered Jones and Mnookin to create private law that would apply only to the relationship between IBM and Fujitsu. And we would not leave them unsupervised to get into further trouble. We would retain jurisdiction for another decade and resolve all future software disputes between them. There would be no appeal. If we did our job well—and much remained to be done to flesh out and implement our framework—these two giants would compete in the marketplace, not the courtroom.
We answered reporters’ questions for about an hour and gave individual interviews to CNN and other stations. All three U.S. networks reported the story that evening, and the next day it would be front-page news around the world. When the last reporter had left, Jack and I retired to the hotel bar and enjoyed a few rounds of drinks. We looked at each other with amusement and a certain amount of disbelief. Jack clinked my glass and grinned: “Who would have thought a farm boy from Iowa and a Jewish kid from Kansas City would end up doing something like this?”
Jack’s question was a good one. How did we come to be responsible for solving this enormously complicated problem?
In my case, it was a fluke. In the late spring of 1985, as I was sitting in my office at Stanford Law School, I got a call from Dave Nelson, a senior partner at Morrison & Foerster, a large law firm based in San Francisco. At the time I was a forty-three-year-old professor.
I knew Dave Nelson but not well. I hadn’t seen or spoken to him in five years, not since I’d left the law faculty at the University of California at Berkeley to join the faculty at Stanford. (When I lived in Berkeley, we had both served on the board of the private school my daughters attended.) Nelson said that he was representing a client involved in a major software dispute with another large company, and it looked like the conflict was headed for arbitration. He couldn’t disclose the name of either party, but soon his client would have to nominate someone to serve as its designated arbitrator on a three-person panel. Nelson had thought of me because he had recently read an article of mine in the California Bar Journal.
Life takes strange turns. The short article that had reminded Nelson of my existence was so trivial that I hadn’t even bothered to put it on my résumé. Titled “Spreading the Word about Spreadsheet Software,”4 the article explained how electronic spreadsheets could be useful in a variety of legal contexts. At most, the article showed that I was an early adopter and reasonably sophisticated user of spreadsheet software (which was unusual for a lawyer in those days).
I told Nelson I had no expertise in software programming and only a little experience as a mediator or arbitrator. The field of “alternative dispute resolution” (ADR) was still in its infancy and I was hardly a big name in it.
Nelson brushed aside these disclaimers and invited me to San Francisco to talk with his partner Bob Raven, who would handle the case if arbitration proved necessary. I accepted the invitation. I was curious. Who was this secret client? What was the fight all about?
The next week I drove to San Francisco for my first meeting with Raven, one of the brightest stars in California’s legal galaxy. He was then about sixty years old, a physically imposing man of at least six-foot-three with a full head of gray hair. With his rugged features and confident air, Raven looked as if he would be just as happy wearing jeans and riding a horse as wearing a suit and tie and sitting in a conference room. (I later learned he owned a ranch.) He was an easy man to like, exuding an appealing combination of energy, strength, and warmth. But behind his charm was a fiercely competitive and ambitious temperament, which I would also come to appreciate.
Raven asked about my background and seemed particularly glad to hear that I had studied economics and taught antitrust law. (I would later learn why.) But when he asked about my knowledge of computer programming and intellectual property law, I trotted out my disclaimers again. I told him that if he wanted a real expert in these fields, he should talk to two of my Stanford colleagues who were far more qualified.
I enjoyed the interview and left persuaded that nothing more would come of it.
To my surprise, about two weeks later Nelson called again and asked me to come back to San Francisco. It was at this second meeting that I finally learned the identity of the client, Fujitsu, and its opponent, IBM. (Given IBM’s dominance, I suddenly understood why Raven had been so interested in my background in antitrust.) Raven told me only the bare bones of the dispute—that it involved operating system software for mainframe computers—because if I were appointed as an arbitrator I would be serving a quasi-judicial role. But he did tell me that IBM would be represented by Tom Barr of Cravath, Swaine & Moore.
