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IP Practice Management: Observations from the Outside

Robin A. Rolfe

©2015. Published in Landslide, Vol. 7, No. 6, July/August 2015, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

It will come as no surprise to readers in their mid-career or later that the management of intellectual property (IP) practices has changed dramatically over the past 20 years. Even those who are more recent law school graduates are likely to recognize that the practice environment is different from when they started.

It could be assumed that IP practice management has changed because of developments in IP laws. However, it is equally reasonable to assert the reverse—that IP legislation has been in response to the changes in the business of intellectual property. For example, harmonization treaties were necessary to streamline IP practice management by reducing the time and costs of acquiring rights in multiple countries.

Generally, the changes in IP practice management track the evolution (or some say revolution) of law practice that started in the 1990s and transformed a time-honored profession of trusted advisors into a competitive industry of legal services providers. There are many factors that contributed to this, but in commercial law practices, including intellectual property, the primary driver of change was the surge in international business and emergence of “the global economy.” The expanded parameters of business created enormous needs and opportunities for lawyers. Add to this a suddenly fashionable metric of law firm success known as “profits per partner,” and law practice became a business.

The new “business” of IP law management has impacted both law firms and in-house practice management. Looking back at the development provides a perspective for consideration of the future.

Law Firm IP Practice Management

Historically, IP practice largely resided in boutique firms that handled all aspects of patent, trademark, and copyright matters from creation of rights to transactions and enforcement, and including litigation. Most IP firms were essentially patent practices whose attorneys had scientific or engineering backgrounds, which distinguished them from lawyers in other legal disciplines. There also were trademark specialists, although frequently they were patent lawyers who had detoured away from patent law or whose clients depended on brand protection, as well as inventions. Copyright law was nominally part of full-service IP practices but was also within the expertise of law firms specialized in representing copyright-centric industries, such as publishing, music, and entertainment. Among general practice firms, corporate and litigation departments occasionally crossed into copyright and trademark territory but not patents, and by no means presented themselves as IP specialists.

In the years when IP firms only competed against each other, there was enough work for everyone. It was a small collegial bar where lawyers frequently knew each other from college (particularly the polytechnic schools), law school (especially if there was a patent law course), the United States Patent and Trademark Office (USPTO) (where many started their careers as examiners), or the specialized IP bar associations. With industry-oriented technical expertise, they also crossed paths representing competitors. The result was a restricted and arcane field of practice.

The firms, too, were generally small and informal. Internal management was often laissez faire with the founder, senior partner, and/or rainmaker acting as managing partner by default or fiat. Washington, D.C., home to the USPTO, was ground zero for patent prosecution firms, while New York firms handled more of the litigation. In addition, there were IP boutiques located near pockets of industry throughout the country that serviced clients ranging from garage inventors to Fortune companies.

Law practice management was not a concept, let alone a term of art. Patent lawyers practiced their craft, and there was no need for proactive management or strategic business development. Administrative responsibilities were delegated to a secretary or office manager, and a partners meeting was more likely to be a dinner gathering than a forum for critical planning. Getting partners to send out bills was a bigger problem than the collections.

By the 1990s, large general corporate firms began to expand in size and scope to fully service their major institutional clients. DuPont introduced its Convergence Program to cut costs and manage litigation more efficiently by reducing the number of outside counsel and consolidating representation in a few firms. Other corporations followed DuPont’s lead and joined the bandwagon to engage “preferred providers” to handle their legal work.

Besides the incentive to be among the chosen, the general firms recognized the financial potential in patent litigation. The large firms perceived that their own trial lawyers could be successful patent litigators because they were experienced presenting complicated cases to judges and juries. However, business sense dictated that to build a patent litigation practice that would pass muster with their clients required bona fide patent litigators. They looked to the IP firms. The September 1994 International Corporate Law magazine reported, “Long regarded as gawky technocrats lacking the polish and the instincts of first class lawyers, they [IP litigators] now find themselves being courted by New York’s elite firms, many of which are anxious to develop IP capabilities.” The general firms offered patent litigators marquee clients, higher compensation, and greater staffing resources than the boutiques.

A strategic development that was good for the large general firms and patent litigators and, arguably, advantageous to clients took a toll on many of the IP boutiques. The exodus of patent litigators from IP boutiques ended the era when IP practices were self-contained silos with a monopoly on IP law practice. The IP firms were caught off guard, and the economic impact caused the implosion of a number of firms and the wholesale merger of others into general practice firms. In unstable situations, internal management issues and otherwise minor business events, such as the renegotiation of a lease, led to firm breakups. The migrations also disrupted firm succession. When firm elders opted to retire, there were leadership vacuums if the presumed successors had left the firm.

In boutiques where the patent litigators stayed, increased tension between the litigation and prosecution groups was predictable not only because of the threat of the litigators leaving but also because it changed the internal power balance. One ramification was that litigators frequently pressed to change traditional compensation structures. Another area of practice management contention was in boutiques where there were no litigation specialists and the lawyers both prosecuted and litigated.

