Just one more thing.

I promise, I do have other subjects to write about; however, immediately after my last blog we received some additional news of interest concerning the NetApp litigation.

After NetApp filed its lawsuit to halt adoption of Sun’s open source ZFS technology, we responded by filing reexamination requests with the PTO citing the extensive amount of highly relevant prior art that was not disclosed or considered when NetApp originally filed its patents. The patent office clearly agreed with the relevance of this prior art, as demonstrated by its rejection of the claims across all of the reexaminations. Of these patents, three have been described by NetApp as “core” (US Patent Nos. 6,857,001; 6,892,211; and 5,819,292). Here’s the current status of each of them:

NetApp Patent No. 6,857,001 – The PTO rejected all 63 claims of the patent based on 10 prior art references provided by Sun. In addition, the trial court has agreed to remove that patent from the litigation for now pending the final reexamination by the PTO.

NetApp Patent No. 6,892,211 – The PTO rejected all 24 claims of the patent based on 12 prior art references provided by Sun. There is currently a request pending before the trial judge to stay this patent from the litigation as well.

NetApp Patent No. 5,819,292 – And late last week, we were informed that the PTO has rejected all of the asserted claims of this patent relying on at least two separate prior art references out of the many provided by Sun. (The examiner felt that to consider the other references would be “redundant”.)

Some may recall that the ‘292 (“WAFL” technology) patent was what NetApp’s founder, David Hitz, originally highlighted on his blog as being innovative and infringed by ZFS. However, what this litigation is proving is what we have known all along – ZFS is a fundamentally different, game changing technology.

It’s the same thing we hear from our customers.

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More on the NetApp litigation

I recently read Judge Laporte’s Order Construing Claims in the NetApp v. Sun litigation. Judge Laporte is the United States Magistrate Judge who is hearing this case in the Federal Court for the Northern District of California. Reading the order was again a reminder of the breadth and diversity of cases that judges are called to consider. These include everything from antitrust, personal injury and employment lawsuits, to cases involving conflicts over ERISA and some even more unique disputes.

Which makes it all the more impressive when a judge is also able to understand and render a decision relating to highly complex technologies in a patent case as part of a Markman hearing. For those who don’t practice in this area, a Markman hearing (taking its name from the case of Markman v. Westview Instruments, Inc.) is a pre-trial procedure in which each party presents briefs, tutorials and expert witness testimony to establish the meaning of key terms in disputed patents. Aside from the actual trial, the Markman hearing is the most important part of a patent infringement litigation.

On August 27, 2008, the Markman hearing was held before Judge Laporte. In dispute were fourteen phrases in seven patents (four asserted by Sun and three by NetApp) that required the court to determine the meaning of terms like “Domain Name”, “Non-volatile Storage Means” and “Root Inode”, among others. Given the complexity, we were impressed when only two weeks later, the judge issued her order.

And, we were very pleased.

In summary, the court agreed with Sun’s interpretation on six of the disputed terms (two of which the court adopted with slight modification) and with NetApp on one. As to the remaining terms, the court either formulated its own interpretation or requested that the parties propose a further construction (i.e. definition). If you want to read the Order from the Markman hearing you can find it here.

Most significantly, the Court found each of the asserted claims in NetApp’s 7,200,715 patent relating to RAID technology to be “indefinite” – meaning that someone with experience in this area of technology could not understand the limits of the claimed invention. With regard to NetApp’s ‘715 patent, the court agreed with Sun’s position that the claims of the patent are flatly inconsistent with and impossible under the teaching of the patent specification. In effect, unless NetApp appeals and this finding is reversed, the ‘715 patent is effectively invalidated in this case and against others in the future.

In addition, the Court’s findings on the terms “server identification data”, “domain name”, “portion of a communication” “element of a communication” and “completing a write operation within a local processing node” further strengthen our position that the processors, network interface and systems management software used across NetApp’s product line infringe Sun’s patents.

Meanwhile ZFS and OpenStorage continue to gain momentum.

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To Err is Human, To “Arr” is Pirate.

Last week, we celebrated “International Talk Like a Pirate Day”. It was a great way for all of us to release a little stress and channel our “inner buccaneer”. But we took it a bit farther than most as we not only spoke like pirates, but dressed like them as well.

As part of the festivities, we collected donations (thanks everyone) for 826 Valencia. This is a non-profit organization in San Francisco that provides tutoring and workshops to help local students (ages 8-18) develop their reading and writing skills. And, it’s operated out of the back of a pirate supply shop!

The most enjoyable moment of the day was my first morning meeting. It was with an attorney from Singapore who joined Sun about six months ago. Prior to Sun, he had worked with two prestigious U.K. law firms and also held a number of other significant roles, including as general counsel. It was the first time I had the opportunity to speak with him and we met over a cup of coffee in the campus coffee shop. Toward the end of our conversation, I asked how Sun compared to other places he had worked. He paused, and then in a thoughtful and deliberate response (complete with British accent) replied: “I’ve observed that Sun has a culture that is very different from other places where I have worked”.

