IBM, GE, Facebook, Google and the law—lessons learned, or lessons forgotten?
Paul Lippe
How can newly powerful, global tech companies fulfill their legal responsibilities to customers, employees, shareholders and the different societies in which they operate? And how can lawyers help?
Three developments this summer—as well as generations-old choices at IBM—highlight these questions:
- • On June 19, General Electric was removed from the Dow Jones Industrial Average (in favor of Walgreens!) because of GE’s faltering performance; now GE’s board is considering breaking up the company.
• On July 18, the European Union announced a $5 billion antitrust fine against Google. It’s a little ironic that Google finds itself in the antitrust crosshairs, since many of the key folks at Google were part of Netscape’s and Sun’s antitrust battles against Microsoft in the ‘90s. And just this month came the news that the Senate Intelligence Committee was not willing to accept Google’s highly regarded general counsel, Kent Walker, as a witness for an upcoming hearing. President Donald Trump also criticized Google, which was summarized by the New York Times as “The president’s tweets landed at a difficult moment for the tech industry. There is a growing sense across the political spectrum in the United States and in other countries that something must be done to rein in their influence.”
• On July 24, Facebook’s general counsel resigned in the wake of (although not necessarily caused by) Facebook’s highly publicized problems with Cambridge Analytica, Russian hacking and data privacy. Facebook’s problems have been foreshadowed by two of the sharpest people I know: Jonathan Zittrain and Roger McNamee.
Much of Google and Facebook’s extraordinary success has been propelled by a certain ahistoricity, an inclination to disregard the lessons and constraints of the past, which are often reflected in legal rules. But history is not so easily cast aside, so Google and Facebook may risk repeating other companies’ mistakes.
Fifty years ago, IBM, led by General Counsel Nick Katzenbach and the Cravath firm, fought a decades-long antitrust battle against the Justice Department (which Katzenbach had led before joining IBM), and in the process, arguably defined the practices—delaying litigation tactics, massive hourly billing, high starting associate salary, leverage—that now characterize BigLaw.
While IBM nominally won that battle when the Justice Department settled, in the long run it lost the war, becoming the poster child for industry disruption, dramatically losing market share in the computer/IT space. In hindsight, most analysts concluded that IBM would have been better off being broken up rather than tying itself in knots to fight the DOJ.
GE embraced a similar legal approach, and long touted itself as having the pre-eminent legal department. Yet according to Robert Pozen, the performance of GE’s board was a key source of its troubles. Despite nominally following governance best practices, the GE board underfunded GE’s pension plan, used too much cash in stock buybacks and engaged in earnings mismanagement.
Both IBM and GE followed strategies of conventional law firm strategies—hiring supersmart, prestigious lawyers; taking advantage of procedural opportunities; using their powers of analysis and persuasion to gain short-term tactical victories; pushing back against the government. For my money, I think the GE legal department should also accept some responsibility. How can you separate the board’s performance from the legal team’s, especially when all the problems identified by Pozen were problems of process or misclassification managed by lawyers?
Having spent most of my career as a general counsel, I’ve seen time and time again that legal cleverness often leads to business catastrophe; what my old boss Sen. Daniel Patrick Moynihan would have called the “law of unintended consequences.” I’ve also seen that “God is in the details,” and you have to know how complex digital systems operate to devise appropriate legal strategies, and so what sometimes gets dismissed as commodity work is in fact the most fundamental.
Today, Google and Facebook are arguably more powerful than either IBM or GE ever were; part of a group of five American superstar companies referred to as FAMGA (Facebook, Apple, Microsoft, Google, Amazon), for whom the regulatory toolkit is in flux.
What is the right approach for Google and Facebook? To maneuver around the legal rules that may constrain them, as IBM and GE did? Or to accept that in many cases those legal rules reflect some deep-seated wisdom and find a way to integrate the social duties implicit in law into their business? Or as Goldman Sachs is reputed to say, should they “be long-term greedy”?
