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Setting the Bar High: Abbott Laboratories
The year and a half Laura Schumacher spent on the wrong side of a $1.67 billion verdict is not a period she'd like to relive. The Abbott Laboratories general counsel had anticipated that her team might lose the patent trial in the plaintiff-friendly Eastern District of Texas. But the sting of the verdict wasn't something that Schumacher or any of her lawyers had seen coming. "I don't think that we anticipated how it would actually feel to lose a verdict of that size," says Schumacher, Abbott's GC since 2005.
After the trial, Schumacher was as confident as ever that the merits of the case were on Abbott's side. Her lawyers understood the patent, and they had been involved every step of the way in developing case strategy. There was a lot on the line for the legal team, but they dusted themselves off and filed an appeal.
Schumacher joined Abbott in 1990 as a litigator. Even then, she says, the in-house lawyers were more involved in litigation than those at most other companies. It's more than a bunch of in-house lawyers descending on a business group for litigation. Department lawyers work side by side with business leadersembedded, if you will, so they practically have no choice but to be involved in everyday decisions.
It's a practice they deploy not just in litigation, but also on the front end of a matter. Abbott CEO Miles White puts it this way: "They're going to be a heckuva lot more effective if they understand what the business people are trying to do." And when litigation does arise, the in-house lawyers apply their big-picture perspective to resolving cases.
Abbott's method paid off big-time last February inthat patent case in Texas. Led by head of IP Jose Rivera, Abbott's lawyers got the biggest patent verdict in U.S. history unanimously reversed by the U.S. Court of Appeals for the Federal Circuit. Abbott's lawyers understood the strengths and weaknesses of its patent on anti-inflammatory drug Humira. Having worked closely with the business, they also knew exactly what was at stake for the Abbott Park, Illinoisbased pharmaceutical giant. The company raked in almost $8 billion in sales last year on that one drug alone20 percent of its total revenue.
So even though Rivera felt as if he'd been punched in the gut when a jury delivered the whopper of a verdict, he and his team didn't panic. The lawyers were still confident that they were right about the merits. Instead of compromising by taking a settlement, they gathered their wits and went back to work. The U.S. Supreme Court declined to review the reversal in February.
That wasn't the first time. It's how Abbott's lawyers work. In the last couple of years, they've moved forward on three cases that collectively put billions of company dollars at stake. Winston & Strawn partner James Hurst says that 99 out of 100 companies would have paid enormous settlements to avoid letting a judge or jury decide their fate in those cases. "But Abbott's intense case evaluation gives them the confidence and courage to make the right call," says Hurst, "even if it means taking a massive case to trial."
The lawyers have developed that self-assuredness by getting their hands dirty. Hurst has tried cases with Abbott's lawyers for more than 20 years. He has had in-house lawyers up at midnight helping prepare witnesses to testify the next day. "Any trial lawyer will tell you that pretty much never happens," says Hurst. "In-house lawyers are normally off to dinner as soon as we get out of court."
Embedding its lawyers with their business clients is just one of the successful tactics of the department, which we're honoring this year as one of our four Best Legal Departments. Some practices were introduced by Schumacher, but some of them are her variations on the tried-and-true methods the department had been using for years.
By the time she became GC, Schumacher had already developed a keen understanding of the company and the industry. Instead of reacting to crises, she had learned to spot issues before they became problems. She'd learned how to marshal resources, then move ahead strategically.
We also liked Schumacher's ability to get the absolute most out of her legal team. She insists that her lawyers always work hard and consider every angle in a case. This year she's handing them their biggest challenge yet: splitting the company in two. The M&A team will lead the divvying up of all the employees, litigation, and assets and liabilities. Every employee will be involved in the spin-off, but Schumacher says that at the end of the day, it's really a legal function. "It's just adding the separation to what was already a pretty high bar of expectation," she says.
To help them meet her always high expectations, one of the big changes Schumacher made early on was taking the administrative work of running the department away from the lawyers. Before she took over, the lawyers were shouldering a lot of the legal operations work. Instead of using a centralized system, department heads were haphazardly managing vendors and processing conflicts waivers. Schumacher knew that the department needed to be run more like a business.
Enter Jeff Paquin. Paquin was a long way from Illinois when he was asked to come onboard as head of legal operations. "I was running my own firm in Atlanta," he says, "minding my own business." Schumacher had a vision to create a division that would be led by high-caliber legal and business minds. Paquin was impressed enough to move.
The two of them divided the group like this: legal technology, e-discovery and records, outside counsel and vendor management, IP operations, and performance management and administration. Each operations segment fell under the control of someone who had a law degree, an MBA, or both. They've been able to use their expertise to secure volume-based discounts from vendors and otherwise generate big savings for the legal department. And with legal operations out of the way, Abbott's lawyers were able to get back to doing what they were paid to do: lawyering.
When she ascended to the post of general counsel, Schumacher made another organizational change in response to industry challenges. Patent litigation was picking up, and she says that regulators and plaintiffs lawyers were targeting pharmaceutical companies more and more. The GC recalls looking forward and thinking, "This is going to get only more difficult." So she separated out patent from the rest of litigation and put Rivera in charge.
Schumacher's intuition was right on target. According to statistics published by the federal courts, the number of patent cases filed across industries increased nearly 50 percent from 2005 to 2011. Abbott has seen a significant jump in patent suits since Schumacher became GC. Filings more than doubled at their peak, and cases are currently up about 70 percent since 2005.
