Windows of Opportunity

In 1978, Bill Neukom helped launch Microsoft. Now he's going after a small thing called world justice

Published in Corporate Counsel Edition® - 2008 Magazine — August 2008

In a way, Bill Neukom, 66, needs the bow tie. The former general counsel of Microsoft and outgoing president of the American Bar Association is nothing if not dignified. He's tall and thin, with a thick head of white hair; when he speaks, his sentences are long, intricate and often dry. Imagine Henry James speaking legalese. The bow tie, then, which he began wearing in the late '60s, is both part of and antidote to this image.

Neukom became Microsoft's lead outside counsel in 1978 and its general counsel from 1985 until he left the software giant on June 30, 2002. During that time, its legal department swelled from four employees to more than 600, and Neukom and his team helped define what aspects of the software industry were copyrightable (computer code) and not (Apple's "overlapping rectangles of information").

But he may be best remembered for the landmark antitrust U.S. v. Microsoft case, which he divides into three epochs: Microsoft One, which culminated with a government consent decree in 1994; Microsoft Two, in which Microsoft was accused of noncompliance with the '94 consent decree; and Microsoft Three, in which the Justice Department accused Microsoft of violating the Sherman Anti-Trust Act. This third epoch began with a bang of publicity and a June 2000 order to break the company into two parts and ended with a whimper on June 30, 2004, when the U.S. appeals court approved Microsoft's settlement with the Justice Department.

Like his former boss, Neukom is heavily involved in philanthropy. He donated about $20 million to both his alma maters, Dartmouth and Stanford Law. He and his four children run a family foundation, which funds health and human services, social justice, education and environmental causes. As president of the ABA, he launched the World Justice Project, a multinational initiative to strengthen the rule of law worldwide.

And this October, he's acquiring another prestigious title: San Francisco Giants' managing general partner.

We first spoke with Neukom about his storied career in 2005, and caught up with him again this spring. Both interviews are excerpted here:

In 2005, Neukom was chairman of Preston Gates & Ellis (now K&L Gates), three years after he left Microsoft.

 

Could you talk to us about the early days of Microsoft? It's a kind of famous story. In 1978 Bill Gates Sr. stopped by your office at Shidler McBroom Gates & Baldwin (now K&L Gates) and said ... what, exactly?

He said, "My son's bringing his company up here from Albuquerque, and they'll need legal counsel, and I think we will get a chance to start as their legal counsel. Would you be willing to do that?"

 

What did you think of computer software back then?

I thought it sounded exciting. Cutting-edge technology.

We started to work right away. They wanted 24-hour access to their office building in Bellevue, and the landlord couldn't understand [why they needed] that. The first high-profile intellectual-property enforcement case we litigated for the company was a classic piracy case, in which a small company in California was literally copying code of an important and popular product that Microsoft had created, and we caught them red-handed.

 

Was computer code considered copyrightable at the time?

Barely.

There'd been [the Apple v. Franklin case in 1983] that had established the copyrightability of software code, but not a lot of hair had grown on the notion that this new technology was copyrightable. So part of the thrill was dealing with not much law on such threshold questions as "Is this stuff copyrightable?" and "Can you avail yourselves of the copyright law in terms of protecting your commercial advantage?"

The big case early on was the Apple case. It began in '88. But the scenario started earlier. Apple was concerned when it learned that Microsoft was going to use overlapping, rectangular containers of information as a screen display generated by its Windows product. They thought they had a copyright in overlapping windows.

 

Overlapping windows means essentially ... ?

[Neukom points to a PR rep's portfolio on the conference table]

That's an overlapping window right there. She's got her portfolio on top of a pad. You're overlapping in some ways. You've got a—

 

... pen on my notepad. Right.

And that's the point we tried to make, and did make, successfully. The notion that ... having overlapping containers of information or implements is so generic, so idea-like and not a matter of fanciful expression that you can't expect to get a copyright in it.

