Friday, January 30, 2009
Without Disruptive Innovation, Many IP Law Firms are Destined to Meet the Same Fate as Buggy Whip Manufacturers
Notwithstanding the growing conversation about the need for alternative legal service billing methods, I fear that the majority of IP law firms will either try to ignore the desire for change or will respond by offering only incremental modifications to their existing methods of providing legal services to their clients. As someone with considerable experience dealing with IP lawyers, I believe that, unfortunately, the conservative nature of most IP attorneys means that IP firms will likely lag behind in client service innovations. Thus, I am of the opinion that many prestigious and historically highly profitable IP law firms will in the foreseeable future cease to exist.
I reach this conclusion as a result of various salient experiences. In one of these, several years ago, I approached a managing partner of a well-known IP law firm with suggestions of how to decrease the number of attorney hours expended on client matters. At that time, the firm was beginning to experience considerable push back from clients about the cost of routine legal services. I noted to the managing partner that he could lower the cost non-substantive e.g., administrative client IP matters, by assigning such tasks to lower billing paralegals. His response to this idea: "If paralegals did the work, what would the 1st and 2nd year associates do?"
Of course, the central premise of the managing partner's response was that in order to keep the gears of the firm's billable hour/leverage partner model turning smoothly, he needed to keep the young associates busy billing by the hour. The existing paradigm of his law firm required that it keep hiring associates to increase partner leverage and ensure that they efficiently billed clients by the hour, with a significant portion of each associate's billed time directly going into the partner's pockets. Left out of this business model was whether the clients' best interests were properly served by the model that best served the law firm's partnership.
Clearly, this law firm was not well managed, which might serve as an excuse for the managing partner's self-serving perspective on client IP legal services. However, my experience as a corporate buyer of IP legal services further revealed that that the billable hour/leverage partner business model was an arrangement that frequently put the client--which was now me--after the law firm's interests.
As an in-house counsel spending several $100K's per year for legal services at a number of respected IP firms, I consistently felt that when I called outside counsel for assistance the first thought that popped into the lawyer's mind was "So glad she called--I wonder how much work this call is going to lead to?" More often than not, I got the sense that my outside IP lawyers viewed my legal concerns as problems for them to solve on a per hour basis, not as issues that might affect the profits of the company for which I worked. The difference is subtle, but critical: the context of the former is lawyer as a service provider, whereas the latter is lawyer as a business partner.
Against these experiences, I was not surprised at what I heard recently when discussing my feelings about the billable hour/leverage model with a partner friend at one of the top IP specialty law firms in the US. This partner echoed my sentiments about the need for innovation in IP client services. However, she also indicated that most of her firm's partners do not recognize that there is a problem with the way they currently provide IP legal services to their clients. As she told it, many of her more senior partners have been living well on the billable hour/leverage model, so they currently see little need to modify their behavior. My partner friend nonetheless realizes that her law firm is critically ill and is likely to soon experience something akin to sudden cardiac arrest. Sadly, she is not a member of her law firm's management and, since there is no upper level recognition that change is needed, it would serve little purpose for her to raise her concerns to those partners who could effect change (and would probably not be politically expedient for her to do so).
The failure of these currently well-compensated IP law firm partners to recognize the shifting winds of their client's acceptance of their billing practices--the fundamental basis of their law firm's business model--mirrors the response of entrenched interests throughout history to innovations that did not mesh with their existing business model paradigm. Moreover, the inability of many IP law firms to recognize the climate for change leads me to believe that many of these venerated law firms will soon meet the fate of buggy whip manufacturers if they do not innovate in the manner by which they provide legal services to their clients.
Playing out this analogy, buggy whip manufacturers met their demise because they thought they were in the buggy whip business when they were actually in the transportation business. When buggy whips became obsolete, so did these formerly prosperous manufacturers. Notably, buggy whip manufacturers possessed the ability to change and thrive in the new world of the automobile. They already held strong business relationships with the buggy manufacturers that became the first automobile companies. They also employed skilled craftsmen who could have turned their efforts to making leather seat covers or other aspects of the automobile. These buggy whip manufacturers needed only to accept that they needed to ride the wave of innovation occurring at that time and reinvent themselves as suppliers to automobile manufacturers instead of buggy makers.
