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After several years of losing partners and big-ticket litigation work to general practice firms, Los Angeles-based Lyon & Lyon announced Thursday that it is closing its doors at the end of the month. Lyon & Lyon partner John McConaghy said the final blow for the 90-attorney intellectual property firm was the collapse of merger negotiations with Townsend and Townsend and Crew. “That seemed to be the precipitous event if there was one,” McConaghy said. “I think that everybody was trying to be loyal to the core here to try and have the Townsend deal work.” Lyon & Lyon’s plight is similar to many other prominent IP firms which, unable to compete with big general practice firms, have either gone out of business or merged with another firm. Limbach & Limbach and Majestic, Parsons, Siebert & Hsue shuttered their doors at the end of 2000. And two months ago, Flehr Hohbach Test Albritton & Herbert merged with Minneapolis-based Dorsey & Whitney. Lyon & Lyon and Townsend confirmed in July that they were in merger discussions, but as of July 26, the talks had broken off. Townsend Chairman James Gilliland Jr. said Townsend had made a proposal but the biggest stumbling block was Lyon’s “very significant lease obligation.” While he declined to go into detail, Gilliland said Lyon had planned for a lot of growth that hadn’t happened. Since the Townsend deal fell through, Lyon & Lyon attorneys have been looking for a new home. McConaghy said the Los Angeles, San Jose and Washington, D.C., offices will dissolve, but the San Diego and Irvine offices will continue to explore merger options. McConaghy said last week that the Orange County office had been in discussions with Orrick, Herrington & Sutcliffe. William Anthony Jr., the head of Orrick’s IP group, wouldn’t comment on whether the firm was talking to Lyon, but he said Orrick is “looking like crazy for laterals” in IP litigation. Proskauer Rose recently acquired the 10 lawyers in Lyon & Lyon’s New York office, including the firm’s former managing partner, Robert Dickerson. That left Lyon & Lyon with approximately 36 attorneys in Los Angeles, 24 in Irvine, eight in San Diego, nine in San Jose and three in Washington, D.C. Former partners and industry insiders say Lyon & Lyon suffered from poor management and the inability to shift from litigation to prosecution work. “With enlightened leadership I think Lyon & Lyon could have adapted,” said one former partner who spoke on condition of anonymity. “Management wouldn’t respond in a realistic way to a merger proposal as they should have a year or two ago.” “The evolution of IP law means litigation is no longer going to boutiques as it did 10 years ago,” another former partner said. He said he had to decide whether he wanted to continue to litigate “or transition to what IP boutiques have to transition to if they want to stay viable.” McConaghy said IP litigation, which once represented about 70 percent of the firm’s business, has been whittled back as general practice firms came to dominate the market. “You have seen almost every IP firm that hasn’t been always strictly prosecution based” — or derived its litigation work from prosecution business — disappear, McConaghy said. RISE AND FALL Frederick Lyon founded Lyon & Lyon in 1901. Originally known as Lyon & Hackley, the firm took its current name in 1919 when Lyon’s son joined the firm. For decades Lyon & Lyon was one of the premiere IP outfits in Southern California, but over the last several years it began to lose clients to big general practice firms. IP consultant and recruiter Katharine Patterson said Lyon for many years was the lead counsel for Genentech Inc. However, in recent high-stakes litigation — such as its current battle with Chiron Corp. — Genentech has turned to Keker & Van Nest. As business dropped off, partners also began abandoning the firm. The first major departure occurred two years ago when five partners and an of counsel in the San Diego office went to Brobeck, Phleger & Harrison, leaving the office without any partners. Since then numerous partners have defected to other firms. Most recently, six partners and five associates jumped to Cleveland-based Jones, Day, Reavis & Pogue. Lyon had, in fact, talked with Jones, Day about a possible merger last year. McConaghy said former partner Robert Weiss — who was part of the group that joined Jones, Day — had led the discussions for Lyon. In addition to declining litigation work and partner defections, Patterson said Lyon also did not address the concerns of its younger partners. They were frustrated and angry at “the lack of flexibility in management of the firm” with regards to things like sharing income, Patterson said. “Older patent firms are structured in a hierarchical pyramid. Older partners get all the cash gravy out of it.” SURVIVING THE ODDS But despite everything, recruiters and surviving firms say IP shops do not necessarily face extinction. Several IP firms — like Boston’s Fish & Richardson, New York’s Fish & Neave, Washington, D.C.’s Finnegan, Henderson, Farabow, Garrett & Dunner — are doing quite well. Why are they successful? San Diego legal recruiter Lawrence Watanabe attributed it to their “deeper track record in IP litigation and more geographic dispersion.” Townsend and Skjerven Morrill say they too have continued to bring in significant litigation work. Townsend’s Gilliland said his firm is reaping the benefits of its 1993 merger with Khourie Crew & Jaeger, which replenished Townsend’s litigation ranks. “Before the merger Townsend did some significant litigation work, but in 1991 to 1992 they were experiencing a problem similar to that of Lyon,” he said. At that time a number of key litigators had defected to other firms, including Henry Bunsow, now at Keker; Gerald Dodson, of Morrison & Foerster; and Orrick’s Anthony. Gilliland said Townsend has also been conservative in its management, not hiring more attorneys than it needed and implementing a management structure. “A number of smaller IP firms I’m finding didn’t put in place a very active law firm management, and they’re suffering from that,” he said. Lyon, in fact, has not had a managing partner for some time and appears to be run by its executive committee. “We’re not ready to concede we have to be a general practice firm,” Gilliland said. “We believe we can remain as a standalone IP firm and survive and prosper.”

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