Trolls are normally the stuff of Nordic folklore or the occasional inhabitants of children’s nightmares. But, in their modern incarnation, they are also the bane of Jonathan Pearl’s professional life.
Pearl is the general counsel at global mobile telephone and electronics giant Sony Ericsson, and his fearsome adversaries are a far more commercially dangerous variety of ‘patent trolls’ – officially, non-practising entities (also known as non-product enterprises or NPEs). These are effectively holding companies with no assets other than patents.
NPEs have a taste for bringing claims against established technology manufacturers. Their home patch has been a far-flung court in the small, dusty city of Marshall in Texas, where the local judge has built a reputation for quickly processing claims and putting them before plaintiff-friendly juries that dole out large damages’ awards.
But the trolls have more recently been spreading to Europe and around the world. One of Sony Ericsson’s major competitors, Finland’s Nokia, is currently defending a claim in Germany brought by IPCom (not to be confused with IP.com), a company jointly owned by Munich-based logistics company Schoeller Group and New York private-equity and hedge fund Fortress Investments. IPCom describes itself as an ‘intellectual property (IP) asset manager’ – but, to others, it is little more than a European patent troll. If it is successful against Nokia, then IPCom – troll or not – is in line for damages of more than $ı6m.
Undermining creativity
With figures like that, the stakes are high, which is why Pearl’s views on the subject of trolls are robust. Indeed, it is his opinion that they resemble less trolls and more leeches, feeding off the creative ingenuity of others. And his main professional wish would be to see the US federal government and individual states legislate to kill them off.
‘There is a huge business now around patent trolls,’ he explains. ‘And the law should be changed so that those companies that are not manufacturing products have an automatic discount on the patent royalties they can claim. They don’t add anything to the supply chain – all they do is suck money out of the industry.’ And he is adamant that only a concerted lobbying effort of the US and EU authorities will curb the trend. ‘The industry has to work together to kill the trolls because they exploit any weakness in the supply chain, going after different levels of supply to maximise their profit.’
It was not simply chance that saw the patent trolls born in the US, says Pearl, maintaining that the American civil-justice system was ideal for nurturing their development. A combination of having jury trials for IP litigation, the renowned contingency fee structure (‘which means lawyers are prepared to invest their time and effort because they can see dollar signs’) and a sympathetic judge in Marshall created the perfect breeding ground. And now Pearl is increasingly concerned with the spread of patent troll-generated litigation. He cites not only Nokia’s troubles in Germany, but also his own company’s troll litigation in that jurisdiction and in Italy.
System error
Nonetheless, it is litigating in the US that Pearl says is his biggest headache, and patent trolls are only part of the pain. ‘You have to deal with the US the way it is – it is a difficult jurisdiction, the stakes are very high, and litigation is expensive.’ The main problem is the US’s system of discovery. Unlike disclosure in the UK, where parties generally stick to relatively narrow parameters of directly relevant material to the dispute, discovery in the US has evolved to a point where it has assumed a life of its own, serving as an excuse for the parties to go on fishing expeditions to trawl for whatever they can find.
Pearl says: ‘They have gone too far in relation to discovery in the US. Now, litigation is not even about the finding of fact; it is about seeing who has got more muscle and who is prepared to slog it out for longer – it’s not a fair fight.
‘But the reality is that you’ve got to deal with it,’ he adds. ‘If you want to do business in consumer electronics or telecoms, then you’ve got to be there. The US is one of the most exciting and one of the biggest markets in the world – you can’t possibly not operate in it.’
Indeed, Pearl is keen to keep Sony Ericsson clear of not just US courtrooms, but trials generally. While he acknowledges that, in some instances, it is impossible to avoid going to trial, the past two years of recession have almost completely killed his appetite for risk of any kind. ‘We don’t have huge wads of money floating about to take that risk,’ he concedes. ‘You tend to be more pragmatic about settlement in tough economic times.’
That approach also applies to litigants – especially in the area of IP, says Pearl. ‘If you’re a patent-owner, you’re conscious of that big risk. You know that, if you go to court, you might lose that patent and then you can’t use it to protect your technology any longer. So it cuts both ways. Companies are going to court less – that doesn’t mean they’re not fighting to protect their rights, just that they are settling before going to court more often than they would have done a couple of years ago.’
There is no escaping that the past two years have been tough. Despite the fact that there seems to be no shortage of people on their mobile phones in the street, on buses, trains and even now on some aeroplanes, Sony Ericsson has been stung by the economic downturn. The company is reported to have suffered seven consecutive quarters of losses, with its US-based president and chief executive, Bert Nordberg, only cautiously forecasting a return to profitability by the end of 20ı0.
Emerging from the storm
From the company’s global headquarters in London, Pearl says candidly: ‘It’s been an incredibly tough couple of years financially, but also from the point of view of governance and increasing risk. When cash is tight and companies are operating on the margin, businesses tend to take more risks because they need to do so to get the same profit.
‘That means as risk managers – as lawyers – we have to be much more on the ball. Everyone’s chasing smaller amounts of money – some suppliers might be shaving their margins, perhaps cutting corners on quality, and that can have a knock-on effect on us. We have to look at contracts – are they good enough? All the way down the chain, it’s getting tighter and tougher to operate.’
Indeed, the supply network causes a high-tech business such as Sony Ericsson particular concerns. Not only is there the danger that some might reduce the quality of components to increase their narrowing margins, but they might also be experiencing serious financial problems themselves. ‘We are constantly aware that suppliers may go bust,’ says Pearl.
