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After epitomizing the practice of patent law for decades, all that remains of the venerable Los Angeles boutique firm of Lyon & Lyon, which closed down last summer, are the bare bones of a Web site. The home page displays the firm’s old-fashioned script logo, which, of course, is trademarked. A photograph of downtown L.A.’s swanky Library Tower office building, which symbolized the firm’s rise but also hastened its collapse, is visible underneath a three-paragraph note from the partnership, which reads in part: “It is with deep regret that after 100 years of quality and excellence, Lyon & Lyon closed its doors on August 31, 2002.” The Web site lists forwarding addresses for more than 100 lawyers, 81 of whom remained when the firm closed. This was a drop of about one-third from the firm’s peak three years ago, before Lyon’s lawyers started abandoning the firm where many had spent their entire careers. In their online goodbye, the partners expressed pride in the Lyon legacy and noted that attorneys were “moving on to new opportunities. . .. We are confident that the spirit of Lyon & Lyon will continue as our extremely talented pool of attorneys join top firms across the country.” Within weeks of Lyon’s closing, most of its lawyers had been snapped up by elite general firms, including Jones, Day, Reavis & Pogue of Cleveland, Orrick, Herrington & Sutcliffe of San Francisco and Perkins Coie of Seattle. The end came quickly for a firm that knew success for so long. Over the past decade, big general practice firms began to steal the litigation work that had brought in up to 80 percent of Lyon’s revenue, but many partners still clung to a dusty business model. “This was the culture they grew up in, and it was very successful for a very long time. Then the commercial realities changed,” says a former associate. The firm “didn’t know how to transition when the competition came knocking.” As the big firms began picking off Lyon’s partners, the firm debated whether to do things differently — compete more aggressively for business, restructure partner pay to reward rainmakers or merge with another firm. But these discussions came too late and didn’t produce meaningful change. There was, in the words of another former associate, “a paralysis in management.” Lyon & Lyon had a very good run. Founded by Frederick Lyon in 1901, the firm was controlled for decades by members of the Lyon family. Eleven of them, spread across four generations, became partners. But the firm was more than a family fiefdom. Its partners were hardworking ex-engineers and scientists. “No bow ties, no trust funds” is how one associate described the place. Lyon & Lyon handled countless historic patents: the Hughes Tool Company’s rock-drilling bit, which revolutionized the oil business around 1910; RCA’s first television systems in the 1930s; and spread-spectrum technology invented during World War II by actress and amateur technophile Hedy Lamarr and used today in cell phones. The firm represented young Walt Disney when major studios tried to copy the logo based on the character that would become Mickey Mouse. It filed the early patents for biotech pioneer Genentech Inc. Lyon & Lyon lawyers argued many landmark cases, including, in 1986, the first biotech case before the U.S. Court of Appeals for the Federal Circuit, Hybritech Inc. v. Monoclonal Antibodies Inc. For 15 years beginning in the early 1980s, the firm’s revenue rose an average of 10 percent annually. “We pretty much funded our expansion from 20 lawyers in 1978 to more than 125 out of cash flow,” says James Shalek, who headed the firm’s executive committee in 2001 and is now at New York’s Proskauer Rose. In the late 1980s, associates, who were paid based on a percentage of revenue collected on hours they billed, could make close to $200,000 a year. The firm had a comfortable list of major clients including American Honda Motor Co., Amoco Corp., Chevron Corp., Del Monte Foods, Genentech, Halliburton Co. and Smith Tool Co. By the early 1990s, the firm’s three major offices were humming away under three top rainmakers — James Geriak in Orange County, Robert Weiss in Los Angeles and Douglas Olson in San Diego. The firm had also expanded beyond Southern California, opening smaller offices in San Jose, California, New York and Washington, D.C. “There had been an explosion in patent litigation, and we had very little competition,” recalls Shalek. The firm was handling major litigation for biotech companies