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Intellectual property law firms have been living inside a paradox for the past decade: While the IP practice booms, IP boutiques face a constant threat of extinction. The pressure hasn’t let up since the mid-1990s, when general practice firms waded into IP litigation. Since then, brand-name century-old boutiques have perished: Fish & Neave (1878-2004), Pennie & Edmonds (1883-2003), and Lyon & Lyon (1901-2002). Countless smaller practices have been absorbed by general practice firms. Brian Poissant, a former Pennie & Edmonds partner who is now at Jones Day says “it’s just a matter of time” before the IP firm vanishes. Perhaps. But as every IP lawyer knows, time and predictions are both relative. In the face of a decade’s worth of disasters, the most remarkable fact is that a group of IP specialty firms have survived, and even thrived. In Poissant’s analysis they all have targets on their backs. But in evolutionary terms, they were either born with traits that have allowed them to prosper in a hostile environment — strong management, loyal clients, merit pay — or they have adapted, rapidly. Some have expanded and adapted, such as Finnegan, Henderson, Farabow, Garrett & Dunner and Fish & Richardson. Others, like Townsend and Townsend and Crew, have stayed small, but radically changed their pay scales, keeping partners from fleeing. And a few, like Fish & Richardson, have branched out into new areas of litigation. In addition, the really specialized boutiques — patent prosecution shops — have held their niche, at least in part because their economics have not drawn much interest from the marauding general practice behemoths. Finnegan Henderson has outgrown the IP boutique label. With 325 lawyers — up from 150 in 1996 — Finnegan is the largest of the IP firms. And with profits per partner at $760,000 in 2003, Finnegan’s also one of the most profitable. In the past three years, only two partners have defected. Finnegan hasn’t gotten this way by luck. After several partner defections in the mid-1990s, Finnegan shifted from a lockstep to a merit-based pay system. The new structure focuses on the overall contribution a partner makes to the firm, says managing partner Christopher Foley. New business, hours, firm management, and outside activities all count toward compensation, as well as other factors such as collegiality. Foley explains that like most firms that do patent prosecution, Finnegan’s biggest issue is client conflicts. Often the firm will need a prosecution client to sign a waiver, so Finnegan can take on a big case. “It’s important that partners are amenable to seeking waivers from their clients,” Foley says. At the same time Finnegan revamped its pay structure, senior leadership decided to turn firm management over to the younger partners. The managing partners elected since then — Thomas Jenkins and Foley — were both in their mid-40s when they took the helm. But the youth movement hasn’t completely transformed the firm: Its best-known partner is 73-year-old Donald Dunner, a chief architect in the creation of the U.S. Court of Appeals for the Federal Circuit and a familiar figure there. After Finnegan, the only other IP firm in The Am Law 100 last year was Fish & Richardson. The 350-lawyer firm (up from just 25 lawyers in 1987) took in profits per partner of $755,000 in 2003. While boutiques were losing partners to general practice firms, Fish & Richardson went the other way, aggressively recruiting from the competition. Partner John Gartman says that 43 of the 56 lawyers in the firm’s San Diego office were lateral hires, including himself, who came from Brown & Bain (now Perkins Coie Brown & Bain). Thirty-six of those laterals hailed from general practice firms such as Cooley Godward and the now-defunct Brobeck Phleger & Harrison. In fact, Gartman says, seven of the nine offices Fish has opened in recent years were initially staffed with recruits from general practice firms. Laterals have included IP litigators, general litigators, and patent prosecutors. In January, just five days after Barry Shelton’s firm, Gray Cary Ware & Freidenrich merged to become part of 2,700 lawyer megafirm DLA Piper Rudnick Gray Cary, the patent litigator left to open Fish & Richardson’s two-lawyer Austin, Texas, office. Shelton says his decision was easy. “First, full-service firms are never going to focus on patent litigation to the extent an IP boutique does,” Shelton says. “Second, no matter how great a full-service firm is, it’s never going to have the technical depth I need to support my practice. No full-service firm comes even close to the number of scientists and engineers that Fish has.” Fish’s Gartman adds that his firm offers young lawyers with superstar potential opportunities that are often unavailable at more tradition-bound general practice firms — namely, the chance to try huge cases and make a lot of money. “We’re a meritocracy — we compensate our people based on their success as firm builders,” he says. Five out of the top six highest-paid partners at the firm are under 45, he points out, and five out of the six partners on the management committee are under 45. Fish & Richardson is trying to expand into other areas of litigation, but it’s a slow process. Gartman says that 70 percent of the firm’s work is still IP related. The non-IP litigation — corporate and securities and regulatory — is typically for high-tech clients, who