Recession also dramatically increases the risk of corporate fraud, although Pearl is adamant that this is no more prevalent in the telecommunications sector than elsewhere in the global industry. Still, he is not complacent: ‘The possibility for large-scale fraud in my organisation is pretty small. But there is the simple fact that, in good times, if people are not happy, they are more inclined to move on, whereas, in a recession, they tend to stay. And people who are unhappy tend to do things that they shouldn’t do.
‘It is generally accepted in the corporate world that, during a recession, dissatisfied employees tend to stay where they are and perhaps commit fraud. Also, people aren’t getting the massive bonuses that they were, so some of them think that they are entitled to take a bit off the top.’
Ironically, economic uncertainty and generally enhanced risk factors have had a positive effect on in-house corporate legal departments, Pearl maintains. The increased heat in the boardroom has focused attention on the value added by corporate counsel and the role they play in protecting their businesses. ‘I’m on my CEO’s speed-dial and I think a lot of people in my position probably are,’ says Pearl. ‘We are needed more than ever because there are so many things now that involve quick decisions based on a review of data; for example: “Can we do this? Can we do that? Can we do it now?” When things are fine and everyone is making money, then frankly people don’t tend to run to the lawyers as often.’
However, the Sony Ericsson in-house department has not been exempt from cost-cutting measures. About a year ago, 10 legal positions went in the US as a large group of engineers at an American site was made redundant.
Pearl anticipates that trimming of the legal department is now more or less finished across the company, although he doesn’t rule out losing a few more posts this year through natural wastage. On balance, however, he maintains that the Sony Ericsson board is not piling on pressure regarding headcount. Where Pearl does feel the heat is in relation to his operating expenses. And that means taking a harsh view in relation to the use of external legal advisers.
Controlling costs
‘In terms of reducing the amount we spend on our outside counsel, we are doing several things, including considering consolidation,’ comments Pearl. Sony Ericsson doesn’t operate a formal panel of law firms as it uses such large numbers, especially in the US. There is also a clear strategy behind instructing so many external lawyers. Pearl explains: ‘We use so many, partly to diversify and partly to ensure that we have some of the better people tied up with us.’
The company is also adopting revised approaches to instructing outside counsel as a result of the recession. ‘We split the work on certain cases between bigger, more expensive firms and smaller, cheaper firms,’ says Pearl. ‘On a particular case, the heavy lifting would be done by the smaller firm and the strategic and very analytical stuff would be dealt with by a firm that charges a higher fee.’
In addition, alternative billing models are becoming increasingly attractive – Pearl says that he ‘despises’ the billable hour – and he claims that private practice is gradually willing to entertain the concept of a more flexible costing structure. ‘People are much more open to that, particularly now,’ he says with a wry smile.
A question of privilege
Internal and external belt-tightening aside, one issue high on the agenda of leading general counsel cuts to the core role and position of in-house lawyers. The representative and governing bodies of many jurisdictions tend to relegate company lawyers to a second tier in relation to their private-practice counterparts on the grounds that their independence is compromised by virtue of being employed and therefore answerable to a board of directors.
A major question hanging over EU general counsel revolves around the issue of legal professional privilege and whether it extends to the advice they provide to their company executives and directors. Indeed, the AkzoNobel case – which has so far seen the European Commission adamantly arguing against privilege for employed lawyers – still rumbles along in the EU courts.
For his part, Pearl takes a pragmatic view, maintaining that in-house counsel have to accept that they are in a different position to lawyers in private practice. ‘It is just something you have to deal with. It is not the same as being a private-practice lawyer – you’ve got to take a few more risks. You do run the risk of being tainted by your company if it does something bad – that is just a fact of life. I advise people to choose their employers well. Lawyers have an obligation to try to ensure that the company stays on the straight and narrow – that is part of their job – to be the moral compass of the company.’
Should advice given by general counsel to their boards be privileged? Again, Pearl is succinct: ‘I assume that nothing I write will be privileged and that whatever I write to the CEO or anyone else could end up on the front page of a newspaper because there are indeed some companies in which that could happen.’
BIOGRAPHY
Jonathan Pearl
Jonathan Pearl qualified as a solicitor at London law firm Bates Wells & Braithwaite LLP in 1988. He took his first in-house role in 1990 with Apple UK as legal counsel and, three years later, moved to what was then Sony Electronics Europe as chief counsel. He became general counsel and company secretary for Sony Ericsson in 2005. He heads the company’s global legal department, which has some 70 staff, including 20 lawyers, 20 IP Rights specialists (patent engineers or patent attorneys), and a mixture of counterfeit and export-control and administrative staff.
COMPANY IN BRIEF
Sony Ericsson
HQ: London, UK
Established: October 2001, as a 50:50 joint venture by Sony Corporation and Telefonaktiebolaget LM Ericsson.
Sector: Telecommunications
Legal team: The biggest group in the legal team is based in Sweden, while the second-largest contingent – including the dispute resolution and patent teams – is in the US. The company’s legal staff are also based in Munich, Tokyo, Beijing and Singapore.
Product design: Sony Ericsson phones are designed in the company’s studios in Sweden, London, the US and Japan, where industrial designers work with graphic and material designers to produce stylish new product releases, such as the Xperia X10.
HAVE YOUR SAY
Do you agree with Jonathan Pearl’s views? To comment on this article, email the editor.
This article was first published in Legal Strategy Review, issue 6
