In-house teams are generally cutting back on legal spend with law firms but IP is a trend buster. As budgets continue to be squeezed, how can law firms run profitable IP businesses that offer good value?
According to his biography, published late last year, the late Steve Jobs was so incensed by Android’s alleged similarities to his beloved iPhone that he vowed to spend every cent of the $40bn Apple had in the bank defeating its rivals in court if he had to. And given the persistent arms race between Apple and the likes of Nokia, HTC, Samsung and Motorola, it seems no-one embroiled in the high-stakes smartphone and tablet wars is particularly concerned about cutting back on legal spend anytime soon.
It’s certainly not just the household name technology companies engaging in crucial and lucrative patent litigation either. In 2011 a Texas court awarded Bruce Saffran, a 50-year-old radiologist from Philadelphia, $482m for winning a case over three patents for drug-coated stents against Johnson & Johnson subsidiary Cordis Corporation and Boston Scientific. US IP specialist Dickstein Shapiro represented Saffran.
Costs can be immense. In March this year, Hogan Lovells was awarded E504,000 in costs after winning a patent case for client Eli Lilly against generics company SAS Sandoz in France.
While these examples illustrate that major IP litigation carries on regardless of the economic climate, it doesn’t explain why IP appears to be defying the convention of in-house teams worldwide, which appear to be cutting back on external legal spend in most other areas in favour of moving more work in-house.
According to the 2011 Census Report published by the Association of Corporate Counsel, budgets for in-house legal departments have increased by more than 18%. The report indicates that in-house counsel are turning less frequently to law firms, taking more work in-house. This data reflects the current zeitgeist, with law firm partners constantly reporting that clients’ in-house legal teams across all industries are getting larger and retaining more work.
However, IP continues to buck that trend. According to another survey, the 2012 Intellectual Property Law Department study published by the ipPerformance Group, companies worldwide are reporting a reduction in IP attorneys and IP staff. The total number of IP staff globally is down 18%, with the decrease in headcount compensated for with an increased use of law firms. The inference is clear: IP is not an area where companies feel they can cut corners.
In March this year, Hogan Lovells was awarded E504,000 in costs after winning a patent case for client Eli Lilly against generics company SAS Sandoz in France.
While companies may want to reduce overheads by cutting back on staff levels, they can’t reduce the amount of work that needs to be done. This is true of mainstream corporates, where IP demands could be more sporadic and it makes little sense to maintain large IP teams during quiet periods. This is not the case for industries such as life sciences, technology and media, where IP is absolutely essential and large in-house teams both handle their own workloads and farm significant matters out to law firms.
‘We’re busier than we’ve ever been,’ says Bristows’ head of IP Edward Nodder. ‘That suggests client requirements for IP advice have held up pretty well and are not significantly affected by cutbacks. All buyers of legal services are anxious to control their budgets, so of course we’re not immune to fee pressure and requests for discounted rates, but overall IP has prospered in the downturn and is a very good specialist area in which to be market leaders.’
Last year Bristows obtained an important patent victory for client IPCom against telecoms giant Nokia, when the High Court ruled that one of its client’s telecoms patents was both valid and infringed by Nokia, a judgment that has recently been confirmed by the Court of Appeal.
‘In 2007/08 there was such a serious downturn that even IP spending was pared back, but that was abnormal,’ says Wragge & Co head of IP Gordon Harris. ‘Usually businesses see IP as a quick route to improving or protecting their market share during a recession and that has certainly been the case in the last two years, with no evidence of any reduction in spend on IP protection and enforcement.’
He adds that patent attorneys are reporting strong results in their filing practices and there’s plenty of litigation for law firms. Wragges has recently represented key client Dyson on IP infringement issues in China and recently advised Tokyo-based Astellas Pharma on a $90m collaboration and licence agreement with global biopharmaceutical company Optimer Pharmaceuticals.
‘There is some evidence of “carefulness” in spending, with more requests for “step-by-step quoting” and putting more work out to tender to drive competitive pricing,’ adds Harris. ‘However, there is no sign of actual cutbacks in activity.’
Why IP?