When I heard Barr’s name, I realized that the stakes in this conflict had to be enormous. In terms of big-case commercial litigation, Tom Barr was a five-star general. He had successfully defended IBM in a massive antitrust suit brought by the U.S. government and scores of private plaintiffs. By enlisting Barr in this fight with Fujitsu, IBM was signaling to the world that it would spend whatever it took to prevail.
After confirming that I had had no conflicts of interest in the case, Raven popped the question: Was I interested enough to go to Japan and let the client look me over? He would send Mike Jacobs, a young associate, to keep me company. (I was amused. Did I need a chaperone? It was the first sign that Fujitsu, too, was sparing no expense.) Perhaps I could give an academic talk of some sort to Fujitsu employees, but that wasn’t critical. The point was that the company’s senior executives wanted to meet me in the flesh before they nominated me.
I asked for a couple of days to think it over. Raven had said the case would take about half my time for the next eighteen months—little did we know how off the mark that guess would turn out to be—and that I’d be well compensated for my time. I thought it all sounded extremely interesting, but I worried that the whole exercise might be a distraction from my academic career. Fortunately, my Stanford buddy Ron Gilson stepped in and told me I’d be crazy not to do it. This assignment would put me in the middle of an important high-tech dispute between two giant companies represented by superb lawyers. I would learn a great deal about dispute resolution, an emerging interest of mine. “Stanford is in the middle of Silicon Valley. You have tenure,” Gilson urged me. “The dean would surely grant you half-time leave. Do it!”
So I said yes. Mike Jacobs and I flew to Japan. We spent a day visiting Fujitsu’s executive headquarters in Tokyo, a large, modern office tower overlooking the Imperial Garden. I was given a tour of several museum-like rooms that traced the company’s phenomenal growth. In 1949, it had been an obscure company that made telephone switching equipment and had about 2,300 employees. (That was the year that Takuma Yamamoto, the company’s future CEO, graduated from Tokyo Uni-versity and was steered to Fujitsu by a professor. As Yamamoto later confessed in his memoir, he was “totally crushed” when the professor placed him at Fujitsu because Yamamoto had “never even heard” of the tiny company.5) By the time of my visit in 1985, Fujitsu was Japan’s largest computer company, with annual revenues in the billions of dollars.
As requested, I gave a thirty-minute talk in English to some software engineers and mid-level managers. It was a bit of a farce. Although Yuri Morita (then a young manager) ably served as translator, the engineers had no clue what I was talking about, or even why I was there. Those who managed to stay awake were impeccably polite. The real point of the trip was for the top executives to meet me in person. I remember having a rather elegant lunch in an executive dining room and being introduced to a number of distinguished-looking, extremely polite men, none of whom had attended my lecture. (Morita again served as translator.) I learned that all had spent their entire careers at Fujitsu and were extremely proud of the company’s growth.
The man who made the strongest impression on me was Michio Naruto. Voluble and self-confident, younger than the other top executives, he was a member of the Fujitsu board and in charge of international operations. I would later learn that this charming and outgoing man was independently wealthy (his family owned vast forestlands in Japan) and had a passion for golf. Naruto traveled the world and played whenever he could. He owned at least three matched sets of clubs and kept one in California, another on the East Coast, and a third in Europe so he could play during his travels. He said nothing to me about Fujitsu’s conflict with IBM except to underscore the arbitration’s extreme importance. I responded that if I were appointed, I would work very hard to resolve this conflict.
About a week after my return to the United States, Nelson called to tell me that the trip had gone well. Fujitsu wanted to nominate me as an arbitrator. I was pleased but puzzled by Fujitsu’s decision-making process. What had Fujitsu learned of importance about me during my visit? Nelson later told me that I was hired because Naruto liked my face.