Like buggy whip manufacturers, I believe that many lawyers have become so entrenched in the law firm business that they have effectively forgotten that they are first legal services providers. As people charged with ensuring the continued vitality of the business, law firm lawyers often become primarily fee generators where the fees are obtained from billing clients by the hour for legal services. Care and feeding of the law firm and its partners by ensuring constant creation of billable hours therefore often takes precedence over the legal needs of clients. Also analogous to buggy whip manufactures, IP lawyers working in law firms have the ability to change to prevent obsolescence. Indeed, these lawyers possess the requisite skills to continue practicing their craft outside of the existing paradigm of the law firm. Still further akin to buggy whip manufacturers, lawyers also have the existing relationships with customers i.e., clients, which gives them a valuable head start over newcomers who wish to enter the IP legal service arena using innovative, but unfamiliar, client service models.
Using the well-known picture of obsolescence presented by buggy whip manufacturers more than 100 years ago, I believe that IP lawyers who recognize that they must embrace innovation in the way they provide IP legal services to clients will be poised for success when their clients decide that the time for change has arrived. On the other hand, lawyers who believe they are in the IP law firm business will invariably be left behind when innovations in client service enter the marketplace that render the law firm business model obsolete.
IP lawyers should not expect that they will be able to predict when their clients will demand change. As with the customers of buggy whip manufacturers, law firm clients will not serve their IP counsel with notice warning prior to taking their business to lawyers who provide them with innovative, and more client-centric, service models. To the contrary, when clients are finally presented with acceptable alternatives, they will naturally migrate to the innovation that best meets their business needs. The result will be that one day, these currently successful IP lawyers will likely wake up to realize that they are losing their clients in droves to lawyers who succeeded in developing and introducing an innovative client service model to the world. And, as most lawyers will tell you, once a client is gone, they are likely gone forever.
Not only will clients fail to announce that they intend to leave their law firm before they do so, they also will not tell their lawyers how you can serve them better. Why should they--they are not in the business of providing legal services. Accordingly, mutually beneficial client service innovations must be generated by and because of lawyer action. But, because of their inherently conservative nature, I believe that many IP lawyers may fail to realize that innovation is critical until it is too late to preserve their client base.
Some might contend that complaints about the billable hour model have abounded for many years, but no major changes have occurred to date, thus indicating that most clients may be all bluster and no action. While it is certainly true that clients exerted no real pressure on lawyers for change in the past, circumstances are markedly different today than before. Disruptive innovation is rocketing through society, and many formerly solid business models, such as newspapers and recorded music, are now teetering on the cusp of demise as a result.
The signals are there that law IP firms that rely on the billable hour/leverage model appear poised to experience significant stress from clients and critics in the near future. Those relying on this model for their livelihood would be well-served to look for innovative ways to address this changing environment. In short, those who think that the billable hour/leverage law firm model will escape the transformative business innovations of the current era are merely "whistling past the graveyard." IP law firms, as well as other types of law firms, must innovate now and innovate big or I fear they will suffer the fate of the buggy whip makers.
Sunday, January 25, 2009
To someone who has toiled in the trenches of intangible asset protection at both the law firm and corporate levels, the at least 70 % generalization always possessed a sense of being pulled out of the air, as does the new sub-50 % number. I now understand that these values emanated from nothing more than a "guesstimation" of total corporate value that analysts believe should be accorded to an asset class that they do not fully understand. Put simply, analysts understood that corporate intangible asset value should amount to "a whole bunch" and they assigned a suitably large figure to allow calculation of that unknown amount. It is now evident that this figure was wrong and, since the sub-50 % figure does not appear to have been calculated with any more precision, it would appear that this recently assigned multiplier is likely inaccurate, too.
However, just because the numbers proposed for corporate IP valuation were (and are) wrong in the aggregate does not mean they were not otherwise real for many corporations. And, corporate intangible asset value can only continue rising as we become a primarily knowledge-based economy. To capture the asset value of our less tangible economy, we must certainly develop more "reality-based" methodologies to accurately quantify--or more substantively qualify--that aspect of corporate value associated with intangibles.
The question is how to better distinguish those corporations possessing real intangible asset value from those that are just riding on the coattails of others. To this end, I believe that analysts must develop methodologies that will allow them to "separate the wheat from the chaff" in terms of corporate intangible asset valuation.