All of this begs the question as to why IP seems to be driving continuous activity. ‘All IP rights have a value which is limited in time or fatally eroded by inaction,’ says Nodder, summing up why IP seems to be so immune to the vagaries of the global economy. ‘You have to make hay while the sun shines if you’re an IP rights holder and that means taking timely steps to prevent your rights being weakened or circumvented.’ It’s clear that IP is not an area where you can put things off when times are tough, when the chief financial officer says overheads need to be reduced.
‘The most important difference perhaps is that legal spend is perceived to be necessary and non-discretionary,’ says John Olsen, IP partner for US firm Edwards Wildman Palmer in London. ‘As many companies are built on the foundation of IP rights, budgets are built around protecting revenue streams. When the economy dips, spending on maintaining rights continues nevertheless (although perhaps at a reduced rate).’
Although it is clear there is no holding back when money needs to be spent on IP, there does seem to be increased willingness on the part of IP rights holders to look at their IP portfolios and decide where the money should be spent wisely, rather than trying to spend money on everything. Clients are looking at where rights, which have no intrinsic commercial value can be divested or even be allowed to lapse where there is no commercial imperative.
‘We have definitely seen a shift in approach in terms of IP expenditure. The pattern is complex, however, and not uniform,’ says Antony Gold, IP partner and sector group head for retail at Eversheds.
One example, according to Gold, is in the retail field where some clients have scaled down their brand protection fairly dramatically. This not only reflects more limited budgets but is also a function of their contracting aspirations in terms of the number of new brands and territories which they hope to develop. However, he adds: ‘Successful retailers who can afford to invest in further expansion have ramped up their IP spend.’
Retail is an example of one area where IP is perhaps not dominant and where a decline in legal spend has been noticed. But in industries where IP takes centre stage, the issue for in-house IP teams is getting value for day-to-day and less complex work and focusing spend on crucial, business-critical patent disputes.
‘At the lower end of the market there are big costs pressures but for those operating at the top end there is still a good flow of work.’ – Nick Rose, Field Fisher Waterhouse
Nick Rose, head of Field Fisher Waterhouse’s IP and technology dispute resolution group, says he is seeing in-house counsel cut back on legal spend in IP as well as other areas of law. ‘This means that they are taking more standard work on enforcement and anti-piracy in-house,’ he says. ‘They are, however, still outsourcing the cutting-edge work where there are complex cases and areas where there is little or no legal precedent. This means that at the lower end of the market there are big costs pressures but for those operating at the top end there is still a good flow of work.’
Olsen says the spend very much depends on the role that IP plays in the asset structure of the business. If the business is in an area of high innovation and competitive advantage is achieved through patent and brand visibility then value is achieved from a sophisticated programme of IP portfolio management. If the business is in a more mature industry then, perhaps, value is achieved by spending less on co-ordinating various rights but only ensuring that there is protection in place. ‘The problem is businesses in the middle area, where IP rights might assist in protecting revenue streams but are deemed not to be absolutely essential,’ he says.
Tim Powell, name partner at IP litigation specialist Powell Gilbert, says even the huge conglomerates are taking a more commercial approach to managing their IP rights. He recounts the senior vice president of IP at Unilever, Matt Goodwin, recently saying that he would be making a big push to fully integrate the company’s IP portfolio with the strategic aims of the business. This, Powell says, means keeping the resources behind strategically important rights but also looking at where you can perhaps divest yourself from rights that are no longer aligned to the business.
‘There’s definitely a trend towards in-house IP managers looking at IP portfolios more strategically and commercially and looking to integrate that ever-more closely with the business aims,’ he says.
‘We have seen more motivation on both sides of a dispute to settle instead of pursuing full litigation,’ says Christian Schumacher, IP partner at Schönherr. ‘As regards prosecution (the registration and maintenance) of IP rights, we have seen the clients look cautiously on the geographic extent and potential advantage of each registration or extension in order to save costs, including whether costly efforts relating to objections shall be made.’
High end v high volume
Cost pressure is critical. Clients cannot afford for vanilla IP work to be done at a high cost, either internally or externally. As such, a lot of IP work tends not to be very profitable until you get to the really big patent cases.
Richard Price, a partner in Winston & Strawn’s IP practice and one of the most experienced IP litigators in the City, says he joined the US firm last year because of its reputation for being instructed for business-critical, bet-the-company litigation, particularly for pharmaceutical companies.
