The Peacemaker

Nov. 15, 2001, was a nerve-wracking day for Brad Smith. That morning, the senior Microsoft lawyer received a phone call from CEO Steve Ballmer's assistant asking him to meet with Ballmer at 4:30 that afternoon. Smith knew what it was about.

During the previous four months, Smith had been through six grueling interviews--in true Microsoft form--vying for the company's coveted general counsel position. Microsoft was looking for the ideal candidate to fill the shoes of long-time GC Bill Neukom, who was retiring after 22 years with the company. And Smith was about to get his answer.

"I know Steve," Smith says. "He's the type of person that would call me into his office to give me the news one way or the other."

But Ballmer was running late. So Smith sat in the CEO's office for 15 minutes, not knowing what was going to happen next.

"When he finally walked in, he just stuck out his hand and said, 'Congratulations.' It was quite a memorable moment," Smith explains.

Since that day three and half years ago, Smith has had a lot on his plate. He's been in negotiations with some of the country's top technology companies, such as Sun Microsystems, AOL Time Warner and Novell. And he's gone head-to-head with the likes of Eliot Spitzer and Bill Lockyer.

But Smith's first priority wasn't to follow in the footsteps of Neukom, who had a reputation of fighting tooth and nail for his client. After Neukom negotiated Microsoft's settlement with the U.S. Department of Justice in the fall of 2001 and retired, Smith stepped in as peacemaker--putting a new face on Microsoft's legal department.

"Brad is an ideal successor to build on Bill's legacy, as well as to take the department forward," Ballmer says.

The company was ready to move in a new direction, according to Smith. So he went out and made himself known in the industry, visiting government officials, as well as GCs and CEOs at competing companies.

"Brad's understanding of the importance of building constructive relationships with the industry and the government made him well suited to lead Microsoft into the future," Ballmer says.

Also at the top of Smith's to-do list: settling some of the company's long-standing lawsuits. "My preference has always been to work things out in a reasonable way," he says.

The Boy Next Door

Long before Microsoft was even a thought in the mind of founder Bill Gates, Smith knew what he wanted to do with his life. By the time he reached the fourth grade, he had decided to become a lawyer.

"We had some lawyers in the family, so I had exposure to the profession at a young age and found it intriguing," says Smith, whose father moved the family around a lot while working for Wisconsin Bell Telephone Co.

"Moving around a lot can be challenging for a kid," Smith says. "But you learn a lot about how to make friends, get to know a new place and become part of a new community."

Those attributes allowed Smith to adjust well when it was time to go to college. He applied to only three schools: Princeton University, Northwestern University and the University of Virginia. All three schools wanted him--but Smith was drawn to one more than the others.

"Princeton was very appealing from the undergraduate studies perspective, and it had a manageable campus size for a kid from northeastern Wisconsin," he says.

At Princeton Smith attended the Woodrow Wilson School of Public and International Affairs, where he focused on international economics and political science. During the summer before his senior year, he traveled to Geneva, Switzerland, to study and write his senior thesis on international refugee law at the United Nation's High Commission for Refugees.

"It was a great experience meeting and interviewing people that worked for the U.N.," he says. "And it was then that I decided I wanted to study international law when I went to law school."

He already had the venue picked out: Columbia Law School in New York. "Columbia was one of the standouts in the country for international legal studies," he says.

The summer after his second year of law school, Smith returned to Switzerland to study at the University of Geneva's Graduate Institute of International Studies. He stayed in Geneva for one year, focusing on international refugee law, which continues to remain a central part of Smith's legal work.

London Calling

After returning from Switzerland and finishing his last year of law school, Smith clerked at a U.S. federal courthouse in Manhattan for a year before accepting a position with Covington & Burling in Washington, D.C., in 1986.

"The opportunity to work on broader public issues, governmental issues and to some extent, international issues, was really what attracted me to Covington," Smith explains. "And Covington offered a very diverse practice."

At the firm, Smith handled everything from antitrust litigation and government-oriented regulatory work to international transactions and arbitrations.

"The first thing that stands out about Brad is he has this incredible sense of initiative," says Bill Iverson, partner at Covington and Smith's former supervisor. "He always did what you asked of him essentially perfectly."

After three years in Covington's Washington, D.C., office, the firm asked Smith to help start up its new office in London. And although initially Smith wasn't sure he should go, he realized it was an opportunity he couldn't pass up.

"It was a very different experience," he says. "It was going, as a third-year associate, from what was arguably the leading and most-established firm in Washington with more than 200 lawyers to what was a complete startup environment in London."

Ultimately Smith was thrilled to make the move. "It was exciting both to do something that played to my international interests, as well as participate in creating a new part of an institution and help build a new law firm."

While in London, Smith worked in the international arbitration area, mainly focusing on the Iran?? 1/2 U.S. Claims Tribunal in The Hague, Netherlands. He also represented a variety of software and computer companies on various competition law issues.