More recently, IP firms have been confronted by other practice management challenges as prosecution practice has continued to reflect changes in the global market. For example, competition from third-party vendors that provide outsourced IP services to IP rights owners with one-stop shops and aggressive pricing have taken a share of the work. International IP treaties and simplified filing protocols have altered the management of IP portfolios, as well as reciprocal work relationships with foreign firms. At the same time, new aspects of IP practice are emerging from technology, and new U.S. legislation, such as the America Invents Act (AIA), has generated new opportunities for IP practices to adapt and expand their practices in post-grant actions and administrative litigation.

The IP firms that took the merger route and were absorbed into general practice firms met with mixed success. Unique issues of IP practice integration, perhaps not fully anticipated by the parties, included: different software for IP management; labor-intensive docketing; extremely large client rosters in patent and trademark prosecution practices; and IP practice norms of advancing filing fees for clients, the absence of advance retainer payments, and increased billing frequency. Typically, within two years after a merger, there was a shakeout of the acquired lawyers, some leaving because they did not like the environment, and others leaving because their practices were adversely affected by conflicts, billing rates, or the new firm’s revenue requirements—all practice management issues.

Nonequity partners and senior associates who adjusted to the more competitive nature of IP practice in both IP boutiques and IP practices of general firms by minding clients and doing good work learned the true meaning of the “business of law” in the 2008 global economic downturn. Without their own books of business generating revenue for the firm, they were expendable when business slowed.

The aggressive cost-cutting measures of the financial crisis passed, but the pressure to contain costs is still a critical issue. Clients have maintained pressure on their outside firms to be efficient and economical, and they are more willing to change firms than ever before. Clients expect excellent quality legal work, responsive service, and good results. The variables are most often functions of the IP practice management, including (1) costs, specifically IP billing rates and structures; (2) unacceptable add-on charges for administrative services, such as additional fees for docketing or processing (e.g., sending clients original patent or trademark registrations); (3) control of staffing; and (4) efficiency through process management and technology.

Effective IP practice management reaches across the full range of a firm’s services and is as vital to success as the substantive law work. It requires understanding of the market (awareness of threats and opportunities), strategies and planning, a willingness to act and to make changes, knowledge of clients and tailored solutions that provide value to their businesses, deliberate business development, asset (human resource) management, technology investment, and, not last or least, firm leadership.

In-House IP Practice Management

In corporations, changes in IP practice management have been as equally significant as they have been in outside IP practices, but different. High-stakes, high-profile, and high-cost patent litigation, as well as transfers of intellectual property as key assets in transactions, have raised corporate consciousness of intellectual property to the C-offices and made them part of the business design.

The relevance of intellectual property is notable in BTI’s Legal Market Outlook for 2015, which based on general counsel input predicts areas of increased corporate legal spending. Moreover, despite concerns about “legal spend,” BTI anticipates that global companies will add $1 billion to their outside counsel spending in the United States. Among the forecasts impacted by IP issues are that (1) cybersecurity will grow three times faster than any other legal market segment; (2) food companies will spend three times more on litigation than the average company; (3) natural resource and energy companies will increase M&A and litigation activity; (4) high-tech companies will increase spending in almost every major segment of the law; (5) health care is poised to increase spending in seven legal segments; (6) multinational and global companies will acquire middle-market companies and startups to drive their own growth; and (7) corporate regulatory needs will be a high priority in almost every industry.

Intellectual property was not always perceptible in business or legal management conversations. For many years before the 2008 economic reset, intellectual property was treated as technical legal devices that provided limited monopolies or identifiable brands that supported the business. IP lawyers were generally part of the centralized corporate law department. In patent-driven companies like pharmaceutical, chemical, and industrial businesses, the trademark lawyers usually reported to patent counsel, who reported to general counsel. In some companies, the patent law group was part of the R&D unit, while trademarks were embedded in the law department. In consumer products corporations that were brand heavy, the trademark department also was part of the general legal group and reported to general counsel. Copyright lawyers in the copyright-dependent businesses were frequently the core of the law department.

Regardless of the internal organization structure, the patent and trademark attorneys were largely siloed. As experts in a narrow area of law, they acquired and maintained intellectual property. Because the outside vendors, i.e., lawyers and IP-related services suppliers, also were specialized, the IP group had autonomy in the selection of IP support, which included outside counsel for assistance in searching, clearance opinions claim writing and prosecution, inter partes and civil litigation, and international representation, as well as IP vendors for searches and translations. The costs, together with government fees, were plugged into the legal department budget or, in a few companies, charged to the relevant business unit.

The scope of IP practice remained well defined, with the volume of work growing with the company. As new issues related to IP law emerged or became more integral to the business, the IP departments were frequently overwhelmed. Whether the result of pushback from the IP departments or by general counsel or others, elements of IP practice were spun off into other parts of the legal department or other departments. For example, as corporate litigation increased, primary responsibility for IP litigation was often reassigned to a legal department’s litigation group, with the IP counsel providing technical input. Some pharmaceutical companies, like Merck, established a business unit for technology licensing that included patent and technology license negotiations and agreements. As the Internet became a core part of business, responsibility for domain names often was reassigned from the trademark group to the IT department. Other IP-related issues that could have been within the IP departments, such as anticounterfeiting, cybersquatting, cybersecurity, franchising, and merchandise licensing, were not. As a result, IP practice management did not extend to these IP-related subjects.