‘Market conditions may be tight and in-house counsel may be under pressure to cut costs. However, they are less likely to drive costs down on business-critical work where they will only want to be represented by leaders in their field with excellent track records of success,’ he says.
Another firm that doesn’t do commoditised, low-end work is Powell Gilbert, which was crowned TMT Team of the Year at the Legal Business Awards in February. The firm was singled out for successfully representing Human Genome Sciences in the first major patent appeal to reach the Supreme Court. The long-running and very high-profile case against Eli Lilly concerned the validity of a patent for a gene sequence that could be used to treat people with immune diseases. It is this type of work that is high stakes and, as a consequence, lucrative. Powell Gilbert has a total fee-earner count of around 25, which means overheads are low and there are not too many mouths to feed. This is evident in the firm’s profit per lawyer number of around £183,000.
Clients come to Powell Gilbert for a bespoke, standalone service. Others do not have that luxury. Some firms, such as Bristows, Bird & Bird and Taylor Wessing, are full-service IP firms but have the required capability to handle the most complex patent disputes. Others such as Allen & Overy, Freshfields Bruckhaus Deringer and Hogan Lovells have significant global reputations and have contentious IP practices that complement this status. For many others, there is a need to find the crucial balance between value to the client and a profitable practice. Perhaps the answer is for firms to offer two distinct business lines in IP – work that is routine and less complex being handled by junior lawyers or even ‘delawyered’ and handled by patent and trade mark agents and paralegals. With this work handled in high volumes in a manner that is cost-effective to the client, the hope is that more of the high-value contentious work will flow through, making the business more profitable.
However, IP lawyers warn clients against using cheaper firms for run-of-the-mill work. Portfolio management is one thing but as Wragges’ Harris says: ‘Engaging “cheap” inexperienced firms to do IP litigation is a false economy whatever the subject matter.’
‘Poor quality evidence submitted in one case may come back to bite you later on in another related action.’ – Sarah Turner, Hogan Lovells
Olsen agrees and says the you-get-what-you-pay-for mantra rings particularly true for IP. ‘Many businesses make the mistake of seeking commodity type pricing but when an issue arises where rights are required to resist a vigorous attack from a competitor the assets may not be up to the job,’ he says. ‘Similarly one can cut corners and reduce cost by warehousing rights with a commodity provider but there will be, or could be, a consequence.’
‘Poor quality evidence submitted in one case may come back to bite you later on in another related action,’ says Sarah Turner, IP counsel at Hogan Lovells. ‘Many non-specialists have fallen foul of the peculiarities of IP legislation when it comes to enforcement of rights. This can be a costly mistake.’
This belief is universal. Omar Obeidat, head of IP at Al Tamimi & Company and located in the UAE, says that while certain companies prefer to handle initial administrative tasks in-house, when it comes to serious businesses then ‘use-the-experts’ is the name of the game. ‘The overall costs are always on the high side when one calls in the professionals in desperation to fix the maladies after having used the “cheaper” suppliers initially,’ he says. ‘So it is advisable to regularly use the pros for turn-key solutions that cover soft IP issues and provide pre-emptive solutions for complex IP issues. Of course, on a wise budget.’
All that said, there is a groundswell of belief that more IP legal work can be commoditised and managed more cost-effectively. This involves offshoring, outsourcing and better use of technology; managing aspects like witness interviews and disclosure in an efficient and cost-effective way by using top-level IT support and video-conferencing to avoid costly travel and meeting time.
‘Yes, IP service lines can be commoditised, absolutely,’ says Nick Beckett, head of IP at CMS Cameron McKenna. ‘We have been through a process of modelling to ensure the most efficient and cost-effective resource is used.’
According to Isabel Davies, a highly experienced IP practitioner who is now a consultant to Reading-based Boyes Turner, not all IP needs to be carried out by highly qualified professionals. Areas of work can certainly be commoditised as long as there is proper supervision. Outsourcing and offshoring may in certain circumstances provide a more cost-effective solution. ‘However,’ she says, ‘it is important that there is effective quality control as mistakes have the potential to be expensive as well as time consuming.’