[Apple] challenged us and they came [to Seattle] and talked about it; and we told them we didn't think we were violating anybody's intellectual property rights, least of all a copyright for that idea. They sort of clawed in some other intellectual property rights abuses they thought Microsoft had engaged in, and we negotiated an agreement with them. The agreement included a license where Microsoft was entitled to use in any of its future products any of the screen displays generated by existing products. That included overlapping windows explicitly. We drafted that agreement in the fall of '85.

And in '86, out of the blue, we heard from a reporter that Apple had sued us in federal court in San Francisco for overlapping windows.

 

Why do you think they sued?

I think they felt threatened by Microsoft's growing market share. This was a time when Apple, understandably, wanted the Macintosh to be not just a hobbyist system but, if you will, a corporate IT system. ... I think it was a somewhat desperate move on their part.

You have to put yourself back in time. In the mid-1980s Apple was ... magnificent. They had wonderful public relations around it; the [Silicon] Valley was just starting to bubble and blossom and assert itself as the incubator of great intellectual property on a worldwide basis. It was just heady times. People were making fortunes and careers and achieving "immortality" in very short order, and there wasn't a lot of adult supervision. People made decisions that, in hindsight, look a little unwise. But in those days there was a sense that, if you were Apple, you kind of owned the world.

Long story short. At the end of about five years of litigation, not only did we get their claim dismissed by the trial clerk before going to trial, but the 9th Circuit Court of Appeals unanimously affirmed it.

But ... this was a very popular company, in a large media center, and we were, I think, viewed in a pretty hostile light. And it wasn't until we got pretty far along in the litigation that people stopped calling [Microsoft] names and realized there was a very legitimate legal basis for what we were doing.

 

Was the hostility from the other Silicon Valley companies or the press?

The pundits. The influentials. The lion's share of opinion was that Apple had this very valuable intellectual property and Microsoft had stolen it.

 

Let's talk about U.S. v. Microsoft. What's its legacy?

Well, it's still being taught in law schools. But the lessons learned are that we had to go to the court of appeals in almost every round of that litigation.

Microsoft One, if you will, was what culminated in the consent decree of '94. ... It went in front of [Judge] Stan Sporkin ... and he said in open court [paraphrased]: "I read this book, Hard Drive; Bill Gates is a bad guy; the company is a bad company; you, Mrs. [Anne] Bingaman, as head of the antitrust division, haven't done enough. I want more restraint on this company." And he wrote this "Valentine's Day card," as I call it, in February '95, in which he just harpooned Microsoft. The Department of Justice went after us like crazy.

We took that up to the court of appeals, and the court of appeals removed him from the case. Said the consent decree was perfectly appropriate and required that it go to a new judge. Thomas Penfield Jackson, it turned out. He entered it on a very short hearing, as he should have. That was Microsoft One.

Microsoft Two began when a new head of the Justice Department antitrust division, Joel Klein, got a lot of pressure from competitors, and—

 

Competitors? Are you talking about Microsoft's competitors?

Yeah. Netscape, Sun, the usual suspects.

And he decided that there's reason to believe that Microsoft wasn't complying with that '94 consent decree, because we continued to add new features and functionality to our Windows operating system.

For example, one of those features is Internet access. Microsoft claims that's what an operating system does. Although some people would say that Internet access could be defined as an application.

The question is, Was there some kind of technological tying that Microsoft was engaged in there? Joel's team thought they had a case. They confronted us; we respectfully disagreed. ... Now [Judge Jackson] was asked to be a finder of fact in a controversy. He came down entirely on the side of the government. We appealed that ... and [the court of appeals] threw that out in its entirety.

But before they reported that decision in June '98, Klein's team had taken the next step. Windows '98 was about to come to the market. It plainly had Internet access hardboiled into it. And so they brought a Sherman Act case. That was Microsoft Three.

So in all three battles, there were missteps at the trial court level that were corrected by the court of appeals.

The myth is [that] the Sherman Act is designed to rein in businesses. The reality is the Sherman Act is designed to encourage businesses to expand their business and to compete zealously. Elbows-out competition. What the Sherman Act does is determine where the sidelines are for open competition—where the margins are—and to enforce restraints there.

