Professional Licensing

Sun’s legal department is about the equivalent in size and number of practice areas as a mid-sized law firm, but with two important differences. We are global (with employees in over 25 countries) and we have a single client – Sun Microsystems, Inc.

As the manager of this function, much of my focus is on creating opportunities for our attorneys to have continued career development. Sometimes this means moving geographically; sometimes into a new area of law or business. All are excellent ways for attorneys to expand their professional skills. Lateral movement within the organization also ensures diversity of thought – it’s amazing how a fresh perspective can help to solve problems. Geographic movement of our lawyers can also help to control costs and avoid business disruption. Have an attorney who is out on maternity leave in England? Use it as an opportunity for an attorney from another country to work there and to contribute as part of a short-term assignment.

By now, you’re likely nodding your head and asking why I’m writing about something that seems so evident. The answer is that professional licensing rules in most jurisdictions greatly impede everything I have just described. In the United States, ABA model rule 5.5(d) allows in-house counsel to provide legal services anywhere in the U.S. regardless of state of license. While many states have adopted it, at least half of them still require a special license for in-house lawyers. California, for example, has a special licensing requirement. At least ten states do not provide any exception for non-locally licensed in-house attorneys. In fact, the general counsels of several companies encountered this very issue earlier this year when it was discovered that, although licensed elsewhere, they were not licensed in the state in which they resided (and where the company was headquartered).

Now, just as there is no single unified law that governs in-house licensing requirements throughout the United States, the situation is even more fragmented when the problem is viewed at a country level. With the possible exception of Pennsylvania, there doesn’t appear to be any state that will permit an attorney with a non-U.S. license to work within the state without meeting general local licensing requirements – including passing a state bar examination. Outside the United States, the situation is even more confusing. Many countries view in-house attorneys as not being independent and as such not “true” attorneys as their counterparts in law firms. The result is dramatically differing rules that make it difficult for an in-house attorney to move from country to country and be confident that they have met all the local requirements for working in-house. It also creates ambiguity as to when and in what jurisdictions the attorney-client privilege can be asserted as this recent decision in Europe illustrates.

Without doubt, there are specific practice areas in which a locally licensed in-house attorney is required – litigation is an obvious example. However, much of in-house legal work can be effectively handled by attorneys who have been educated under a similar legal framework (e.g. civil or common law) and who are properly trained and supervised by other in-house attorneys. I’ve previously spoken about the impact of the internet in a variety of areas. This is another one. Increasingly, in-house attorneys find themselves advising clients on a global basis. With the ability to quickly transfer work over the internet, it will not be uncommon to have a situation in which an attorney licensed in Australia negotiates a contract while on assignment and residing in New York with a distributor in England with California law as the choice of law under the contract.

This all may seem at odds with the intent of local licensing rules; however, these rules were designed to protect a client who was usually thought of as an individual consumer of legal services. As I mentioned, in-house attorneys have a single client – the company that is their employer. Unlike where an individual retains an attorney, companies are well equipped to evaluate and select qualified counsel, to provide training and oversight and to absorb the consequences that may result if they do not receive quality legal services.

There is a significant difference between the practices of in-house counsel and our counterparts in law firms. We need state legislative bodies and those in other countries to recognize this distinction so that we can better support our corporate clients. (And, a plug here for the ACC which has been doing a great job in this area.)

Ex Ante

For decades, standard setting organizations (SSOs) have largely been considered to be an arcane area limited to a select group of manufacturers and technologists. However, with the rise of truly global markets and the significant switching costs inherent in many technologies, SSOs are now gaining increased public prominence.

If you are someone who hasn’t considered the importance of SSOs in your life, think about this basic example. What if lighting manufacturers each used a different size base for light bulbs? It would result in chaos for consumers, distributors and resellers of lighting products. The cost of lighting would also increase because manufacturers would have a more limited market in which to allocate their R&D costs. Instead, most lighting companies build products conforming to industry standards set by an SSO. The result is that rather than differentiating their offerings based on the size of a light bulb socket, manufacturers are competing on the implementation – the things that really matter to consumers (lumens, energy efficiency, cost/watt).

For a standard to succeed, the members of the SSO must operate with transparency. To effect this, the rules of most SSOs require disclosure of any patents that implicate a proposed standard and agreement to license them on a “FRAND” (fair, reasonable and non-discriminatory) basis. Absent these requirements, an SSO member and patent holder could wait for a standard to be widely adopted and then assert its patents to extract higher royalties than it would be able to absent the standard. In the standards world, this is what is commonly referred to as a “patent hold-up”. In this situation, companies that have invested resources in developing products based on one standard frequently find it too expensive to shift to another standard. Instead, they are left with the choice of litigating or paying the higher royalties (the cost of which is ultimately borne by the consumer or end user).

To me, it’s reminiscent of a game we played as children called “UNO” . In it, players make certain assumptions only to unexpectedly be faced with a “wild card” from another player. Of course, the consequences in the world of SSOs are significantly more severe for companies, consumers and shareholders. When a SSO member fails to adequately disclose the existence of patents or refuses to license on FRAND terms, the viability of standard is called into question. The result is that adoption is frozen until the courts have removed the uncertainty. And, it’s no surprise given the accelerated growth of computing that many disputes have arisen in connection with standards in the IT industry – In the Matter of Dell Computer Corp. (computer bus), In the Matter of Rambus, Inc. (computer memory), Broadcom Corporation v. Qualcomm, Inc. (cellular telephony) – are just a few examples.

In order to avoid the problems inherent with FRAND licensing, an increasing number of companies (including Sun) are advocating for the adoption of an “ex ante” standards model. Under this model, standard setting policies require that members disclose applicable patents and specific license royalties and provide sample licenses (or agree to prescribed terms) at the beginning (thus, “ex ante”) of the process of developing a new standard. This permits the members of the SSO to make more informed and efficient decisions as to what technology should be used as the basis for a standard. It also results in better predictability in licensing fees, instead of the “wild card” of litigation that results under many FRAND policies.

VITA , a SSO creating standards for real time modular embedded computing systems, and the IEEE are examples of organizations that have both adopted policies in support of the ex ante licensing model. And, the United States Department of Justice has recognized these policies as pro-competitive.

Increased adoption of ex ante policies by other SSOs will help drive better transparency, openness and efficiency in the standards setting process. As a result, it will make it easier for companies to focus on innovation in the market instead of the courtroom.