Now mind you, at the time he spoke these words, he was fully outfitted as a pirate and sitting in a booth in a busy cafeteria. Across the table from him, I was similarly attired (including wig, earing and sword).

I laughed about it the entire day.

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Reg FD update

Almost two years ago, our CEO and I had a discussion in which he challenged some of the legal restrictions placed on him concerning blogging about Sun’s financial results and more generally about use of Sun’s IR website. He very convincingly pointed out that these restrictions were inconsistent with the objectives of Reg FD. That conversation resulted in a blog, an unexpected response from SEC Commissioner Cox and an invitation for several of us to meet in Washington with members of the SEC.

It was my first time at that institution and my visit had a Capraesque feel to it. But, the attorneys on the Commissioner’s team were intelligent, engaged and receptive. Clearly they listened to us and many other reporting companies as indicated by the SEC’s recently released interpretive guidance on the use of company websites under the Securities Exchange Act of 1934. You can find a PDF of it here.

When Reg FD was first adopted eight years ago, the SEC took the position that website disclosures alone would not be viewed as meeting the public disclosure requirements of the regulation. Since then the U.S. has seen explosive growth of internet access. With it’s latest release, the SEC has recognized this growth by making clear that depending on the circumstances website disclosures can meet the public disclosure requirements of Reg FD.

While the release does not provide much in the way of objective standards, it is not surprising that the SEC was reluctant to provide a “bright-line” test given the differences in size, market following and web infrastructure among reporting companies. However, absent that clarity, the Commission did give pragmatic guidance on factors a company should evaluate in considering whether it’s use of website disclosures are Reg FD complaint. These include the extent to which a company :

-Informs the market of the company’s website practices;

-Establishes a pattern of regular website disclosures;

-Makes the disclosures prominent;

-Takes steps to increase market and media attention to the website;

-Makes the website accessible through RSS feeds and similar technologies;

-Keeps the website current and accurate; and

-Uses the website as a predominant method for public disclosure.

(The nature of the information disclosed is obviously a significant factor as well.)

It was also nice to see that we have already incorporated much of this guidance in Sun’s disclosure process and website. To see what it looks like go here.

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Finding Value

Years ago, I worked for an established New York based law firm. I was assigned to support one of our major clients, a large international pharmaceutical company. As a junior associate I grappled with billing – trying to juggle the minimal value of my limited legal experience with the pressure of meeting the firm’s billable hour requirements. I shared this with the senior partner on the account and, to my surprise, he told me to bill for all of my time and that he would ensure that the firm received “compensation commensurate with the value the firm provided to the client”.

At the time, I wasn’t confident enough to ask how this was accomplished. But I later found out that this partner had a long standing relationship with the client’s CEO. At the end of each year, the two of them would meet over a nice dinner and bottle of wine and review the work that the firm had done the previous year. Among other things, they would discuss the amount and type of legal support the firm had provided and the value of that work to the client. At the end of the meal, they would agree on an annual fee for the following year – usually memorialized on a napkin. Some years the fee increased; in others, it decreased.

I was thinking of this story while attending a meeting with lawyers from a number of San Francisco Bay Area companies and law firms. Under the aegis of the ACC we were together to discuss the devolution of legal services from the halcyon days described above to the present where law firms optimize for profits per partner while in-house legal departments focus on efficiency and value. It was a lively discussion and, although there wasn’t a clear solution, some ideas resonated with me.

1. Legal Education – Law schools (especially in the U.S.) remain primarily focused on theory, rather than practice. As a result, a significant expense for law firms is attributable to providing practical training to recent law school graduates. In turn, this expense is passed on to clients in the form of higher hourly fees. Our legal education system needs to provide better practical training. In this respect it should mirror the residency requirements of medical schools or legal programs in other countries. For example, in Germany, a practice residency is already incorporated in the law school curriculum. In addition, law schools need to recognize that the “legal profession” is also a business for providing legal services. To be successful, lawyers need to be trained in how to manage a competitive business enterprise. Interestingly, future members of our profession already understand this and are focusing on the issue.

2. Legal Media – As a public company, Sun provides a very transparent view into all aspects of our business operations. This transparency drives increased competition in the marketplace for our products and services. Obviously, law firms aren’t required to provide this type of information. However, the limited information that is available focuses on the wrong metrics. Legal media need to shift the focus from metrics like profits per partner to those metrics that are valued by clients. When legal periodicals begin to report firm operating expenses, average cost per billable hour and similar metrics, the legal world will change very quickly – and for the better. Law firms understandably dislike RFPs. In-house legal departments feel the same. Unfortunately, there is no other mechanism for clients (i.e. customers) to ensure that they are getting cost-effective value.

3. Law Firms – Law firms need to better understand that they are both licensed professionals and also employees of a business enterprise in an increasingly competitive (and global) market. This means they need to understand every component of their operating expense and business model. What is the cost of attorney turnover in the firm? What are its core v. non-core technical strengths? Can the firm manage sub-contractors (i.e. other legal service providers) to provide more cost effective services to clients in non-core areas? Does the firm fully understand its customers and does it tailor its services to the customer’s specific needs? (In this regard, I note that I have never had a firm propose a non-standard billing relationship for a specific matter. Instead, I’ve always had to request it.)

