I Will Survive

Lisa Shuchman

Corporate Counsel

07-25-2012

Intellectual property specialty law firms were supposed to have vanished by now. They couldn't survive competition from general practice firms aggressively moving in on their turf, many IP lawyers said [ IP Law & Business, "Adapt or Die," March 2005]. And sure enough, the past decade saw a half-dozen IP firms close their doors or merge with general practice firms. Howrey, which mixed a strong IP practice with antitrust and general litigation, became the most recent victim in 2011.

Not every IP firm is ready for last rites, though. Fish & Richardson; Finnegan, Henderson, Farabow, Garrett & Dunner; Fitzpatrick, Cella, Harper & Scinto; Knobbe, Martens, Olson & Bear; and Kenyon & Kenyon have all made The Am Law 200 every year for the past five years. Their rankings have shifted a bit. Their gross revenues have in some cases fallen from year to year. But they aren't about to disappear. "There's nothing wrong with the IP model," says Peter Devlin, president and chief executive officer of Fish & Richardson, a 353-lawyer IP firm where profits per partner averaged $1.44 million in 2011. "Demand for IP expertise is stronger than ever."

Indeed, intellectual property law has never been more important, prominent, or profitable. Companies are being forced to actively defend their patents: Patent licensing firms cost companies $29 billion in direct legal costs in 2011, according to a recent Boston University study. Businesses feeling the effects of a weakened economy say they are getting more aggressive about using their intellectual property as a source of revenue. Technological innovation has led to a need for more patent filings, as well as more licensing, litigation, and lawyers.

But this growing demand is actually part of the problem. While the need for IP–related legal services means that business at IP–only firms should be booming, general practice firms such as Winston & Strawn and Gibson, Dunn & Crutcher have expanded their IP practices in recent years. (Last year, for instance, Winston added more than 40 IP lawyers from the Houston office of the now-defunct Howrey.) An IP practice, once perceived in the legal community as the domain of geeks and nerds, is today viewed by many general practice firms as not only attractive, but necessary. "IP is the new little black dress everyone has to have," says Nicholas Cannella, chairman of the management committee at New York–based Fitzpatrick. These relative newcomers are competing with IP firms for much of the same talent, clients, and work.

The heightened competition has contributed to the demise of once-prominent IP firms such as Morgan & Finnegan and Darby & Darby, which closed their doors in 2009 and 2010, respectively. Some general practice firms have merged with other IP firms, the way Kilpatrick Stockton absorbed Townsend, Townsend & Crew last year and Ropes & Gray swallowed Fish & Neave in 2005. IP firms are still approached by firms looking to boost their intellectual property practice, says Michael Lennon, a senior partner and head of the business development committee at Kenyon & Kenyon, noting that his firm has been approached by other firms over the last decade—but ultimately decided to remain independent. "We prefer to practice law in the form and manner in which we're doing it," he says.

But the raids and mergers have enabled general practice firms to capture some business that once fell easily into the laps of IP–only firms. Technology companies with huge IP portfolios—such as International Business Machines Corporation, Intel Corporation, and Apple Inc.—now spread their legal work around, lawyers say. Businesses are looking for alternative fee arrangements. And more and more companies are increasing the size of their in-house IP legal departments so they can handle some intellectual property matters without the help of outside firms. "The legal sector is experiencing changes and pressures that law firms need to respond and adapt to," Barbara Clarke McCurdy, managing partner at Finnegan Henderson, said in an email.

The top-ranking IP–only firms cite two key reasons why they have survived despite the competition from other firms and the financial pressures brought on by clients: They have not lost sight of their mission to be full-service intellectual property firms. And they have put more and more emphasis on making sure their firms are well managed. "What really determines whether a firm will survive—whether it be an IP or a general practice firm—is the talent, expertise, and management of its partnership," says Lennon.

IP–only firms say they can offer a nearly unmatched level of intellectual property expertise: They have scientists, engineers, patent agents, and Ph.D.s, and the extent of their technical knowledge is rarely found at general practice firms. They label themselves "full-service IP" because they handle a range of matters: strategic IP counseling, patent prosecution, licensing and other transactional work, and litigation. Full-service IP also means that a client can receive seamless representation and strategic advice on matters related to the Patent and Trademark Office, district courts, federal courts, and the International Trade Commission, these firms say.