can appreciate the firm’s scientific expertise. “When a corporate guy gets a new biotech client, we can put four or five Ph.D.s on the conference call,” Gartman says. “The client sees that we actually understand what they do.” Like Fish & Richardson, San Francisco’s Townsend and Townsend and Crew has moved beyond IP work. In 1993 the IP firm delved into a new practice area when it merged with antitrust boutique Khourie Crew & Jaeger. So when Intergraph Corp. sued Intel Corp. on patent and antitrust claims, Townsend handled the litigation, shepherding Intergraph to a $450 million settlement in 2002. Townsend has a strong prosecution practice, but its litigation team grabs headlines — it was named as one of “Nine Notables” in The American Lawyer‘s 2004 “Litigation Department of the Year” survey. Last year, the 170-lawyer firm branched out into complex commercial litigation when it acquired Legal Strategies Group, a 14-lawyer Emeryville, Calif.-based litigation boutique. Townsend’s merger with Khourie also brought a new management philosophy. When James Gilliland, a former Khourie partner, was made chairman in 2001, he says he created a new organizational structure “that looks much more like a corporation.” He formed a policy committee to look at “big picture” issues, a management committee to handle day-to-day matters, and appointed an executive director to manage firm business. Gilliland also replaced the firm’s compensation formula, which focused on billings and origination of business. Now partners are also judged on nonmonetary contributions such as firm management, pro bono work, teaching seminars, and other activities. The compensation structure is based on promotion levels that go up in $50,000 increments. Partners at each level earn the same amount. “The goal is to achieve rough justice within any level, so if a partner looks at her peers in the same level, she believes they are contributing the same amount to the firm as she,” says Gilliland. The new system avoids the minor differences in compensation of the old system, which, he says, “were much more divisive than useful.” Some firms got it right from the start. Fitzpatrick, Cella, Harper & Scinto managing partner Dominick Conde was just 41 when he was named to his position in 2002. “Any law firm without strong management — general practice or IP boutique — is generally going to have serious issues with regard to retention of partners and firm viability,” says Conde. The pay structure at the 150-lawyer firm encourages rainmakers like Robert Baechtold to share client work with other partners, says Conde. “All of our clients are considered firm clients,” he says. For example, any partner working on a matter may contact the client when necessary. The firm won’t disclose profits, but Conde notes that he’s lost only two partners in the past three years. Fitzpatrick Cella has carved out a niche with its work for Big Pharma clients. The firm has represented Pfizer Inc., Merck & Co. Inc., and Bristol-Myers Squibb Co., for more than 20 years, says Conde. Recently it’s added GlaxoSmithKline plc to the list, making pharma Fitzpatrick Cella’s biggest litigation practice area. In 2003 the firm scored a huge hit for Bristol-Myers when the Federal Circuit upheld a ruling on a dispute over the anti-cancer drug Taxol, which awarded Bristol-Myers $32 million, including $26 million in attorney fees. IP boutique Knobbe Martens Olson & Bear, with 165 lawyers in six offices, all in California, hasn’t changed its management structure either. “The legal industry has changed — we haven’t,” says James Bear, “Maybe we’re a dinosaur.” Not really. The firm has a merit-based pay system like Finnegan and Fitzpatrick. Each year, when it comes time to adjust compensation, the entire partnership — sans the partner whose pay is at issue — tries to assess the partner’s performance. Based on that discussion the partnership votes on adjustments. No partners left Knobbe in 2004 and only one partner left in 2003, Bear says. “Most of the people who practice here could make more money somewhere else, but this is a nice place to work.” Loyalty has its rewards: Knobbe has a five-year partner track, and its revenue per lawyer have been rising, jumping 8 percent to $505,000 in 2003. Knobbe’s profile also climbed in 2004 with a major winning streak, including a $134.5 million award for client Masimo Corp. in a medical device patent case; and a victory for Ranbaxy Pharmaceuticals Inc. over Glaxo [See " Giant Slayer"]. To at least one outside observer these firms are beating very long odds. According to Blane Prescott, a partner with Hildebrandt International in San Francisco. “IP law firms are the most management-resistant law firms in the profession,” Prescott says. He lists a host of management sins: Boutiques are “overly democratic, tend not to have strong leadership, lack succession planning, and are the least knowledgeable about what aspects of their practice are profitable.” IP firms are also backwards when it comes to compensation, Prescott says, rewarding partners solely on the basis of client billings and billable hours, and not looking at nonmonetary contributions. Pennie & Edmonds never changed its compensation plan, says Poissant, who headed Pennie’s litigation department. According to insiders, the firm was polarized between those like Poissant, who wanted to merge with a general practice firm, and those who didn’t want change. In the meantime, Pennie