Some commentators have proposed that estimation of intangible asset value, namely in the form of patent rights, could be improved by creation of a transparent market for intangible assets, such as a stock exchange or other type of marketplace where buyers and sellers could be matched and prices paid subject to full disclosure to the public. For me, however, such so-called "transparency" is not the answer to improve the accuracy of corporate intangible asset valuation. From tulips in the 16th century to housing prices today, we have seen that transparent markets and pricing models may create confidence for a short time, but more often confidence in such markets turns out to be unfounded when the bubble bursts.
Valuation of intangible assets primarily by what a willing buyer would pay on the open market also pre-supposes that corporate intangibles derive value only from their transactional value. To the contrary, when properly created and managed, intangible assets allow a corporation to significantly magnify overall corporate value independently of whether the intangible asset owner desires at any time to sell the asset. Good examples of this are the increased profits obtainable from patented non-commodity products and the market share improvements associated with brand name recognition and high corporate reputation.
Moreover, the vast majority of valuable corporate intangible assets will never make it to the market for sale or trade and, as such, will never be priced. Attempts to extrapolate the value for all intangible assets in the same class (patents, trademarks etc) from the prices set for a small number of assets that actually appear on the market would likely wildly mis-value IP held by corporations for business reasons. Basing corporate intangible value on the market price of an IP asset that is not actually comparable to another would effectively short-change those companies that have strong intangible asset management programs, but which have nonetheless decided that their best business strategy is to hold onto their intangibles.
In truth, I do not think there is any currently applied methodology that allows one to accurately value corporate intangible assets, which would explain the precipitous fall of intangible asset value in the last several months to the current sub-50 % level now reported. My view is that the at least 70 % value was too high for some companies and too low for some highly idea-heavy companies, such as technology start-ups. Similarly, the sub-50% is likely too high for many corporations today, especially those that have neglected to appropriately manage their intangible assets in recent years.
But just because we do not know how to accurately value intangible assets does not mean this asset class does not form a significant aspect of the market cap of many corporations. We must then decide what intangible asset valuation methodology will provide an objective and reality-based assessment of a corporation's intangible asset value. My view is that we need to start looking at the people managing a corporation's intangible asset programs. Put simply, a corporation that manages its intangibles as business assets and that appears to be doing a good job at establishing processes and staffing signals its seriousness about capturing, protecting and maximizing intangible asset value. In contrast, when a corporation maintains a traditional model of intangible asset management, such as operating IP as a legal cost center, analysts should receive a strong signal that the corporate management does not "get" intangible assets. The latter corporation should therefore not be accorded a market cap "bump" in intangible asset value because its management clearly does not deserve the credit.
Of course, assessment of a management and staffing processes from the outside is only a proxy for whether a corporation should be given an increase in market valuation resulting from intangible asset ownership. Nonetheless, it is common to review a corporation's internal management structure when analyzing a corporation's market value--Apple under Steve Jobs' management is a great example of this. I believe that looking for intangible asset management signals emanating from within a corporation's infrastructure can allow financial analysts to better identify companies likely to be winners in the intangible asset maximization game and that deserve to be giving additional market cap for intangible assets.
Admittedly, analysts seeking quantifiable numbers to associate with corporate intangible assets may desire more precise methodologies to assess market attributable to intangibles. However, those with this mind-set will be well-served to remember that fixation on absolute numbers to assess value is arguably part of the reason that the current crisis occurred. And, I submit that accurate qualification is better than dubious quantifying methodologies any day.
Monday, January 19, 2009
Tuesday, January 13, 2009
How Asking One Fundamental Business Question Can Reduce Expense and Improve Business Outcome of Patent Litigation
While a majority of companies consider the cost of obtaining patent protection an essential element of the product and technology development process, few of these same organizations favor the prospect of asserting their patent rights against potential infringers. Moreover, no company relishes the prospect of being a defendant in a patent lawsuit. That most do not readily welcome patent litigation is not surprising given that the average cost of large case (i.e., over $25 MM at stake) patent litigation through trial in 2007 was about $5MM per party in 2007. For disposition of smaller cases, the total amount per party was about $1MM in 2004 dollars.
Why does it cost so much for a patent owner to assert her patent rights against an alleged infringer? Put simply, patent litigation at its core is an adversarial undertaking in which lawyers typically define the meaning of a successful outcome. In this context, each discovery battle or brief writing episode serves as an essential battle that must be won in the overall patent litigation "war." The patent litigation process itself can become an end unto itself, and the business interests of the parties become secondary to validation of the party's legal positions by the judge.