"We have a depth and breadth of knowledge that is hard to duplicate," says Cannella of Fitzpatrick. Canon U.S.A. Inc. agrees. The company has turned to Fitzpatrick for some 35 years for everything from prosecution work to litigation. "They know our business, and they understand our technology," says Seymour Liebman, Canon USA's executive vice president, chief administrative officer, and general counsel. "There's always someone there we can draw on for the expertise we need."

"A lot of our litigation is very technical and specialized, requiring a lot of people with a strong IP background," says Bill Scarff, vice president, associate general counsel, and chief litigation counsel at the pharmaceutical company Allergan Inc., which retains Fish for many of its high-stakes patent cases. "In those high-stakes situations, you want a deep bench, and it would be tough for us to justify going elsewhere." Much of Allergan's litigation falls under the Hatch-Waxman Act, which deals with drug price competition and restoration of patent terms. These complex cases, in which pharmaceutical companies try to fight off generic drug manufacturers challenging their patents, are heavily litigated and don't often settle, Scarff says. Fish has handled most of these lawsuits for the company for more than a decade. "It doesn't make sense for us to go to another firm, unless we're using a group of firms on a case," Scarff says. (Allergan has used other firms in non–Hatch-Waxman IP matters, he says.)

Fish in the early 1990s started to expand its practice to include more corporate work—in part because partners believed that this would give the firm more direct access to general counsel's offices, says Devlin. But three years ago, the partners of this 134-year-old firm that in its early years represented such inventors as Alexander Graham Bell, Thomas Edison, and the Wright Brothers decided to return Fish to its IP roots. The firm shed most of its 14 corporate attorneys, except for what Devlin calls a "small number" whose practices leverage the firm's IP expertise. "We realized we didn't need second-door access to the client," says Devlin. "IP is prominent by itself, and general counsel are now intimately involved in IP matters."

The keen focus on IP makes it all the more important for IP firms to hold on to their top talent. And at a time when general practice firms are seeking to beef up their IP prac­tices, this isn't always easy. "You can't prevent some raiding from taking place," says Lennon of Kenyon & Ken-yon, which lost patent litigator Jeffrey Gerchick to Quinn Emanuel Urquhart & Sullivan in April. "But a firm's culture and values can foster loyalty and limit partner defections."

Kenyon & Kenyon works to create a strong firm culture by bringing associates up through the ranks and only occasionally taking on lateral hires. Just four of the current 57 Kenyon partners were lateral hires, Lennon says, adding that partners who have been at one firm for most of their career have more firm loyalty and are invested long-term in the firm's success. Finnegan also prefers to promote from within; in the 47-year history of the firm, fewer than five equity partners have left to work at another law firm, McCurdy says.

And at Knobbe, a unique culture that stresses teamwork and lifestyle over the size of an attorney's book of business keeps the talent from moving elsewhere, says managing partner Steven Nataupsky. An associate at Knobbe makes partner in just five years. This is actually long by Knobbe's historical standards: Making partner took a mere two years when the firm started in the 1960s. "Our philosophy is that once we know we like someone and respect their lawyering skills, they should be made an equity partner," Nataupsky says. "It doesn't take more than five years to figure that out." Compensation for the all-equity partnership is based on seniority, not on how much work each partner brings in, and Knobbe discourages its attorneys from billing more than 1,640 hours a year. The point is to achieve a work/life balance, Nataupsky says. Knobbe encourages its attorneys to pursue activities out of the office. Some do nonlegal charity work. Some spend more time with their children. A group of Knobbe attorneys goes surfing at 5 a.m. every morning. One partner, 34-year-old Bryan Wahl, who represents medical device makers, is also a practicing physician who on nights and weekends can be found working in hospitals. "We've found that people with outside interests are happier and make better lawyers," Nataupsky says.

There's a trade-off: Knobbe partners earn less than they would at a more traditional big firm. Knobbe ranked 153rd among Am Law 200 firms in 2011, with gross revenue of $165 million, but its profits per partner averaged just $445,000, 188th in the Am Law 200 rankings. Among Knobbe's peer IP firms, PPP ranged from $870,000 at Kenyon & Kenyon to $890,000 at Fitzpatrick to $1.13 million at Finnegan to $1.44 million at Fish.