I first met my co-arbitrator, Jack Jones, in the lobby of the Ritz hotel in London. We had flown there as part of a large entourage, including Raven of Morrison & Foerster and Tom Barr of Cravath, to interview candidates for the position of chair of the arbitration panel. The parties’ earlier settlement required them to resolve disputes by arbitration—a common commercial practice. Substantial international arbitrations are typically resolved by a panel of three arbitrators, one chosen by each party and a third who acts as chair. Fujitsu had chosen me, IBM had chosen Jack, and now our group had to complete the panel by selecting the third arbitrator.6
Why London? Because Fujitsu had refused to accept an American chairperson and IBM had refused to accept one who was Japanese. Because the proceedings were going to be in English, the parties had decided to focus our search in the United Kingdom and Canada.
The night before our first interviews, Jack and I met in the bar to get acquainted over a couple of drinks. He was not a lawyer and had never been involved in an arbitration case, but he knew a lot about computers and had served as a witness for IBM in the antitrust suit brought by the U.S. government. As the executive vice president of the Norfolk Southern Corporation, he was in charge of purchasing millions of dollars’ worth of computer equipment. He bought a lot of IBM machines, but he bought from many other companies as well. He personally used an Apple computer, which he adored.
As he talked, I remember thinking, “This guy would be a hell of a witness.” He was an impressive-looking man, about sixty years old, who seemed comfortable in his own skin and completely credible. He was articulate and straightforward. His manner was relaxed. He obviously was very knowledgeable about computers and software, but he avoided the use of jargon. His stature was imposing—both tall (about six-foot-four) and big-boned. Best of all from IBM’s point of view, he didn’t always buy equipment from IBM. He could make the case that IBM was not a monopoly and had plenty of competition. That was how Jack had gotten to know Tom Barr, who had chosen him for this arbitration.
I soon discovered that Jack and I were both from the Midwest, but that was about all we had in common. He drank bourbon; I drank scotch. He liked country and western music, and Willie Nelson was his favorite. I preferred classical music, especially Bruckner symphonies. More important, Jones had grown up on a small family farm in Iowa, the only child of Lutheran parents of German ancestry. He had been the first in his family to go to college—choosing nearby Luther College in Decorah, Iowa, a tiny church-affiliated school. His big break was a scholarship to MIT, where he got a master’s degree in electrical engineering with a minor in mathematics. I had grown up in Kansas City as a rather privileged kid from an assimilated Jewish background. I spent my high school years in a private boys’ school and went off to Harvard College without considering it all that unusual.
Nor did Jack and I share much in way of recreational interests. He loved to hunt and fish. I didn’t. He asked me if I had ever gone to a pig roast, grinning at the question: he knew I had not. He had a huge pig-roasting pit in his backyard, and nothing pleased him more than staying up all night roasting an entire pig for a party. His home was a huge log house in the middle of fifteen acres of woods outside Chesapeake, Virginia. Jack had little interest in foreign travel with one exception
: every year he would take his wife, Nancy, and their entire clan of seven grown children and spouses to Munich for Oktoberfest. Year after year they would stay at the same hotel, drink beer in the same beer gardens, and sing the same songs. Much of this struck me as charming but completely alien. I could not imagine the Mnookin clan going on an annual pilgrimage to Munich, much less to drink beer and belt out German drinking songs. I’d never met anyone like Jack before.
Over the next twelve years Jack and I would become something of an odd couple, partners who grew very close but couldn’t be more different. Looking back, I realize that our knowledge and talents were complementary. I knew a lot about law and process; he knew a lot about computers. I was talkative and intense; he was laconic and very calm. I was an academic who fretted over nuances of language and loved to analyze everything to death; he was an executive who, to my endless admiration, could make decisions quickly and never look back.
In London, our group interviewed five candidates who looked promising on paper. Most were prominent English barristers, called Queen’s Counsel, who were experienced in international arbitration. One candidate, a crusty old lord and retired judge, disqualified himself within minutes. After greeting us, he said, “I’ve heard of IBM. But this other company … Fujitsu? Or is it Jujitsu? What is it?” Another barrister assumed he’d already been picked and took over the interview. He didn’t make the cut, either. Nor did the others. None seemed very technologically sophisticated, and Tom Barr saw several of them as stuffy and pretentious.
Bargaining with the Devil Page 17