In my experience, even the most sophisticated business managers can lose objectivity and become emotionally involved in the patent litigation process. As one example, I once heard a general counsel of a large manufacturing company exclaim using profanity that there was no way his company would settle a patent lawsuit brought by my client, even when the judge made it clear that his company would lose the case at trial. The case eventually settled, but not before both sides spent several weeks in preparing for trial at considerable extra expense.
In another example, a prestigious New York City patent litigation firm convinced a patent holder that its case against my client was a guaranteed win and that a court would like award many millions in damages and my client would also be required to remove its supposedly infringing product from the market. As a result, the patent owner threw every legal argument it could against my client, which required my client to pay several $100K per month in legal fees. Understandably upset about the cost and concerned about an adverse litigation outcome, my client attempted to settle with the patent owner on several occasions. However, because the patent owner had been assured by their counsel that the lawsuit was a winner and that damages and market supremacy were inevitable, no settlement was possible. At trial, the patent owner lost and no damages were awarded. While my client did ultimately prevail, the cost to do so greatly affected its profits for that year. Indeed, the only winners in the patent litigation were the lawyers, who were rewarded handsomely for taking the case to trial.
While I previously benefited both financially and professionally from the adversarial nature of patent litigation as both a law firm and corporate IP lawyer, I now believe that patent litigation rarely benefits any of the participants other than the legal professionals involved. I believe a significant reason for this is that when faced with a patent litigation matter even the most highly skilled managers seem to check their business pragmatism at the door. These otherwise engaged and hands-on businesspeople typically pass over all or almost all responsibility for managing expensive and time consuming patent litigation to their lawyers. Certainly, these lawyers have the best interest of their clients as the primary motivation for their actions. Nonetheless, no matter how well-intentioned a patent professional may be, putting her in charge of managing a patent litigation is akin to "putting the fox in charge of guarding the henhouse."
To put business interests ahead of legal ones, corporate managers must begin to engage with their company's patent litigation just as they would any other aspect of their business costing $1MM or more and that also have potential to affect their company's competitive position in the marketplace. This does not mean that business people must insert themselves in the day-to-day decision-making aspects of patent litigation. Rather, I believe that corporate managers must apply the same type of business process control to patent litigation matters as they do to other parts of their business.
It is beyond the scope of this writing to suggest a business process design for patent litigation as a whole. Each situation will also present different issues and, as such, no single business process will be appropriate for all patent litigation. Instead, the fundamental premise of my argument is that corporate business managers must resist their typical reaction of "call my lawyer" when faced with a patent litigation issue. I believe that patent litigation should be treated first and foremost as a concern for the business. Of course, patent litigators should manage the day to day operational aspects of the litigation, but business management oversight is a critical function to ensure that the legal aspects do not quickly overshadow the business interests at stake in the litigation.
Many corporate business leaders no doubt are reluctant to become involved in patent litigation because even the most basic cases involve highly complex and even arcane issues. However, when one cuts through these issues, the basic question that a corporate manager should ask when faced with patent litigation is no different from the question forming the basis of any other significant business decision:
That is, the first thing a corporate manager should ask when faced with a patent litigation question is "should we be in the business of litigating this patent matter or issue?" This should be asked not just when the patent litigation matter arises, but also when any significant decision point occurs in the process. Moreover, this question should be posed to those without a vested interest in the outcome of the litigation; specifically, lawyers involved in the process should not be the primary source of validation of whether the lawsuit should be pursued vigorously.
Notably, the above question differs from the usual patent litigation questions asked by business managers which generally comprise: "what is our chance of winning this litigation?" and "how much will this lawsuit cost us"? These more common inquiries pre-suppose that the litigation battle is inevitable and, as such, are directed toward mitigating the damage caused to a company by a patent lawsuit. In contrast, the "should we be in the business of litigating this patent matter or issue?" question sets up a threshold inquiry of whether the litigation process should occur at all, the answer to which should serve a gate keeping function at all significant points in the patent litigation process.
Admittedly, at least two sides must be assuaged in any patent litigation matter. Application of rational business considerations by one side may therefore be met with resistance by the other participants. Nonetheless, there can only be benefits to applying objective business considerations to a process that often can seem somewhat irrational from a business perspective. Assuming equally competent legal representation, I strongly believe that the party who approaches their role as a patent litigant as it does other objective business situations will end up spending considerably less than the other litigants on legal fees.