To answer these questions, let’s consider the unique circumstances facing Google and Facebook. Both companies:
- Operate simultaneously globally, and so are subject to every country’s laws. A hearing in Congress may attack them for both failing to adequately respect U.S. law and for respecting the law of another country in which they operate, “knuckling under to tyrants.”
- Are subject to conflicting legal requirements, while the governments and courts that promulgate these requirements are under no obligation to reconcile or synthesize these conflicting requirements.
- Operate “in the cloud,” which means both that their operations and data may cross borders and often be unclear as to precisely what is happening where.
- Are constantly making decisions (where to put data, what to show users) based on rules. Some of those rules come from governments, but most don’t. As Larry Lessig said, “Code is law,” and so both companies are making billions of decisions every hour that are implemented by code. In an emerging world of artificial intelligence, some of those decisions will be made by machines interpreting rules originally set by humans, but applied in ways that may not be fully anticipated or understood by the same humans.
- Have a “revolutionary” new business model, where they provide mostly free services to individual users and monetize them through highly customized advertising and related services. For GE and IBM, most of their business was defined though business-to-business contracts that established a superstructure of obligations and constraints, whereas Google and Facebook operate largely free of contracts, and so must devise their own constraints, or have governments devise constraints for them. Even contracts of adhesion for companies such as Microsoft govern what customers can do with the companies’ intellectual property; Facebook and Google’s contracts govern what the companies can do with their users’ data.
- Operate with a level of intimacy well beyond the norms of business, and which approaches the role of governments, a best friend or a religious confessor. It has always been understood that the companies could be enormously profitable, but that they would also have to be good stewards of their customers’ data.
- Have a history of defying conventional wisdom. Having defied many of the norms of corporate governance that were applied by GE, they have shown that those norms were often flat-out wrong. So it’s not surprising that they don’t always take lawyers’ claims at face value.
- Are appropriately beholden to their employees who have thoughtful and deeply held, but often conflicting, views about the appropriate social role of their employers.
- Are committed to empiricism, to what is referred to as A/B testing, effectively the same standard used in medicine and most science.
- Have deeply internalized the lessons of IBM and disruption (especially Google) and seek to avoid the mistakes of previous industry leaders.
The business and legal complexity is so great that governments will never be able to devise fully effective ways of regulating Facebook and Google. Their lawyers, rather than exploit the inherent weaknesses of legal regimes as IBM and GE did, should find ways to integrate the best of law with their innovative business practices.
Many historic legal rules like antitrust are rooted in deep wisdom about concentration of power, potential for abuse, and long-term pro-competition and pro-innovation policy. Fiduciary rules are similarly rooted in experience. But now these rules don’t just operate episodically between a company and the government; they help define their billions of interactions with customers.
We are now operating in a world of near-absolute transparency. IBM used the discovery process to generate a decade-plus of delays in its battle with the government; now with e-discovery and search, a company’s actions are quickly discernible. Big and small institutions need to be as consistent and transparent as possible in their behavior; lawyers who seek to “hide the ball” or distort accounting of financial performance may lead their companies to failure. The financial crisis of the past decade was precipitated by “elite” law firms helping banks package up low-quality mortgages into AAA securities—a misclassification exercise similar to GE’s.
While most elite lawyers have been dismissive of the move to legal tech and legal ops, much of the energy of those movements is in better defining and measuring legal performance, analogous to Google and Facebook’s commitment to empiricism.
I was lucky enough to meet Nick Katzenbach in 1989 and discuss these issues with him. I think in hindsight he wished he had handled the antitrust case differently. I’ve watched the rise of Google and Facebook and seen friends there grapple with these choices.
I don’t want a world of rule of law without Google and Facebook (or the other FAMGAs); I certainly don’t want a world of Google and Facebook (or the other FAMGAs) without rule of law. And I don’t want the next Google and Facebook (or other FAMGAs) to be based in China and not the U.S.
We’re going to have to raise our game.
Paul Lippe, a longtime general counsel and contributor to the ABA Journal New Normal column, is the founder of Better, Faster Deals and a member of the advisory board for Elevate Services.
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