was losing senior partners like Jonathan Marshall, who went to Weil, Gotshal & Manges in 2002. The firm also suffered two hits: the loss of clients Pfizer Inc., after a patent prosecution for another client led to a messy string of litigation, and Hewlett-Packard Co. (HP wouldn’t comment, but former Pennie managing partner John Normile, who is now at Jones Day, says that HP “diversified its outside counsel.”) A huge win on a contingency case involving generic versions of the heartburn medicine Prilosec boosted the firm’s 2002 profits per partner 38 percent to $835,000. In 2003, however, when it came time to renew the firm’s 20-year lease — a $300 million to $400 million commitment, Normile says — the partnership dissolved. Change is not easy. Fish & Neave couldn’t do it. The New York firm merged instead, becoming the Fish & Neave IP Group of Ropes & Gray on January 1. Former managing partner Jesse Jenner blames “the intense degree of competition from the general practice firms,” but other former partners point to mishandled efforts to update an outmoded management structure. Pressure from general practice firms caused Fish & Neave management to panic and hastily implement a number of reforms that upset many of its lawyers, says one former partner. “The changes destroyed the culture of the firm,” this former partner says. “The place was a mess.” For one, the firm revamped an old-fashioned accounting model that charged expenses immediately and paid out income when it was received months later, Jenner says. The purpose, he says, was to make the firm more attractive to lateral hires who previously wouldn’t get paid for nine months once they joined. Jenner admits that in making the change, the firm also cut partners’ capital accrual (by half, according to one former partner) and made it available only upon retirement, as opposed to any time a partner should leave. As a result, several partners left before the change took effect. Two partners who stayed — Edward Bailey and Kevin Culligan — were angry enough to file a lawsuit. In their complaint, Bailey and Culligan, who are now partners at the New York office of King & Spalding, say that the change did not have the required unanimous consent of the partnership. Jenner counters, “We think they’re just wrong.” Fish & Neave also switched from a lockstep compensation model to a merit-based one. The firm had already lost one major rainmaker in 2003, when senior partner John Nathan left for Paul, Weiss, Rifkind, Wharton and Garrison. But Jenner admits that changing the compensation system also caused a number of partners to leave. Six months after Nathan left, Pennie & Edmonds collapsed. Another former Fish & Neave partner says that sparked the rush out the door: “If Fish & Neave was next, they didn’t want to be left holding the bag.” Will New York’s Kenyon & Kenyon follow Pennie and Fish & Neave on the road to extinction? The firm lost five of its 54 partners last year, all to general practice firms. “If I’m at Kenyon & Kenyon, I’m sweating bullets,” says Jones Day’s Poissant. Still, Kenyon managing partner Robert Tobin is not worried. “I would like to dispel any rumors that we are collapsing or merging,” he says. Tobin points out that profits per partner are back up to 2002 levels — around $770,000 — after a dip to $685,000 in 2003. “I don’t think the pressures on IP firms are any different from those on general practice firms. We have a specialty — we’re in a space where the general practice firms want to be — what’s flawed about that?” Competition from general practice firms may have closed doors for boutiques doing IP litigation, but it has also opened doors for patent prosecutors. As firms like Pennie and Lyon & Lyon have disappeared, general practice firms have gobbled up their litigation leftovers, but haven’t been as interested in prosecution. That work doesn’t appeal to most general practice firms: It isn’t as profitable as litigation, requires extensive back office services, and prosecution presents malpractice concerns — one missed deadline can cost a firm millions. Conflict issues between prosecution and litigation clients can also cause trouble. Some general practice firms — San Francisco’s Morrison & Foerster, Jones Day, and Chicago’s McDermott, Will & Emery — offer prosecution, typically inherited from IP boutiques they’ve acquired. But they are exceptions. Marvin Spivak, name partner at Arlington, Va.’s Oblon, Spivak, McClellan, Maier & Neustadt, says that as other boutiques have dissolved, his firm’s patent prosecution practice has grown. Minneapolis’ prosecution boutique Schwegman, Lundberg, Woessner & Kluth has blossomed from 4 lawyers to 70 since its founding in 1993. Schwegman’s roster of clients includes such heavyweights as Honeywell Inc., Apple Computer Inc., and Micron Technology Inc. Large companies often flock to small boutiques. Founded in 1994, Lee & Hayes, a 25-lawyer patent firm in Spokane, Wash., counts Microsoft Corp., Hewlett-Packard Co., General Electric Co., BellSouth Corp., and Qualcomm Incorporated as clients. Founding partner Lewis Lee explains that his firm focuses on patent procurement for Fortune 100 firms and some “interesting start-ups that don’t run a conflict,” but Lee & Hayes doesn’t handle work for individual inventors. Bigger clients used to hire the bigger prosecution firms, Lee says, but “the industry’s changed.” Lucky for him.

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