No doubt, many patent litigation professionals will find my analysis an over-simplification of the complex issues typically involved in patent litigation. This may be true, however, there is no question that most high-level corporate managers believe that patent litigation is a highly unpleasant process that should be avoided as much as possible. At any rate, the patent litigation process is undeniably broken, and any modification in how it is managed by should be welcomed by the participants. It can therefore do little harm for corporate managers to input some fundamental business process controls of the patent litigation process prior to letting their lawyers loose to beat their opponents into the ground.
Thursday, January 8, 2009
Confessions of a "Recovering Patent Attorney" and Why I Have Joined the Growing Ranks of IP Strategists
Too often, I found that the patents I worked so hard (and was paid handsomely) to obtain failed to serve my client's business needs. In searching for the source of the disconnect between my efforts, the client's expenditures and the ultimate value of the patent to my client's business, I realized that those responsible for the client's business often did not participate adequately in the patenting process. Instead, at many organizations, inventors and patent attorneys served as the gatekeepers for most patent decisions. While the relevant client business unit typically held some say in patenting decisions, at many companies, the process effectively operated within a R&D/patent attorney "silo."
Upon reflection, I found this situation akin to the proverbial "fox guarding the hen house" because those with the most riding on the patenting process i.e., R & D managers and patent attorneys, held de facto decision rights as to their company's patents. Patent decision-making at many corporations seemed therefore to often rest on the perceived scientific value of the invention covered by the patent, not whether a patent for that invention served to effectively execute on the client's business strategy. In short, many patents that I obtained covered cool ideas, but were nonetheless effectively worthless to serve the client's business needs.
Unlike many who become disillusioned with their professions, I chose not to leave the patent business but, rather, to try to change the system from within. To this end, I joined the growing ranks of patent and intellectual property professionals who refer to themselves as "IP Strategists." In such a role, I now work closely with business and innovation managers to ensure that corporate patent decisions are based on whether a patent supports the business first, irrespective of how revolutionary the underlying invention might appear.
In contrast a traditional patent attorney role, an IP Strategist focuses not on the patentability of the invention and in reaching a successful endpoint to the patenting process. An IP Strategist instead focuses first on the business goals of the client. In this framework, if a patent indeed supports the client's business goals, the IP Strategist will work with them to effect cost appropriate patent protection. But, if a patent will not align with their articulated business strategy, the IP Strategist will recommend that the client pass on filing for protection, even if the issued patent would protect a "game-changing invention." Put simply, a game-changing invention that is not in alignment with the client's business results in a client wasting resources for a game in which the client does not play. Logic then dictates that the client has no business spending money to protect that invention.
When put in these terms, my clients quickly recognize that their organization likely wastes considerable corporate resources obtaining patents that do not ultimately provide payback to their business. Their decision to hire an IP Strategist therefore almost immediately results in cost savings typically far exceeding the modest cost of hiring someone like myself. Moreover, by making the threshhold question in patenting "how would patenting this invention support our business strategy?," as opposed to "is this invention patentable?," clients also quickly recognize that spending a bit on strategic patent planning better ensures maximum overall protection for their company's products and technology.
Please note that I do not wish to be seen as being critical of my patent attorney colleagues. I have the utmost respect for these highly trained professionals who work hard to obtain patents for their clients. Indeed, until recently, I made my living as a patent attorney and I still count a number of patent attorneys as among my closest friends. Nonetheless, a patent attorney's job is not to provide business advice to their clients. Rather, as a specialist operating in a complex business environment, and once the client directs them to move forward with obtaining a patent, a patent attorney must keep her eye on the patenting process. It is the client's role to provide business direction to their patent legal specialists, not the other way around.
By way of logistics, as an IP Strategist, I work with my corporate clients before the process gets under way to validate the business appropriateness of their organization's patenting decisions. Patent attorneys then handle the day-to-day process of preparing and prosecuting their clients' patents. My role does not end there, however. Because my clients' business strategy changes from time-to-time, I will also provide periodic oversight of ongoing patenting effects to confirm continued alignment of the patent attorney's activities with the current business strategy of my clients.
Admittedly, we IP Strategists are a new breed of patent professionals. But, many of us are blogging and speaking about our speciality and, fortunately, most of us do not appear shy about talking about the changes we believe needed to the patenting process at many organizations. As a result, I predict that IP Strategists will emerge as a critical first stop for forward-thinking corporations that seek to maximize the value obtained from their patents.