such as Mycogen Plant Science Inc. (now part of Dow Chemical Co.), Gen-Probe Inc. and CellPro Inc. In 1994 Lyon & Lyon had the chance to take over magnificent offices in the tallest building west of Chicago, the I.M. Pei Library Tower in downtown Los Angeles. The offices, which had been abandoned by Pacific Enterprises, were ostentatious, with marble floors, spiral staircases, and built-in carpentry. Lyon negotiated what seemed to be a good deal on the sublease. The firm occupied the 46th through the 50th floors and was committed to staying through 2010. “It was prime, beautiful space,” recalls Robert Lyon, 66, grandson of the firm’s founder and one of the last two namesakes at the firm. “Business was growing. We kept growing in response to it.” The lease turned out to be a long, slow-burning fuse. Just when the firm’s future seemed so bright, it began to face tough competition for the first time. Large general practice firms wanted a piece of the business. By the mid-1990s many had stopped referring their clients’ patent, trademark and trade secret work — especially litigation — to boutiques like Lyon & Lyon. Gen-Probe stopped using Lyon & Lyon as its exclusive IP counsel around 1999. “The boutiques will always have their fans, but clients are no longer required . . . to use [them] in order to find a qualified trial lawyer,” says R. William Bowen, Gen-Probe’s general counsel. The company now retains firms such as Cooley Godward and Hale and Dorr on a case-by-case basis. Lyon & Lyon became more dependent on less reliable, smaller companies, including dot-coms rushing to file business-method patents. These clients sometimes didn’t pay their bills on time or balked at Lyon & Lyon’s rates. Many went out of business. “With exceptions, most of the [client] base [in the late 1990s] were smaller and less-stable companies,” says Robert Lyon. Lyon & Lyon might have been blinded to the dire nature of competition because of its insidious short-term payoff. When the large firms entered the IP market, Lyon & Lyon was able to raise its rates to big-firm levels. Senior partner hourly billing rates went from about $300 to around $500 in the mid-1990s, says Jack McConaghy, the self-described de facto managing partner at the time the firm closed. Large firms were eager to exploit any sign of weakness. In 1997 Delaware District Court Judge Roderick McKelvie ruled that Lyon’s client CellPro willfully infringed two of Johns Hopkins University’s patents for a technology used to treat cancer. He awarded Johns Hopkins approximately $7 million in treble damages. In his damning opinion, McKelvie charged CellPro “with contempt . . . for the law and for our system of justice.” CellPro had relied on Lyon & Lyon’s patent opinion letters, which held that the company did not infringe Hopkins’s patents. “The [letters'] only value” might have been to “try to confuse or mislead . . . an unsophisticated jury,” McKelvie wrote. The decision was a black eye for Lyon & Lyon. It also gave big firms ammunition, which they used, McConaghy says, against Lyon & Lyon in beauty contests. Competition did not seem to sharpen Lyon & Lyon’s marketing focus. One former associate, who had come to Lyon & Lyon from a general practice firm, says he was struck by how rarely most Lyon & Lyon partners visited potential clients, participated in beauty contests, or otherwise cultivated new business. “There was very little marketing going on. They were relying on their traditional client base,” says Nicolas Gikkas, now chief IP counsel at SiRF Technology in San Jose. It wasn’t that the partners didn’t work hard, says Gikkas. “They spent a lot of time being lawyers. . .. But somebody at the top has got to be interested in going out and bringing in other clients.” Robert Lyon, now at Holland & Knight with his cousin, Richard Lyon, agrees: “We never had to market our services and we never learned how.” Some traditionalists held the complacent rationale that “We’ve always done it this way. We’re the best there is. We don’t need to ever market Lyon & Lyon,” says Robert Lyon. “We were arrogant. The arrogance of success was part of our Achilles’ heel.” A dramatic wakeup call came in early 2000, when rainmaker Douglas Olson and 16 other lawyers from the San Diego office — including all of its partners — left for the San Diego office of San Francisco’s Brobeck, Phleger & Harrison. It was the first time Lyon & Lyon had lost a major partner to another firm. The San Diego group controlled important segments of the firm’s biotech and generic drug