Reg FD

Every few weeks, our CEO, Jonathan Schwartz, talks to me excitedly about a blog he wants to post to provide his insights on our financial results or significant new customer relationships or product releases. He believes (as do I) that his blog, along with other channels of communication, is an important source of information for our employees and investors and entirely consistent with the intent of Reg FD. Unfortunately, to date there hasn’t been any specific regulatory guidance from the U.S. Securities and Exchange Commission as to how a company can use the Internet alone (via webcasts, blogs or website postings) and conform with Reg FD. As a result, Jonathan and I have some interesting discussions and he gets some advice that I’m sure he feels is, at times, overly conservative.

A constant focus for us is how to drive greater openness and transparency in our business. It’s part of our corporate DNA. Witness the fact that over 4,000 Sun employees have blogs, including Jonathan. It’s also a part of our approach to technology – whether open standards for document or identity interchange or open source software and hardware.

At the core of all this is the Internet. Today, there is simply is no more effective medium for the timely dissemination of information to the widest possible audience. And, we are only in the early stages of its growth. It is an unparalleled way for companies to have direct and immediate communications with employees, customers, suppliers and, especially, shareholders.

We are excited by the SEC’s desire to support investors by harnessing the power of the Internet. The Commission has been active in promoting the use of interactive data systems (including XBRL) to provide valuable tools for investors. The Commission has also proposed the use of the Internet as a ubiquitous communication vehicle for the electronic distribution of proxy materials on a “notice and access” basis. These actions are consistent with the Commission’s belief in the utility of the Internet to drive corporate transparency and the flow of information to investors.

But throughout history, the pace of technological adoption has always surpassed the speed of adaptation of the law to these changes. By their nature, legislation, regulation and judicial decisions always play “catch up”. To some degree this is the case today with regard to Reg FD. As enacted in 2000, Reg FD was intended to put all investors on an equal footing when it comes to receiving material information about a company. In order to meet its requirements, companies must provide material information on the basis of widespread dissemination through the filing of a Form 8-K or “through another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public.” But, as I mentioned, we don’t yet have clear guidance on how we can use the Internet to satisfy this requirement.

With this in mind, Jonathan and I recently sent to SEC Chairman Christopher Cox a letter sharing our views on the value the Internet in support of Reg FD. While the Commission is embracing the Internet’s advantages in other areas, we think that the time is right for it to also take another look at Reg FD.

Visit to the East Coast

I just returned from a quick visit with our field attorneys in Sun’s offices in Toronto, Somerset and Manhattan.

These trips always have a “Planes, Trains and Automobiles” feel to them as I race from office to airport to rental car to hotel to office. Yet, I wish I could break away from headquarters to do this more often. It is a great opportunity to understand the challenges facing our employees in the field. And, it is a wonderful reminder of the very talented and energetic people we have in our organization (to Frank and Mike – Welcome Aboard!).

On this trip, it was clear that morale was high following our recent product and market share announcements. Then again, it could also be the result of some or our “innovative” employee communications like this one spotted in the HR area of the Toronto office.

I visited our office in Manhattan only days before the 5th anniversary of 9-11. I viewed this behind the receptionist desk.

It contains several items recovered from wreckage of the World Trade Center and a hand-written note from the person who found them. Sun had an office in one of the towers.

It took some time before I could get the lump out of my throat.

The “Tax” on Innovation

Sun has always been about innovation. Last year, we spent more than 15% of revenue on R&D. Previous R&D investment has lead to the development of the Solaris operating system, the Java programming language and most recently our CoolThreads chip-multi threading technology. With this focus on innovation, the current wave of patent cases brought by patent “pirates” or “trolls” is especially baneful as it requires us to redirect focus and resources from invention… to litigation.

For those of you who are new to this area, here’s the reality. An individual, law firm or small group of investors will form a partnership or LLC to acquire a broadly written patent that can be used against the maximum number of target companies. The “plaintiff” then files suit – in many cases without any contact or notice – and usually in a location advantageous to plaintiffs. One of the current venue’s of choice (and there are several) is a court located in the small town of Marshall, Texas where over 88% of jury verdicts favor the plaintiff. For Marshall, patent litigation has become an important part of the local economy. In fact, rumor has it that in the town’s barbershop the “doctrine of equivalents” is a common topic of conversation. Call me “old fashioned”, but I still prefer baseball.