By the late 1990s, the independence of IP counsel to select outside counsel was eroded as companies adopted the DuPont Convergence model for reducing external legal costs by decreasing the number of outside counsel. Because the large, and by then multinational, general law firms had developed IP practices with patent litigation capabilities, it was possible for general counsel to engage those firms for matters requiring outside counsel. The familiarity of well-known law firms handling critical IP cases also brought comfort to CEO and corporate directors who were mindful of their fiduciary responsibilities as defined by Sarbanes-Oxley.

The federal Sarbanes-Oxley Act (SOX) was enacted in 2002 in response to a number of corporate scandals by providing higher standards on public companies for accountability to investors/shareholders. SOX required transparency and imposed disclosure obligations on management with respect to all assets that have a material impact on the financial condition of the company. Because intellectual property is material to the value of many corporations, CEOs and directors took on a new interest in and greater concern for the company intellectual property. As a result, one or more levels of hierarchy were added above the patent department in the forms of corporate IP strategy committees and/or IP strategy directors (a.k.a. IP czars) to assure the appropriate business management of the IP assets. Although it could be coincidental, it appears that the new IP management structure accompanied a more frequent use of litigation as a competitive weapon.

Excluding high-stakes IP litigation, the global financial crisis in 2008 and the recovery since have put law departments under pressure to reduce their overhead and external legal expenses. In addition to reducing expenses, the BTI Market Outlook reports that general counsel are looking for more business-related value from their outside counsel.

IP department operating costs and the related costs of acquiring and protecting intellectual property have not been immune to scrutiny. The patent groups have probably fared better than the trademark groups because of the technical nature of the work, but improving administrative efficiency is a priority for both, from matter intake to docketing to invoice processing. At the extreme end of efficiency management, some companies are considering whether administrative IP functions, including paralegal responsibilities, should be divorced from the IP legal group and incorporated into new models for shared corporate services.

Due to reduced headcount, increased workloads, or purely to reduce costs, some types of IP work previously handled in-house are now outsourced. For patent work requiring knowledge of specific technologies, some companies have rehired recently retired patent lawyers as independent contractors and saved overhead costs. On the opposite end of the scale, for lower-level repetitive tasks of global IP portfolio management, legal outsourcing vendors focused on efficiency and process management have replaced certain in-house functions such as annuity payments, renewals, and assignments. Because of the high volume of this work, the vendors have driven down the fees of local IP associates around the world. The indirect result has been to intensify the price competition among IP agents to the benefit of companies that continue to manage their IP portfolios in-house.

The procurement of IP legal services also has been adapted by some companies to conform to general corporate purchasing procedures through competitive bidding. Either managed by the legal department or the procurement department, requests for proposals (RFPs) for specified work are developed and awarded to the lowest bidder. Another approach to cost management has been to outsource IP work to company employees or external providers in jurisdictions where staffing and production costs are cheaper than the cost of doing the work in the IP department. Patent annuity payments, assignments of ownership, trademark renewals, licenses, and royalties management were among the services that were most amenable to outsourcing, but claims drafting, searching, and trademark filing programs also are being handled in the same way. The changes have caused some to refer to the “commoditization” of IP practice.

The legal function of intellectual property has not changed but the business of intellectual property has changed, and the management of IP assets has been increasingly integrated with business practices. The realities of business have necessitated new methods for IP practice management. Technology and commerce have provided the vehicles for change.

A New Normal for IP Practice Management

Both in law firms and in-house legal departments, IP practice management has evolved—in both positive and negative ways. While there are factors beyond the control of IP practice managers to direct their organizations, IP practice management now requires a stronger measure of leadership to position and sustain the practice in a substantial and meaningful business role. Doing good legal work is not sufficient to make the business of IP law successful.

IP practice leadership demands an understanding of the environment and conditions, and then taking affirmative actions to maximize benefits and reduce risks. In the past, IP lawyers were more reactive than proactive in advancing IP practice. They have not been the drivers of the business of IP; rather they have adjusted to changed circumstances. While the protection and enforcement of traditional IP assets will remain an important need of businesses, they are embedded in the conversations of process efficiencies and legal costs management.

IP law practice should be dynamic and has the potential to address emerging business subjects. A very broad approach would say that intellectual property includes anything that is not tangible property or real property. Today’s businesses are grappling with new and different kinds of innovations, technologies, and issues concerning ownership interests and public rights emerging from the information society. For example, where do the cyber universe and digitization (production and reproduction) fit within the IP spectrum of the business and how should the business deal with related issues of ownership, protection, privacy, security, and commercialization? A new generation of “intellectual property” is how businesses are likely to compete and grow, and where IP practices can advise to add to the business value.

The extension will require stepping outside the comfort zone and managing the IP practice into the future.

Carpe diem. Seize the day.

Robin A. Rolfe

Robin A. Rolfe is president of Robin Rolfe Resources, which provides custom strategic planning and business development consulting services to the legal community, including law firms, corporate law departments, and law-product vendors.