As general practice firms try to lure top IP talent with big money, IP–only firms have tried hard to bolster their profits, says law firm consultant Peter Zeughauser. They may reduce the number of equity partners in the firm; make sure their rates are competitive; push more work to associates and free up partners to do development; or try to improve partner productivity, giving incentives to partners to better manage their time and staff to improve profitability, Zeughauser says. Kenyon & Kenyon, for instance, is placing more value on seniority and contributions such as management, recruiting, marketing, and training, in addition to business origination. "It's not only about the rainmakers anymore," Lennon says.

Knobbe, Fitzpatrick, Kenyon & Ken-yon, and Finnegan have all seen their revenue per lawyer—a key measure of law firm efficiency—decline slightly over the past five years. Fitzpatrick, Kenyon & Kenyon, and Finnegan, however, have still managed to raise PPP by increasing leverage overall, without all of them following exactly the same playbook. Both Fitzpatrick and Finnegan have grown in head count, but kept their equity partner numbers relatively stable. Kenyon & Ken-yon has boosted leverage incrementally, without big changes to its head count; and Knobbe has seen its lawyer numbers shoot up, from 175 in 2007 to 265 in 2011. Fish's head count reduction during the recession, when it trimmed 100 lawyers and closed its Austin office, apparently paid off, with RPL and PPP both rising.

Compensation is only one aspect of a firm's economics, however. The IP firms are feeling increasing financial pressures from their clients. In-house lawyers say they are demanding alternative fee arrangements, such as fixed fees, partial contingency fees, and incentive payments. "We've negotiated a few fixed-fee agreements [with firms], and we like them a lot," says Scarff of Fish client Allergan. Knowing how much a company will have to pay in legal fees each month makes a huge difference—especially to public companies, he says.

But for firms, alternative fee arrangements can cause fluctuations in revenue and profit. Fish, for example, had less contingency fee revenue in 2011 than in 2010. The firm's volume of work and billable hours increased, but revenue and profits per partner dipped. "Contingent fees by their nature come in a lump sum when the case is resolved, so as our inventory of these cases grows steadily, we expect to see fluctuations in revenue and profit," Devlin says.

These firms are also facing increased competition from many of their own clients, which have been increasing the size of their in-house IP practices. Canon U.S.A. used to have Fitzpatrick do almost all of its patent prosecution. Now, more than half is done by the company's 21 in-house attorneys, says Liebman. Bose Corporation, too, does more legal work in-house, according to Steve Romine, chief intellectual property counsel at Bose, which has used Fish for much of its IP work for more than 20 years. The company started to do more patent prosecution and some portfolio management in-house in 2008, finding that it would save money and give the company more control, Romine says.

In fact, most companies do not send all their IP work to one place. For its IP work, Fish client Bose has used both general practice firms and other intellectual property firms. Despite 35 years with Fitzpatrick, Canon also sends IP work to a few other firms, including Milbank, Tweed, Hadley & McCloy. Allergan also uses different firms, including Gibson Dunn, in addition to Fish. Devlin says that even significant clients will from time to time use other firms. Microsoft Corporation, uses Fish for some IP work—and also Covington & Burling and Perkins Coie. "Sometimes we have to pitch for the work," Devlin says.

But companies facing high-stakes litigation are still apt to turn to powerhouse litigators, and IP firms have their share. Fish's Juanita Brooks has won several high-profile cases for Allergan against generic drug manufacturers challenging the company's patents. Finnegan name partner Donald Dunner is considered the dean of the patent litigation appeal bar, says Zeugheuser: "He's the go-to guy, and a company in trouble will go to Finnegan to seek his help." Last year Knobbe's Joseph Re successfully defended Applied Medical Resources Corporation against allegations of patent infringement related to surgical instruments, turning back damages claims of at least $112 million. Kenyon & Kenyon's Richard DeLucia represented Boston Scientific Corporation in its multifront patent litigation against Johnson & Johnson over coronary heart stents, and Fitzpatrick's Robert Baechtold, teaming with Cravath, Swaine & Moore, helped land a $442 million patent infringement verdict against Apotex Inc. for Bristol-Myers Squibb Company and Sanofi-Aventis in 2007 in litigation over the blood thinner Plavix.

There's no certainty in law firms today. (Just ask the former partners of the now-defunct Dewey & LeBoeuf or Howrey.) But the successful IP firms say that they plan to hang around for a long time. "There's a lot of competition out there, and no one can afford to be complacent, says Devlin. "But if a firm is well managed, it has a much better chance of sticking around." •