‘Good value for money can certainly be obtained outside central London through regional law firms where rates and salaries are noticeably lower,’ she adds. ‘There are a number of firms, including our own, that have the expertise, experience and resources to handle the “bet the farm” national and cross-border patent disputes. Using a City firm with significant overheads and subsequently higher rates is no longer an attractive option for many businesses.’
Products have also been developed to help clients manage their IP portfolios cheaply. For example, Turner says Hogan Lovells offers its own online brand protection service called Anchovy for global domain name strategy, registration, portfolio management and global enforcement. Clients can review their domain name portfolio, handle all renewals, apply for domain names across the globe, and receive assistance from the firm’s IP team in meeting pre-registration requirements. Clients can also use Anchovy to monitor the status of their domain name enforcement efforts worldwide.
Hogan Lovells uses other products such as Mercuriam to help clients manage their trade mark portfolios. Mercuriam is a secure extranet that allows clients to access and generate tailor-made reports showing details of the status of their brands. The system also automatically generates alerts for critical due dates and renewal reminders. Further data, including oppositions, infringements, customs seizures, agreements, or cases such as third-party records not handled by Hogan Lovells, may be added to provide a full record of a client’s brand interests.
These types of products supplement the firm’s legal offerings to give clients maximum value for money. This multi-tiered approach is common to many law firms, particularly for soft IP, ie non-patent work. That said, Olswang has offered a ‘one-stop-shop’ mix of patent attorneys and IP lawyers for some years, which offers patent protection and enforcement services to Microsoft, among others.
One firm rules
Perhaps the best way for a firm to effectively resource and manage different service lines is to offer clients the single-firm approach, which was advocated by firms such as Eversheds and Baker & McKenzie in our recent feature Sole adviser – Having it all.
Bakers in particular used the idea of offering different levels of service under one roof to Unilever in 2007, persuading it to pay more than £10m a year to allow the firm to manage its 160,000 global trade marks. This removed the need to use a raft of domestic specialists across a multitude of jurisdictions. The firm won this against 30 firms that pitched for the work and one way that Bakers has been able to run this operation cost-effectively is by using its captive offshore operation in the Philippines to create its Global IP Support Centre. The 40-strong paralegal team in Manila handles Unilever’s volume trade mark work. And providing such cost-conscious services has led to high-profile instructions.
‘Businesses do not like – for good reason – to split portfolios between different firms,’ says Gold at Eversheds. ‘The one-stop-shop has a lot of appeal – it helps if the same firm that manages the core assets also has the skills and resources to deal with any non-routine work which emerges.’
IP specialists can see the merit in the one-firm approach to IP services but warn that clients need to find the right firms that can provide the requisite level of advice in all areas of IP. Olsen says the problem is that such firms are rare. ‘Unfortunately the market has not provided too many instances of firms that provide the full spectrum of IP services because the capital costs are high and the demands made by management at law firms for return on investment make it difficult,’ he says. ‘From the client end, a one-stop-shop makes sense if the expertise is nonpareil, from the law firm point of view the capital requirements are too precious so it does not happen very often.’
Perhaps then the answer is to put only some of your eggs in one basket. Unilever, for example, turned to Wragges when it needed to obtain a high-profile High Court injunction to stop the British National Party from using its ‘Marmite’ trade mark in its party political broadcasts in 2010. The multi-firm approach is favoured by many of the IP-rich corporates, such as Pfizer, whose innovative Pfizer Legal Alliance (PLA) is the brainchild of executive vice president and general counsel Amy Schulman. The PLA is a collaborative partnership between Pfizer and 19 law firms, each of which are paid a flat fee every year for all the work that they do.
Harris says his firm has been endorsing the growing trend of a more holistic ‘consultancy style’ approach to giving IP advice across the board, from creation, through development and exploitation, to enforcement, taking tax and other related issues on board at the same time.
‘Whether this is something which develops in large law firms, or in more niche IP operators remains to be seen, though I suspect that only large firms would have the “shared resource” to offer the broader services in terms of portfolio management, tax, etc,’ says Harris.
It seems that marrying a ‘good value’ proposition for clients with a thriving, profitable IP practice is the Holy Grail. Finding the right balance between commodity and bespoke is key, as Olsen points out: ‘I think the answer lies in offering a menu of services under a single roof to the client. This way the client can obtain the service it wants at the price point it wants, all the while getting the service provider’s guarantee of quality. Flexibility of the service provider is key where volume is the requirement for profitability, one can drive volume and where bespoke tailoring is required one can provide service and expertise at that level.’