 

What about the argument that, in the information age, there can be no such thing as a traditional monopoly? Some people said that might be the ultimate legacy of U.S. v. Microsoft. Of course, it didn't work out that way. Because Microsoft was in fact ruled a monopoly, correct?

Yes. And it's another interesting myth.

Throughout the litigation, our notion was that there are virtually no barriers to entry into the operating system market. One smart woman with a PC can create the next operating system. Linux is a beautiful example. One guy created Linux. He insists it's in the public domain. It's a viable competitor to Microsoft Windows.

So it's not like owning a quarry or all the quarries in one country. It's not difficult, when it's just technology, when it comes out of the agile mind of human beings and when there are no physical or financial barriers to entry, for somebody to get into the competition. The history of software in particular is that no one's been able to sustain a strong market position very long. When you think about some of the great products—like WordPerfect, like Lotus 123, like the Macintosh—leading products, none of which has been able to sustain a large market share.

 

Except one: Windows.

And it may eventually be the exception that proves the rule. But the fact is that, typically, monopolies have a permanence to them. And Windows has been such a different product over time that it's hard to say that its monopoly has been static.

Another indication of a monopoly is that you lead the quiet life of a monopolist. You don't have to improve your product, 'cause it's a monopoly, and you get to charge monopoly rents for your product. Microsoft, by contrast, charged very low royalties for Windows, in a very conscious way. Because it was always nervous about when it would no longer have the popularity it had.

 

But its profits were enormous. Mostly because of Windows.

I don't think mostly because of Windows. There were lots of other products. But that's the nature of intellectual property. Once you have created useful technology, the cost of replicating that technology and making it available to people are so low that you almost always enjoy a good profit margin.

But the fact is that, in terms of what it cost for someone to have the power of an operating system, calculated against other kinds of expenses, it was a very modest royalty. Nothing that anyone could ever claim was so-called monopoly rent.

There still is, I think, a worthwhile academic discussion of whether the kind of popularity that Windows enjoyed over time constituted a monopoly.

But the myth is this: If you're a monopolist, that's bad. And the reality is: If you're a monopolist, that's good. That's exactly what capitalism wants you to become.

 

Looking back, is there anything you would have done differently in U.S. v. Microsoft? Some people talk about the infamous '98 video deposition of Bill Gates, that you should have stopped the deposition and advised him differently.

I'm sure there are things that, in hindsight, we might have done differently. The deposition was taken under one set of rules and, without any provocation from either side, Judge Jackson changed the rules.

The rules going into that deposition were: You can videotape it if you like; videotaped excerpts will not be used in trial. So it was a classic discovery deposition, where you're entitled to sit down with the witness and ask him or her all kinds of questions; the content of that might be read into the record but the actual appearance of that person on the screen will not be used in court. We suspect that—from some source—the judge learned that this was a somewhat interesting videotape and that it ought to come in. And all of a sudden the rules changed.

 

Did you ever talk strategy with Bill Gates?

Oh, sure. It was my job to keep him informed about strategic aspects of the case without tying him up in tactical and lesser stuff. We tried to impose upon his time as little as possible.

It's a technology company, and the competition is largely on the merits of your technology. If you keep your eye on the ball, in the long term, it's not the Sherman Act that's going to determine the fate of your company. What's going to determine the fate of your company is how good your technology is.

 

To what extent do you think you and your legal team were responsible for Microsoft's success?

Companywide success? Oh, boy. You should ask Bill that.

What I do know is that it's a legally intensive business. It's important to the company's success that it have good licenses that make it easy for third parties to use Microsoft's useful technology and that are good and clear in terms of Microsoft's need to enforce them. It's important that they have good lawyers in the piracy-counterfeiting arena to be able to enforce those rights, so they're not competing against themselves. And it's important that they have smart lawyers who can establish their legal rights.

 

Did friends and family ever come to you and say, "Hey, I'm having trouble installing Windows. Can you help?"

[Smiles] Sure. But less and less. People understand how heavily reliant I was on the help desk at Microsoft.

 

Your last name: Neukom. Has it ever been a pun among your friends? You know: "Nuke 'em"?

[Smiles] Not among my friends.