4. In-House Legal Departments – We need stop complaining and be part of the solution. This includes not just considering, but engaging firms that provide alternatives to the traditional legal services model. (Some examples – Axiom, Paragon Legal and the recently announced Virtual Law Partners). We also need to be more willing to retain small to mid-sized firms and firms in other geographical regions. Above all else, we need to more actively share information about attorneys and firms that deliver the value that we need as consumers of legal services.

If you want to be part of the dialog, contact the ACC for more details.

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Accounting and the Tour

I love it when July rolls around. It means the Tour de France is underway. Despite the issues with this event in the past few years, I can’t think of a more compelling display of physical endurance, strategy and teamwork. Much to my family’s annoyance, for most of the month I am glued to the TV. But, today I thought I’d pull myself away from the race for the Maillot Jaune to write about a subject that many find equally exciting – Financial Accounting Standards No. 5.

Ok. Perhaps, it’s only accountants who find FAS 5 to be exciting. However, all in-house counsel should be aware of the potential impact of the changes to FAS 5 proposed by the Financial Accounting Standards Board. In general, these changes would lower the threshold for disclosure of certain litigation loss contingencies, as well as require companies to disclose substantially more information about the underlying litigation.

Under the proposed changes, companies would need to provide disclosures for loss contingencies that are more than “remote”. This is a change from the current higher threshold of “probable loss”. Where disclosure is required, the proposed amendments are significantly broader requiring companies to provide “a description of the contingency, how it arose, its legal or contractual basis, its current status, and the anticipated timing of its resolution; a description of the factors that are likely to affect the ultimate outcome of the contingency along with their potential effect on the outcome; the entity’s qualitative assessment of the most likely outcome of the contingency; and significant assumptions made by the entity in estimating the amounts disclosed…”.

While increased transparency clearly benefits shareholders, the changes proposed by FASB create some significant issues. Among them are the potential that the disclosures may:

– enable opposing counsel to determine important elements of a company’s litigation strategy,

– possibly be admissible as evidence as an admission against interest,

– create the potential for waiver of attorney-client privilege and work product immunity, and

– lead to securities litigation if a disclosure later proves to be inaccurate and an investor relied on it.

Underlying this last point is the real difficulty with the proposed changes – that litigation (like The Tour de France) is inherently unpredictable. Despite having almost unlimited information about the riders, their training regimens, racing strategies, and the strength and weaknesses of their respective teams, you might think you would be able to guess who will be wearing the yellow jersey on the final ride into Paris. However, races are frequently determined by events that are uncontrollable and unforeseen – things like inclement weather, road conditions, mechanical problems, accidents and even dogs. Litigation is much the same. Often the outcome of a case depends on your choice of counsel, discovery resources, venue, identifying expert witnesses, success of key motions and the members of your jury. This uncertainty is the reason that most cases in the US are settled.

You can read the proposed amendments here . Comments to FASB are due by August 8th.

And, in case you’re interested, I’m still picking Cadel, but then again, you never know what will happen.

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Firestar

There is an old proverb that we like around Sun that says that “a rising tide lifts all boats”. In the IT industry the “rising tide” is the accelerated adoption of FOSS around the world. As open models begin to displace proprietary, opportunities increase for all members of the open source community – including Sun. So, it’s in our interest to ensure that the market for FOSS continues to grow. We support this growth, in a variety of ways. Some are very visible and others less so. A recent example of the latter involves a patent litigation – not against Sun, but a competitor.

In 2006, Red Hat was sued by Firestar Software, Inc. in the Eastern District Federal Court in Texas. Firestar alleged that Red Hat’s then recently acquired JBoss technology infringed one of it’s patents. Most often these events are viewed (sometimes happily) as a competitor’s issue to deal with. In this case, however, we considered Red Hat both a competitor and a brother-in-arms. And, given the breadth of the Firestar patent and the likelihood that it would be asserted against others in the community, we decided to invest the time and resources in a prior art search.

We also let our friends at Red Hat know early in the litigation of our activities, that we had filed a request with the PTO for reexamination of the patent, and shared copies of the prior art for Red Hat to possibly use it in its defense.

These things take time, but last week, we received a response from the PTO in the form of an office action rejecting all of the claims in the patent based on the prior art submitted by Sun. Obviously, we are delighted to get this validation from the PTO. Firestar has two months to overcome this rejection, but given what we presented to the PTO, we believe it will be a challenge for them.

Unfortunately, the PTO’s response comes a little over two weeks after Red Hat entered into a settlement with Firestar. Although the recent U.S. Supreme Court decision in Quanta Computers v. LG Electronics protects downstream Red Hat licensees through the application of the doctrine of patent exhaustion it doesn’t insulate others in the open source community from future actions by Firestar. It’s our hope that the rejection of the patent through the reexamination process will become final in August eliminating this threat for all members of the open source world.

As I said, “a rising tide…”

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