The way ahead looks clear and there are signs of the IP gravy train becoming more refined. As with all areas of law, unless you have the volume of IP work to generate a small but consistent margin, an IP practice will only really be profitable if you become the ‘go-to’ firm for bet-the-company disputes work. Otherwise, scratching around and bending over backwards will be the order of the day. Welcome to the real world. LB
Unified Patent Court: bifurcation problems
One issue that is critical to the future of patent litigation in Europe is the creation of a Unified Patent Court (UPC) in the EU. Debate over the issues surrounding this idea has raged on for years and LB discussed some of the key points in 2010 (see System Failure – IP Special – November 2010).
However, the IP world stands at the threshold of a crucial decision this month. There is significant disagreement over whether the Central Division of the UPC should be in London, Paris or Munich. The final decision as to where this will be based is expected in June, and it is a controversial subject. The Court will have an important role – patent revocation actions and actions for declarations of non-infringement will have to be commenced there.
The key issue is that if Munich is chosen as the location of the central court, then the German, bifurcated approach to patent litigation would become an EU standard. In a bifurcated system, infringement is heard and determined separately from a hearing as to whether the patent in question is valid. Infringement is typically heard first and remedies awarded if infringement is established. The validity is decided on a separate and often slower track. If the patent is held to be invalid, any damages or injunctions awarded in the infringement action are lifted. This system contrasts with the UK for example, where validity and infringement are heard simultaneously.
Supporters of bifurcation argue that patents can be enforced more quickly and easily, saving costs and encouraging innovation. But there are detractors, notably some of the most important patent rights holders in the world.
In an April 2012 speech entitled ‘Bifurcation: bad for business’, Nokia’s head of litigation Richard Vary put forward his case as to why bifurcation would place European industry at a significant competitive disadvantage. He argued that in many German patent cases the defendant has incurred cost or lost sales during the period of injunction until the patent’s validity was determined. This has led to many major companies pulling out of Germany, citing a New York Times article which said that Microsoft had decided to relocate a distribution centre from Germany to reduce its exposure to Germany’s bifurcated system.
‘A more patentee-friendly litigation system is bad for European business, simply because the main beneficiaries are not European businesses but our overseas competitors,’ Vary concluded. ‘They can assert weak patents against European companies: unable to contest validity, we will be forced to settle. We are left struggling to assert even our strongest patents against them.’
Strong stuff but Nokia is one of the few European technology companies to lobby strongly against bifurcation. Dr Gareth Morgan, IP partner at Winston & Strawn in London, argues that the debate over where the UPC should be located and the potential effects of bifurcation has focused largely on academics and law firms, perhaps partly to keep clients in the dark. ‘A direct consequence of the current form of the UPC is that it will likely bring more patent trolls to Europe, which will increase litigation costs for clients in the long term,’ he argues.
Patent trolls, particularly common in the US, are parties that opportunistically buy and enforce patents against alleged infringers with no intention of manufacturing or marketing the patented invention. Such activity is already here in the sense that Germany is a huge market and we’ve seen these types of issues at play in the smartphone market. If your latest smartphone is off the market for a year thanks to an injunction granted over an untested patent, then that’s an eternity in practical terms.
‘There are aspects of what is proposed which are favourable to patent trolls and that is a big concern to many industries,’ says Edward Nodder, head of IP at Bristows. ‘If the UPC goes ahead, trolls will be able to put a lot more pressure on companies to pay for patent licences because they can threaten to close them out of the whole of Europe in one go in low-cost bifurcated proceedings where the defence of patent invalidity is completely glossed over. The risk/reward analysis for trolls bringing patent infringement suits in Europe will look much more attractive and this seems likely to fuel an explosion of patent litigation which will put European industry at a grave disadvantage.’
Tim Powell, name partner at Powell Gilbert, agrees and thinks that a concern for some companies will be that bifurcation in Europe will encourage forum shopping. ‘If you have a system like that inevitably it will be a great day for the trolls,’ he says. ‘The pressure you can bring to bear on somebody under that system, where you can get a European-wide injunction before the validity of the patent is tested, is immense.’