 

In March 2008, Neukom was president of the ABA and spearheading the World Justice Project.

You're about halfway through your term as president. How does it differ from what you anticipated?

There's more time-urgent work to be done. Virtually every day, there are a handful of matters that require the president's attention and that's fine if you're in your office. But if you're traveling it means getting up on e-mail or getting a fax slid under your door.

 

Rather than the large issues.

The large issues are still there. ... I don't know whether you have seen the statement that we issued when we had our march in Washington in November or the petition that we gathered—almost 13,000 signatures—but [we're] demanding that [Pakistani President Pervez] Musharraf roll back what he did on Nov. 3, on his Saturday night proclamation, where he suspended the constitution, challenged every Supreme Court justice and every high court judge to sign a loyalty oath to him, rather than to the constitution or the laws. ...

 

Is that more proactive than the ABA has been in the past-involving itself in the rule of law, or the lack of, in foreign countries?

It certainly reflects more awareness by the ABA about lawless conduct in other countries.

But frankly we've been sensitized about rule-of-law issues in this country as well because we've found ourselves having to take positions as a house of delegates in opposition to some of the things the [Bush] administration is doing [including the state secrets doctrine and the treatment of detainees at Guantanamo].

 

So you could almost say that concern over rule of law in this country has led the ABA to be concerned over rule of law in other countries?

Or you could just say that we are seeking to advance the rule of law in this and other countries. It's not a matter of the cart and the horse.

 

What can be done to make Americans more aware of rule-of-law issues? Should law be taught in high school?

It seems very dangerous not to be teaching civics in primary and secondary schools in this country today. ... We have a whole generation of smart people of good faith who want to participate in their government and be the guardians of freedom and they don't have any sense of what the Bill of Rights is, they don't have a sense of what checks and balances and separation of powers means, they don't understand what the judiciary does.

On a broader scale we've launched this World Justice Project, which I don't think existed when you and I first talked—except maybe as a glint in my eye.

 

And it was in your eye. This is your baby.

I'm afraid it is. It started out as mine. A lot of good smart people have stepped up or we couldn't have gotten to where we are now.

There are two premises. The first is: If you want a community of opportunity and equity—by opportunity we mean a viable economy, whether it's a market economy or a socialist economy—then you've got to invest in laying the foundation of justice, of the rule of law. If you don't, then you're going to be much more vulnerable to violence and, worse, terrorism.

The second premise is: If there's some validity to that first premise, then what can you do? Our proposed solution is: It's not the rule of lawyers and judges, it's the rule of law. It's simple justice. And everybody in the community is a stakeholder. That means the media, and human rights leaders, and business and labor leaders, and religious leaders and educators and public health officials and public safety and military people and environmentalists—we all have a stake in living in communities of the rule of law because we can't accomplish what we want to accomplish with and for our constituencies if we're living in a violent, capricious community. Things just don't work.

We've now had meetings on five continents where we invited leaders from, say, 15 disciplines to meet with us to evangelize. It's been remarkably gratifying, whether it's in Latin America or sub-Saharan Africa or Europe-Eurasia, or Asia, or this country itself: people come skeptically but by the end they understand that they are stakeholders, and it's up to them, as much as it is up to the lawyers.

I should say that one of the most exciting parts of this project, which is really just coming into its own, is this: we've got an index that is going to work. And it's going to be an engine for information that will be invaluable. ... How many prosecutors do you have? Are your judicial officers well trained? Are your laws enacted in an open process? Those kinds of considerations that are so basic.

We think that in three years or less we may be able to evaluate up to 80 to 100 countries. And that would be on a rolling basis. Maybe every third year go back and see whether there were changes in those facts.

 

I suppose a cynical response is, "Can't you go for something easier—like world peace?"

Yes, this is a very ambitious program. My friends tell me it's an audacious program in some regards. But someone ought to do it. If not us, who?

 

Have you been keeping up on the legal matters Microsoft is engaged in now?

I'm pretty busy with this chapter of my work and count myself fortunate to have been a part of Microsoft when I was. The law and corporate affairs work is in very good hands over there.

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