Teaching Microsoft To Make Nice?

General counsel Brad Smith is settling suits and turning enemies into partners

In late 2001, when Bradford L. Smith was bidding to become Microsoft Corp.'s (MSFT ) general counsel, he put together a PowerPoint presentation for senior execs that consisted of a single slide. The message was simple and potent: It's time to make peace. Microsoft's longtime legal deputy argued that the software giant should alter its legal tactics -- and business practices -- to improve its relationships with regulators and tech companies. Smith found a receptive audience in Chairman William H. Gates III and Chief Executive Steven A. Ballmer. The company was just then putting the finishing touches on a tentative settlement with the Justice Dept. that would finally end a bitter four-year antitrust battle, and they were willing to try something new. "I felt like I not only got the job, I got something of a mandate," Smith recalls.

In fact, Smith's appointment signaled a major shift for the tech industry's schoolyard bully. For most of its 29 years, Microsoft rarely shied away from a court fight. But in the past two years, the company has aggressively resolved litigation with governments and companies, settling nearly two dozen cases and shelling out $5 billion to plaintiffs in the process. In addition to the deal with the Justice Dept., Microsoft settled disputes with AOL Time Warner, Sun Microsystems (SUNW ), and smaller companies such as Be Inc. Outsiders say the mild-mannered, 45-year-old Midwesterner has been a key part of the change. "A big reason we were able to reach a settlement was because of the trust I had in Brad," says Paul T. Cappuccio, general counsel for Time Warner Inc. (TWX ), which received $750 million when it settled its antitrust suit against Microsoft in May, 2003.

Smith is hardly cutting these deals on his own. Without the support of Gates and Ballmer, Smith would be writing combative briefs, not colossal checks. While Gates and Ballmer were open to a more conciliatory legal approach, it was Smith who designed the strategy to make it happen. His predecessor, William H. Neukom, who retired in 2002, treated legal challenges like death matches during his 22 years as general counsel. Smith, in contrast, is a natural diplomat. "The company has made it a priority to do all we can to end these legal issues," Ballmer says. "What Brad has brought is a tremendous amount of energy, talent, and creativity to help us in this effort and to do so in a way that increases collaboration with other companies."

A WIN-WIN FOCUS. The company still faces a dozen cases that could cost it billions more to resolve. Most prominent are a European Union antitrust case and a private antitrust suit filed by digital media rival RealNetworks Inc. (RNWK ). Smith won't settle at all costs, vowing not to pay unreasonable fees or compromise on Microsoft's basic belief that it has the right to add features it chooses to its products. But he promises to keep trying to resolve cases with the same philosophy he has used so far. "Don't allow something to become personal if it's not. Maintain an open and direct channel of communication [and] focus on win-win opportunities," he says. "If you're looking at a single issue, it can be hard to bridge differences. But if you can expand people's horizons so that we're looking at three or four issues, we sometimes create opportunities to fashion a win-win that weren't there before."

Smith's most daunting challenge may be within Microsoft. If the company's hyperaggressive culture isn't tamed, it could get into new legal scraps faster than Smith can resolve the old ones. Already, trouble is brewing. Microsoft plans to incorporate Web search into Windows -- an attempt to use its operating-system monopoly that could provoke trustbusters. Adversaries say they appreciate Smith's diplomacy but doubt the company will change fundamentally. "The question is: Is it real or is it a mirage?" says Thomas Vinje, a partner at law firm Clifford Chance LLP in Brussels, who has represented Microsoft foes.

Smith concedes that Microsoft has a lot to prove. "This is a work in progress," he says. "Nobody's going to be able to evaluate how successful we are until we're several years out and people can look back at how we've done things."

From his earliest days, it was clear that Smith was going to be good with people. His father, a manager at Wisconsin Bell Telephone Co., bounced around the state in different posts, moving the family each time. Smith's way of coping with new schools was to plunge into student activities and make new friends. He was editor of his high school newspaper in Appleton, Wis., and student government president his junior and senior years. So busy was Smith that he used his mom's Pontiac station wagon as his office -- packing it with student government and newspaper work.

High-school gave him a chance to develop his diplomatic skills, too. When he started at Appleton West High School in the 1970's, students complained about the strict hallway policy -- they were barred from walking the halls for any reason during class time. As class president, Smith helped broker a deal to establish a pass system so students could use the halls for legitimate reasons, like running to their lockers for a textbook. "He was very good at dealing with all those groups," says Tom Fanning, a retired Appleton West history teacher.

College opened the world to Smith. His first trip abroad came as a Princeton University senior, when he traveled to Geneva to work on his thesis on international refugee law. After graduating from Columbia Law School in 1985, he landed at Washington, D.C., firm Covington & Burling, and by 1989, he had moved to its London office. Microsoft hired him in 1993 to run legal affairs at its European headquarters in Paris. It brought him to the Redmond (Wash.) headquarters in 1996 to manage international legal affairs.

`ENGAGING'. By the time Smith became general counsel in 2002, the company was not only weary from the four-year antitrust battle but isolated from many in its industry. In a business where collaboration is vital, few companies had come forward to defend Microsoft. And Smith's predecessor, Neukom had an uncompromising style that rankled foes and some partners alike. Neukom denies he was too harsh and says "it takes two to litigate." But others in the industry draw a sharp contrast between him and Smith. "One was very unapproachable, and the other is very engaging," says Lee Patch, vice-president for legal affairs at Sun.

Smith's willingness to seek a middle ground led to the breakthrough in his settlement with longtime foe AOL. He started by getting to know Cappuccio over lunch at the Four Seasons restaurant in New York. The two hit it off so well that they talked until the restaurant shut down in mid-afternoon. Later, Smith tried to shift the focus from the companies' differences and offered a settlement with benefits for both companies. Microsoft would cut AOL a check if the Net access leader would agree to license Microsoft's digital media software for playing music and movies. Cappuccio went for it and the deal was inked a year ago.

Smith's work is far from done, but he's optimistic about finding common ground in more disputes. "With enough time and a little creativity, anything is possible," he says. His dream isn't beyond reach. After all, who would have predicted two years ago he would turn onetime enemies Sun and AOL into Microsoft's bedfellows?

By Jay Greene in Redmond, Wash., with Andy Reinhardt in Paris and Tom Lowry in New York

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