practices, as well as manufacturing clients like Directed Electronics Inc., the leading car alarm maker. Olson, who argued the landmark Hybritech suit, also represented Amersham Pharmacia Biotech Inc. and Celera Genomics Corp. in a number of matters related to DNA sequencing technology used in the human genome project. The departure drove home “the importance of a book of business,” says McConaghy. It also set in motion a changing of the guard. Olson, 65, was one of three senior rainmakers and one of five members of the firm’s executive committee — all in their late 50s or 60s. With his departure, power began shifting toward younger, up-and-coming rainmakers. At their annual retreat in March 2000, Lyon & Lyon partners voted to enlarge the executive committee to seven members. Two older partners, Coe Bloomberg and Robert Taylor, stepped aside. The partners elected Shalek, Michael Wise, Jeffrey Olson, David Murphy and Robert Dickerson. All five new members — who joined older rainmakers Geriak and Weiss — were under 50. The younger partners pushed the firm to shore up the bottom line. The new executive committee concentrated on collecting unpaid bills from existing clients and making sure new clients were good bets to stay solvent. The new team also tried to reform the firm’s incentive structure. Partners’ pay had been based on billable hours, with relatively little recognition at the top end for rainmaking, says McConaghy, now at Houston’s Fulbright & Jaworski. “There wasn’t any formal recognition of business acquisition,” he says. “It was not at the heart of where we were, because we were so successful just waiting by the door.” The committee persuaded the partnership to restrict equity partnership to those who met minimum collections requirements. They also pushed through a measure that made partners over 65 subject to conversion to senior, nonequity status — and a possible pay cut. This change was not implemented. The firm had plenty of opportunities to merge or be acquired. Once again, the partners were conflicted. The firm rejected overtures from New York’s Rogers & Wells in 1997. It had serious discussions with both Jones Day and Orrick. “That was a disagreement among the partners. . .whether to remain a boutique, grow from within and broaden our practice or merge,” says Robert Lyon. “The major disagreement was whether to merge with a general practice firm.” The failed talks with Jones Day helped hasten the firm’s demise. In late 2000, Jones Day proposed absorbing the entire firm, but negotiations broke down, ostensibly over a client conflict. Jones Day and Lyon & Lyon signed a deal that there would be no raiding for a year, says McConaghy. That just delayed the day of reckoning. When the year was up, around the beginning of 2002, Lyon & Lyon partners started jumping. Dickerson left for Jones Day in February, and Weiss, who had led the merger talks, followed a few months later, taking 10 lawyers with him. (Today, 18 former Lyon & Lyon lawyers work at Jones Day.) Large firms didn’t just want Lyon & Lyon’s clients. They also wanted its lawyers. Former partner Kenneth Ohriner, now at Perkins Coie, says he’d been getting cold calls from headhunters for years. But after February the “intensity and frequency of calls from recruiters” increased. Ohriner had never seriously considered practicing elsewhere, but by June he was examining his options. Shalek broke away to join Proskauer Rose on Aug. 1, taking six of the nine associates in the New York office and a large, diverse client list including the makers of everything from irrigation systems, batteries and bar code scanners to photopolymers, vitamins, flat panel computer screens and monoclonal antibodies. Even scion Robert Lyon left. He was hurt by younger partners’ moves to oust those in his generation but motivated to follow the big cases, which were going to large firms. In July, the remaining Lyon & Lyon partners considered another merger possibility — this time with a boutique. Jeffrey Olson brokered talks with San Francisco IP firm Townsend and Townsend and Crew. Olson and McConaghy say they had the votes to approve the deal. But the Library Tower lease came back to haunt them. After the deal collapsed, James Gilliland Jr., Townsend’s chairman, said Lyon’s “very significant lease obligation” was the biggest obstacle to merger. By that time, many lawyers already had one foot out the door. “That discussion (with Townsend and Townsend) came too late,” says Olson.

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