In most of these cases, the plaintiff will be represented by an attorney who is working on a contingency basis. In other words, rather than an hourly rate, the attorney is compensated based on what is received through settlement or trial – usually this is between 30% and 50% of any recovery. Thus, there is no real cost to the plaintiff in litigating the case and plenty of upside for the attorney.

When the case is filed, the plaintiff requests an injunction as well as claims substantial damages. The company is then faced with a big decision. Does it settle to avoid the risk of a sizable judgment and the possibility that it will be prevented from shipping it’s product? Or, does it fight the case in court? We always choose the latter and have invested significantly in legal resources to help us defend against these cases. But, as a shareholder, and with all respect to my colleagues, I’d rather invest in creative engineers than creative attorneys.

What I’ve described is a destructive perversion of the intent behind the U.S. patent system. The plaintiffs in these cases are not investing in R&D “to promote the progress of science and useful arts”, nor are they adding value to society. Instead, they are using the current system to maximize lucrative settlements.

With this as backdrop, we were happy to recently host a visit to Sun by Congressman Lamar Smith. Along with Senators Hatch and Leahy, he has been a leader in the push for patent reform. In the course of our meeting, we shared our views on the need for significant changes to the current patent system, including the repeal of Sec. 271(f), limits on injunctive relief and the need to restrict damage awards to the value of the invention described in the contested patent. (Under the current system a plaintiff claiming a patent on a small, inexpensive component like a heat sink can claim damages based on the total profit for the entire product – even if it is something that contains thousands of other components.)

In the recent decision in eBay v. MercExchange, the judiciary has shown a willingness to level the patent litigation playing field. It’s nice to see that the legislature now appears to be taking similar steps.

Jokes about lawyers

On occasion, I feel frustrated with the many jokes targeted at my profession. Then again, sometimes I think they may be

What a long strange trip it’s been.

Perhaps it’s just the aging process. But I’ve been reflective lately and thinking about the amazing changes I’ve witnessed during my career. As an in-house attorney in Silicon Valley, I’ve been fortunate enough to experience two major technology shifts – arguably, the most significant technology shifts in the last century.

I still remember the day in 1994 when one of my colleagues at Sun sent me instructions on how to use something called the “Mosaic browser”. It was about 4 p.m. in the afternoon when I first accessed the Internet…. and well after midnight when I logged off and went home (after repeated calls from my wife inquiring about my whereabouts). I was simply stunned. I wasn’t sure of exactly how, but I knew that the world had changed forever. Of course, Mosaic later became Netscape which lead to eBay, Google, Amazon, Salesforce.com, YouTube, Facebook, Technorati and, well, this blog.

As the internet rapidly evolved from just a means for the exchange of technical information to an engine for economic and social change, we lawyers debated things like: How do we ensure that engineers don’t inadvertently reveal trade secrets via an FTP site? What trademark rights attach to a domain name? Which jurisdiction or choice of law applies if a server is located in one country, but the wrongful conduct occurs in another? What is the appropriate tax structure for electronic commerce? And, should employees be permitted to access the Internet while at work? (That last question seems particularly silly in hindsight.)

And, now, as the legal community has developed a framework and as cases have been decided, this area of law has become, maybe not routine, but for the most part – settled.

The second significant change has been the advent of the open source movement. For years, our legal team devoted itself to building barriers around our intellectual property. We spent countless hours creating restrictive license grants and strong confidentiality provisions limiting access to our proprietary information. We also frequently negotiated with customers the appropriate terms for source code escrows. (These days when a customer makes that request, we smile and point them here.)

Since 1991, when Linus Torvalds released the Linux kernel the legal practice has been evolving to support this innovative business and licensing model. As a result, the internal conversations in my organization are now focused around things like: What is the most appropriate license for sharing our IP (CDDL, BSD, GPL, Apache, etc.)? How can we create the strongest community? How do we effectively balance commercial and community interests? What is the best way to handle indemnification issues? What is the appropriate brand? How can we most effectively conduct due diligence on our products to ensure that we have the rights necessary to open source third party components? And, with OpenSPARC we’ve had to consider export issues as well.

It makes me wonder what is coming in the next decade.

P.S. Happy 15th Birthday Linux!