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When partners at Silicon Valley’s Skjerven Morrill voted earlier this month to dissolve the firm, it seemed to confirm an increasingly widespread assumption: IP boutiques are a vanishing breed. After all, in recent years more than three dozen intellectual property shops have been consumed in mergers with larger firms. Just last week, for example, New York’s Lieberman & Nowak was picked up by Dickstein Shapiro Morin & Oshinsky. Other boutiques, such as Lyon & Lyon in Los Angeles, folded in the face of increased competition from general practice firms. And the spectacular implosion of Brobeck, Phleger & Harrison illustrates the peril of over-reliance on one sector for clients. But in the D.C. area, local intellectual property firms appear well-positioned to maintain or even grow their practices. “The IP market is really shaking out, but D.C. firms are a little more stable,” says Hildebrandt Inc. consultant Lisa Smith. “They’ve carved out a distinct niche, and in most cases, will survive.” Local IP firms have used their proximity to the U.S. Patent and Trademark Office to dominate patent and trademark prosecution � that is, preparing applications and shepherding them through the agency. And IP giant Finnegan, Henderson, Farabow, Garrett & Dunner, where profits per partner in 2002 topped $750,000, continues to add lateral partners, open new offices, and litigate major cases. Still, local boutique leaders are paying close attention to the fates of their competitors and adjusting their strategies accordingly. To R. Danny Huntington, the chairman of 100-lawyer Burns, Doane, Swecker & Mathis in Alexandria, Va., the demise of Lyon & Lyon illustrates the hazard of relying too heavily on IP litigation. “Their biggest problem was they moved the focus to litigation, away from patent prosecution,” then couldn’t maintain the business, he says. Agrees Jorge Goldstein, managing partner of D.C.’s Sterne, Kessler, Goldstein & Fox: “They got eaten alive by the general law firms.” Indeed, as the value of corporate intellectual property has soared, boutiques have found that competition for IP litigation, which can yield millions in legal fees, has gotten much more intense. “IP litigation has become high-stakes litigation. It can even be life and death,” says consultant Peter Zeughauser, with the Zeughauser Group in Newport Beach, Calif. With so much on the line, he continues, “the outside counsel hiring decision is now made in the general counsel’s office, not the IP counsel’s office, where it used to be.” Instead of the in-house patent lawyer calling up his friends at the IP firm that handles the company’s patent applications, the general counsel is more likely to tap the lawyers he works with most often � those from general practice firms. And hiring a well-known firm like Howrey Simon Arnold & White, Kirkland & Ellis, Clifford Chance, or Arnold & Porter, for example, provides cover if the matter doesn’t go well. Zeughauser predicts, “Except in limited circumstances, we’re going to see a significant segmentation in the market, with patent prosecution on one hand and firms that do high-stakes IP litigation on the other hand.” Huntington at Burns, Doane says his firm is feeling the competition, and while litigation still accounts for one-third of the business, the emphasis these days is on patent prosecution. “Prosecution is our base. We have really put a focus on that,” he says. “We’re concentrating on trying to build work within the U.S., developing relationships with clients, getting to know the individual inventors.” Burns, Doane is stepping up efforts at marketing � one of Lyon & Lyon’s reported shortcomings � and has hired Levick Strategic Communications. It also brought aboard World Intellectual Property Organization veteran Albert Tramposch to develop a trademark practice based on the recently ratified Madrid Protocol, and last week added Claude Hamrick, the chair of Oppenheimer Wolff & Donnelly’s Silicon Valley IP group, to the firm’s Redwood Shores, Calif., office. “Our vision is that we think there is an alternative to the general practice firms, and that there is a real opportunity for consolidation and convergence on the prosecution side,” says Michael Blanchard, who was hired as Burns, Doane’s first-ever executive director last year. “But, clearly, we’ve got to continue to find ways to differentiate ourselves in the marketplace.” Sterne, Kessler has also kept its focus on prosecution. “We’ve stayed true to what we do best,” says Goldstein. The problem with Lyon & Lyon, he says, was that they “focused too much on litigation as the core business, then sat there and said, ‘We have work, we’ll always have work.’ The competition sneaked up on them.” With 50 lawyers and 30 technical experts such as patent agents and Ph.D.s, Sterne, Kessler also does strategy and opinion work for clients, and has served as co-counsel to firms such as Williams & Connolly in patent litigation. Conventional wisdom is that firms can’t make much money doing patent prosecution, but Alexandria’s Oblon, Spivak, McClelland, Maier & Neustadt name partner Marvin Spivak says his firm’s profit margin for prosecution rivals that of litigation. Oblon consistently leads the nation in number of patent applications filed and issued, and when the firm handles an application, it’s almost like an assembly line, with different specialists working on different pieces, and special docketing software to ensure no dates are lost (an area with a high malpractice rate). Oblon also employs a huge staff � 345 administrators and secretaries for 90 lawyers and 15 technical experts � to move applications smoothly. In 2002, says Spivak, the firm had “the best year ever,” filing more than 5,000 applications at the PTO. In part, that’s because competition for prosecution work has actually lessened, says Spivak, as “the other, smaller patent firms have disappeared or merged into larger firms, and the large firms are not willing to commit to the infrastructure necessary to do a large volume of applications. We’ve had more and more clients coming to us.” When Spivak looks at the fate of Skjerven and Lyon & Lyon, as well as Brobeck, he notes that all were “involved in a lot of startups, venture capital dot-coms, and a large number of them folded.” He adds, “You have to look very carefully at who you are taking on as clients.” Another issue for Skjerven, Lyon, and Brobeck was the inability to find a merger partner once problems mounted. Since 1996, merger has been an increasingly common option for IP firms, with 38 of them picked up by general practice firms, says Hildebrandt’s Smith. Notable acquisitions include D.C.’s 70-lawyer Cushman, Darby & Cushman, which merged with Pillsbury, Madison & Sutro (now Pillsbury Winthrop), and Houston’s Arnold, White & Durkee, acquired by Howrey & Simon. Both Oblon and Burns, Doane report turning aside numerous overtures from larger firms looking to merge. “We didn’t see anything in it for us,” says Spivak. “We’d be subject to their management and control, and there were potential conflict problems.” Still, Oblon has no intention of ceding patent litigation to the general practice firms, and in advertisements, the firm highlights its role in litigating the landmark Festo case � name partner Arthur Neustadt argued on behalf of the Shoketsu Kinzoku Kogyo Kabushiki Co. before the U.S. Supreme Court. Currently, Spivak says, about half of Oblon’s work is in litigation. Also continuing to emphasize litigation is patent prosecution powerhouse Sughrue Mion, which typically files the second-most patent applications each year. Partner Neil Siegel recently won a victory in a patent infringement case in Massachusetts federal court for the Nidek Co. over Summit Technology Inc., and the firm represents Daiichi Pure Chemicals of Japan in several patent cases. Managing partner Cindy Weber says the 100-lawyer firm has competed effectively for work by stressing that “you need the underlying substantial expertise to litigate these cases the way they should be litigated.” Hildebrandt’s Smith is skeptical about whether technical prowess is enough to sustain a litigation practice in the long run. “Clients see more of a distinction between litigation and prosecution,” she says. “You don’t need 50 people doing prosecution to get credibility. . . . IP boutiques tend to view general practice firms as not equivalent, not of the same [technical] quality. Some boutiques still have their heads in the sand on this. Clients want real litigation experience.” The boutique � if you can call a firm with 325 lawyers a boutique � best known for litigation expertise is Finnegan, Henderson, both Smith and Zeughauser agree. Indeed, Legal Times affiliate IP Law & Business recently surveyed the Fortune 250 on who they view as their primary IP firms, and for the second year in a row, Finnegan garnered the most mentions. One of the firm’s marquee names is Donald Dunner, who helped create the framework for the U.S. Court of Appeals for the Federal Circuit, which hears appeals of many intellectual property cases. Nor is he the only draw. Name partner Ford Farabow Jr., for example, is serving as lead counsel for GlaxoSmithKline in a patent infringement case. The firm also recently added IP litigator Patrick Coyne from Collier Shannon Scott and is opening its eighth office, in Taiwan. Managing partner Christopher Foley admits Finnegan took a hit when dot-com and e-commerce work dried up, but says the client base was sufficiently balanced that there was “other work those attorneys were able to do.” About 55 to 60 percent of the firm’s work is litigation, says Foley, with the balance in prosecution and client counseling. When Finnegan lawyers prosecute patents, Foley says, they don’t try to match prices with lower-cost competitors. “Sophisticated clients understand that the time to spend money is up front [on prosecution], not down the road when you’re in litigation,” he says. “Success in litigation is uniquely tied to the quality of the patent prosecution.” When Foley looks at the demise of Lyon & Lyon, and Skjerven as well, one problem he sees is a lack of cohesiveness. “When one partner in a particular group left, others followed, then big chunks left at a time.” At Finnegan, he notes, only three partners in the firm’s 37-year history have jumped to rival firms. Burns, Doane; Oblon, Spivak; and Sughrue have also lost very few partners. That kind of bond, which has little to do with IP or any other practice area, may ultimately be the reason D.C. IP boutiques thrive.

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