These initial changes improved efficiency and put the department in a better position to promote the business. Result? Courtroom victories. Early this year, the U.S. Court of Appeals for the Seventh Circuit upheld a decision in Abbott's favor over pension benefits. The lawsuit was filed in 2004 by a class of former employees of Abbott's Hospital Products Division. They claimed that Abbott illegally tried to avoid paying for pensions by spinning off the division into its own company, Hospira Inc. Karen Hale, head of commercial litigation, says she was disappointed that Abbott's own employees had sued the company.
Although Hale was confident that Abbott had abided by the law, she couldn't get an early dismissal. Other companies might have backed down to avoid having to put their executives on the stand, but Hale made another call. She hoped that those officers wouldn't be called away from their own work to testify, but even if they were, she decided to do it once and do it right.
The outcome of the case had significant long-term implications for Abbott. Hale wanted to make sure that every time the company reshaped itself through an acquisition or divestment, it wouldn't be hit with "frivolous lawsuits."
So Hale put both the CEO and chief financial officer on the stand to explain that the genesis of the plan didn't involve the pensions. "This whole idea started on a dinner napkin," says Hale, adding that there was nothing on that napkin about pensions. The judge cited the credibility of Abbott's corporate officers in his finding that there had not been improper motive. "It was a wonderful opinion," says Hale. "I felt like the judge was in my head."
While that case and the big patent case were both on appeal, Abbott's lawyers successfully resolved seven years of antitrust litigation over Norvir, a protease inhibitor used to treat HIV. GlaxoSmithKline plc and a group of consumers claimed that Abbott's repricing of the drug for a new use amounted to market monopolization. Hale was confident that Abbott was right about the law, and was well positioned to defeat the rival drug company. But the plaintiffs had focused the allegations around harm to consumers, and Abbott's lawyers realized that they were headed for a jury trial that they might lose.
On the eve of trial, Abbott changed the game by settling with the consumers. Hale wanted the opportunity to go one-on-one with Glaxo, which she felt had been hiding behind the aggressive arguments of the other plaintiffs. "Without the distraction for jurors of allegedly harmed consumers, our legal arguments were more impactful," says Hale. The legal maneuver had leveled the playing field.
Jurors handed Abbott virtually an outright win. GlaxoSmithKline had asked for a billion in overall damages, and it had gone home with $3.5 million on a contract claim. But even that finding didn't sit right with Hale. "I am a perfectionist. I wanted a clean win," she says, noting that the verdict is on appeal. "We're going to have that overturned," she vows.
It isn't only about litigation. Much of Abbott's success can be traced to smart acquisitions. A decade ago, Humira was known simply as "D2E7." The compound, the first fully human monoclonal antibody, was up for grabs in the sale of BASF SE's pharmaceuticals branch, known as Knoll.
Although nobody knew the full potential of D2E7 at the time, the compound had the attention of potential buyers. "Everybody that was doing due diligence was focusing on that compound," recalls Honey Lynn Goldberg, associate GC and head of Abbott's corporate transactions. But Abbott's M&A team, which came into the bidding process late, saw a broader opportunity in acquiring Knoll.
Abbott's M&A lawyers acted quickly to put a deal model together. "We looked at it six ways to Sunday," says Goldberg. They bought Knoll for $6.9 billion in 2000. Many on Wall Street predicted peak annual sales for Humira of about $2 billion. But the drug generated $7.9 billion in revenues last year alone, more than justifying the purchase price.
And while other companies were gauging the long-term sales of that single compound, Abbott saw an even broader opportunity in the Knoll purchase. With the buy, Abbott added to its global research facilities base. It enhanced its research and development platforms and doubled its sales force in Europe. The purchase also tacked on key products that Abbott still sells 10 years later, including Synthroid, a drug used to treat hypothyroidism.
Goldberg says the key to making deals is "knowing what to focus on and how to focus on it." Strategy is critical in the deal world, and Abbott has grown successfully by making smart choices. "It's easy to just fall in love with something as you're kicking the tires a little bit," says Goldberg. The 27-year company veteran has learned that you can't ignore the flaws.
Goldberg has led most of Abbott's major M&A transactions since the mid-1990s, and has played a significant role in shaping the company's growth. "When I started, there were so many more big pharma companies," she says. "Abbott was never the largest, but I think it really is one of the most successful."
The company, which generated nearly $39 billion in sales last year, is now planning to become a whole lot smaller. By the end of the year, Abbott will complete its most comprehensive restructuring to date by splitting into two separate publicly traded companies. Abbott will retain its medical device business, and AbbVie, the new entity, will carry on the pharmaceuticals side of the business. "This is a bold strategy, but it is positioning the two companies for maximum success going forward," says Goldberg, whose division will lead the separation.
Abbott's 234 lawyers140 in the United Stateswill be divided along with the rest of the company. That change won't be easy, says Schumacher. Aside from the emotional challenge, the separation will significantly enhance their workload this year. None of her performance expectations will change. But she believes they will adapt to the challenge, as they have always done before.
What will constitute a successful separation? When both sides are fully operational on day one, Schumacher says, they'll get her approval for a job well done. "And it's such a talented group of people that both companies will be populated with top-notch legal departments," she says.
Maybe next year we'll have to send out two reporters to see for ourselves.