But after only one week of being in London Smith learned about the Business Software Alliance. The trade association--created by six companies, one of which was the Redmond, Wash.-based Microsoft Corp.--was only in its infancy. Its mission was to call attention to software piracy, using litigation and outreach programs to enforce the rights of its members.

One of Covington's former associates, Doug Phillips, was the president of the association and asked Smith if he would be interested in writing an article about their Software Directive, a piece of European Union legislation that would harmonize copyright protection and software throughout Europe.

Phillips told Smith that if he wrote the article, it would have to be pro bono, but he would forward it to the association's members. Despite the fact that he was going to Florida with his wife for the weekend and knew nothing about copyright law, Smith--who had developed a considerable interest in the technology industry--seized the opportunity.

"I hadn't even taken an intellectual property class in law school," Smith explains. "So I took two big bags to the library and dumped in everything I could find that looked like it pertained to copyright law and technology."

Smith spent his Saturday in Florida sitting by the pool teaching himself copyright law. On Sunday he took his wife to Disney World and on Monday he wrote the article. After he handed it in on Tuesday morning, Phillips sent it to the association's members.

"One of the lawyers that read the memo was the international counsel for Microsoft," Smith explains. And it was that initial connection that catapulted Smith into the position he is in today.

Mr. Smith Goes To Paris

Smith continued as an associate for Covington during the next several years, but also worked as the lawyer for Business Software Alliance, responsible for lobbying the Software Directive. By the early 1990s, the association had grown significantly and brought on a number of lawyers. Smith had been working with a lot of different companies by that time, but the one he did the most work for was Microsoft.

And in April 1993, opportunity knocked.

Neukom, who was Microsoft's general counsel at the time, asked Smith if he would be interested in moving from London to Paris to lead Microsoft's European legal and corporate affairs group as associate general counsel. Flattered by the offer, Smith told Neukom he would think about it, but his initial reaction was to say no.

"I was up for partner that year, I was really enjoying the work I was doing in London, and I had never really considered going in-house," Smith explains. "I thought it was very nice to be asked, but I really had no interest in doing that."

But after he thought more about what the opportunity meant for his career, he had an idea. Smith told Covington he was considering the offer from Microsoft but didn't want to give up the opportunity to become partner.

"For Brad, a chance to work for Microsoft in Europe was like giving a bottle to an alcoholic," Iverson says. "I didn't have any doubt in the world he would take it. But I don't think his intentions were fixed when he left."

Covington agreed to consider Smith for partner in September 1993, and then allow him to take a leave of absence for two years to work for Microsoft, giving him the option to return to the firm if he wanted to.

"Covington was very supportive, even though it was a rather unusual thing to be voted on for partner knowing I would be leaving the firm a month later to join Microsoft," Smith says. "And Microsoft was equally supportive of the arrangement; although I think they knew once I got there I would never leave."

In November 1993, Smith went to work at Microsoft's European headquarters in Paris, overseeing all of its European legal affairs.

"The transition from law firm to in-house was a big one," Smith says. "But the transition linguistically was even bigger."

While in Paris, Smith adjusted to the language barrier and eased himself into his position. He handled everything from regulatory affairs to litigation and oversaw the founding of government affairs and philanthropic programs for Microsoft in Europe. Those two years quickly came and went.

"Of course the job worked out," Iverson says. "When he left Covington, I didn't have the slightest thought he would ever come back."

By 1996, impressed with his performance in Paris, Microsoft brought Smith back to its Washington headquarters to manage international legal affairs. The company also promoted him to deputy general counsel for worldwide sales.

As deputy GC, Smith's job was to lead Microsoft's legal and governmental affairs work, managing all the company's cases outside the United States. In this position, Smith was able to demonstrate his leadership abilities.

"He always stayed super-focused on key priorities," Ballmer says. "He was results-oriented, strategic and intelligent."

So when Neukom announced his plan to retire in fall 2001, few were surprised that Smith was one of the lead contenders to step in as the company's chief legal executive.

"It was entirely and completely appropriate," says Jon Blake, partner at Covington in Washington, D.C., and a former colleague of Smith. "The track record he had established made him a clear-cut and ideal choice for the slot."

But it wasn't that easy. Smith had to meet with several Microsoft executives before he landed the position. It was a simple PowerPoint presentation that sealed the deal. Standing before Gates, Ballmer and several other Microsoft executives, Smith presented a single slide, which read: "It's time to make peace."

The Mahatma

As he stepped into the position on Jan. 1, 2002, Smith was anxious to set his plan in motion. Under Neukom's 22-year rule, Microsoft had become known as a bully, rarely shying away from a court fight. The former GC was known to take on legal challenges like death matches. And Smith wanted to change that image.

While Neukom had put an end to the Department of Justice's antitrust beef with Microsoft a few months earlier, the company still had several huge lawsuits dangling over its head.

"For the kind of issues we are dealing with today--especially antitrust matters that have such a large impact not only on us but on other companies as well--it tends to be a more constructive path if you can get people in a room and find some common ground," Smith explains. "So when I started this job, one of the first things I did was pick up the phone, call these company executives and government officials, and then go out and see them."

Smith started with the government officials, such as California Attorney General Bill Lockyer, New York Attorney General Eliot Spitzer and Iowa Attorney General Tom Miller, with whom Microsoft had been in a strongly adversarial position. Soon after Neukom inked the deal with the DOJ, the attorneys general accused Microsoft of engaging in unlawful monopolization and decided to go after the software giant on their own.

"I went out to see them and said, 'Look, we've had years of differences, but Microsoft really is interested in forging a new relationship and winning your confidence. We've got the kind of culture and values you can take confidence in,'" he says. Although the process has been slow, Smith says the attorneys general have been very receptive and the relationships are moving in a positive direction.

"It didn't mean they were prepared to abandon their suspicions or give up their litigation position," he explains. "But they have all been very welcoming in terms of being more than fair to sit down and talk, which really creates the basis for a good background."

Smith has taken a similar approach with the companies that have sued Microsoft. Soon after he took over as GC, the company settled nearly two dozen lawsuits to the tune of more than $5 billion.

Microsoft paid $60 million to SPX, which accused the company of infringing on its whiteboard technology. It also paid InterTrust $440 million to settle a patent dispute, which centered on Microsoft's Media Player.

And in even higher-profile settlements, the company paid Sun Microsystems nearly $2 billion and AOL Time Warner $750 million to settle antitrust suits. In fact, Time Warner's general counsel Paul T. Cappuccio told a BusinessWeek reporter last May that a big reason the company reached an agreement with Microsoft was because of the trust he had in Smith.

And most recently, Microsoft paid $536 million to rival Novell after the company sued Microsoft for alleged unfair computer server and operating system trade practices in the mid-1990s.

"The Novell settlement was really a part of the same strategy we've been pursuing for the past couple of years and used with Sun Microsystems and AOL Time Warner--working to mend fences with others in the industry and resolve antitrust disputes that have arisen in the past," Smith explains.

Under Smith's watch, Microsoft has even gone to bat for other companies within the technology industry by targeting spammers with a vengeance, suing not only the spammers themselves, but also the Web-hosting companies that allow the spamming to take place .

And Ballmer is proud of Smith's effort."Brad has been successful in leading the company's efforts to resolve the conflicts of the past in a way that will enable Microsoft to build constructive relationships with the government and the industry, and to continue to innovate for the benefit of the customer," he says.

Troubled Waters

But Microsoft's troubles are far from over. The company is still battling it out with the European Union, which claims Microsoft abused its dominance to stifle competition and accused the software company of trying to squash competing audiovisual software by including its Media Player with the Windows desktop system. The EU demanded Microsoft either produce a version of Windows without the Media Player or incorporate rival programs into the package.

In December 2004, the Luxembourg-based European Court of First Impressions ruled Microsoft must change its commercial practices and has forced the company to divulge some trade secrets, as well as produce a version of Windows without its popular digital video and music player.

"We definitely sought to negotiate an agreement to bring that case to an appropriate resolution and had almost reached a settlement in March 2003," Smith explains. "But unfortunately, we hit a roadblock, and the negotiations collapsed in the eleventh hour, just as we thought we were coming to a common understanding."

An EU court decided the company must immediately abide by the ruling of the lower court. And in January Microsoft decided not to appeal the ruling, but.

Furthermore, Microsoft is still at odds with RealNetworks, which has sued the company for $1 billion, claiming it is illegally monopolizing the growing field of digital music and video. That case is still pending.

Despite the bumps in the road, Smith feels like he and his team have made progress.

"As we've transitioned over the past few years and adapted culturally, we've started to create a much more customer- and partner-centric culture," he says. "We're doing a better job of creating business processes that focus on customer needs and business-partner needs."

Although Smith has managed to shed new light on a company so ridden with legal issues, Microsoft still has its enemies. While many adversaries have expressed appreciation for Smith's diplomatic approach, some doubt Microsoft will ever change at its core.

"It's a mirage. Microsoft continues to flaunt the antitrust law and thereby cause huge damage to the world economy," says Thomas Vinje, counsel for several companies that have sued Microsoft and a partner at Clifford Chance in Brussels. "Absent Microsoft's antitrust violations, we would see a much more vibrant software industry. ?? 1/2 Software users, including large corporate users, pay the price for Microsoft's illegal conduct."

Vinje believes if anything has changed it's that Microsoft has used some of its monopoly profits to settle with already-crippled adversaries--who, he says, not surprisingly have accepted large sums of money to abandon their cases against Microsoft.

"The bottom line is that Microsoft's behavior in the marketplace has not changed," he adds. "The same old beast lies behind the thin fa?? 1/2 ade of the kinder, gentler face of Microsoft."

Despite the critics, Smith is confident he has put the company on the right track.

"A decade from now I want to be able to look back and see this as the first phase of the company's ongoing evolution," he says.

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