The Strange Case of the Vanishing Patent Boutiques

Over the last 10 years the following brand name firms have ceased to exist: (1) Brobeck, Phleger & Harrison; (2) Pennie & Edmonds: (3) Morgan & Finnegan; (4) Lyon & Lyon; (5) Fish & Neave; and (6) Darby & Darby.  There are likely many others that have ceased to exist (I suspect we all know a few) although not with the same brand recognition, but well regarded firms in their own right.  I have also been hearing rumors that another name brand firm is contemplating dissolution.  I won’t name names because I have heard it from only one source so far, but the reality is that there are major changes circulating through the industry.  Thus, it makes sense to devote a little time to try and figure out what is going on, why such highly regarded firms are vanishing and what can be done, if anything, to stop what might otherwise be inevitable.

What is going on in the patent industry?  Litigation is where the big firms and larger IP firms make their money, that much is certain.  Those firms with litigation practices that also engage in patent prosecution do so typically for the purpose of keeping clients in the firm for all their patent needs.  With large fees available for litigators and extreme downward pressure on patent prosecution, which is compounded by outsourcing to India, it is no wonder many boutiques can’t keep up.  Litigation attorneys move on to greener pastures, both literally and figuratively, leaving patent prosecution specialists holding the bag, and scrambling to pay overhead for an office at 100 Extremely Rich Sounding Street in Crazyexpensiveville.

Lets face it, patent litigation is growing more and more complex, not less complex.  Over the years a typical patent has gone from something that could be read by those of reasonable intelligence and casually interested to a document that really makes you want to tear your eyes out.  The Federal Circuit has complicated the law with inconsistent panel decisions in the same way it was a mess when the Regional Circuits heard patent cases.  I suppose patents are more likely to be valid, but with every Federal Circuit decision rippling through patent prosecution like 8 foot surf on the North Shores of Oahu, those drafting patents have to say more and more and convey less and less, both to meet all the patentability requirements while still not saying too much relevant (or anything relevant) that could later manifest itself as an inequitable conduct allegation.

So as technology gets more complicated (as it always does), patents are getting more complicated, longer, nuanced and less informing.  There is more money at stake because the markets are larger and in many areas the markets are not maturing as they once did.  In a mature market there is little real litigation.  Sure there is litigation for a purpose, such as creating leverage in a licensing matter, but in mature markets there is rarely all out, win at any cost, bet the company litigation.  Today, however, we see increasing evidence that even in relatively mature markets there is far more of an interest to go to the mattresses than there once was.  It is as if major companies have forgotten that you can make more money in an oligopoly than you can in a monopoly when staying in charge requires tens or hundreds of millions of dollars a year paid to lawyers.

What does this have to do with the downfall of the IP boutiques, particularly the patent boutiques?  It seems to me that the amount of money at stake and the money companies are willing to pay litigators in the patent space is exorbitant.  Couple this together with low margin prosecution work and litigators think why am I subsidizing patent prosecution?  They see that they could make more money at a litigation firm where everyone brings in big bucks.  So top litigators get lured to large litigation firms.  The litigators that remain at the once dominant boutiques dwindle to the point where one has to wonder whether the firm could handle more than a single massive patent battle.  Companies love redundancy, and no CEO has ever gotten fired by paying too much to attorneys.  They do, however, get fired for picking a no-name attorney that loses.  So the decision is easy, go with the big firm that has the workforce to handle it with plenty of bodies to spare.  Increasingly that is not a patent firm, but a large firm with a litigation department that handles patent matters.

The truth is you can bill 80 to 100 hours a week doing patent litigation, and no one can bill that kind of time doing patent prosecution.  Your mind would go numb and you would be institutionalized if you tried, so the realistic useful week for those engaged in patent prosecution is maxed out around 50 a week, maybe 60 if you push yourself, but that is not sustainable.  On top of that, clients will pay whatever it is necessary (usually) with respect to hourly rates for litigation because there is so much at stake.  For patent prosecution work big clients, particularly tech clients, complain about the cost of obtaining patents and are pushing down billings.  This is a big problem for large firms with big overhead and litigation partners who see prosecution attorneys as a drag on the bottom line.

It is also impossible to ignore that many large tech companies are outsourcing patent work to firms outside the United States.  In some instances it seems to be in flagrant violation of US export laws, as the USPTO explained in a Federal Register Notice in July 2008, but it is still happening out in the open.  Still others complain about the cost of obtaining a patent and they want low flat fees for patent application drafting and prosecution.  I have approached some companies with a better way to proceed in application drafting that would require the inventor to spend 1 hour of time working up a disclosure in a mentored environment and have been told that is unrealistic.  So it is pretty clear to me that many big tech companies want to pay 50 cents on the dollar (or less) for patent application drafting and prosecution, but they want the 50 cents (or less) to come out of the patent attorney end.  So it is more work for less money, period.  No other way to say it.

Is this “more work for less money” mantra causing some patent attorneys to cut corners and do less?  Absolutely.  There is nothing unethical or immoral about it though.  The client gets what they pay for.  It is the same for them in their business when they are selling a product or service, and it is the same in the patent business as well.  Notwithstanding, ignoring the downward pressure being exerted by major tech corporations is to miss the forest for the trees.  As long as the US Department of Commerce allows for the outsourcing of technology information in violation of US export laws, and as long as so many tech giants are willing to accept inferior patent applications that result in the issuance of poor patents, there is little hope for the large patent prosecution firms that exist in office space with marble floors and mahogany conference tables.

The downward pressure on patent prosecution isn’t limited to giant tech corporations, nor is it a function of being a tech giant either.  I know attorneys who do patent prosecution work and are paid extremely handsomely for the work they do.  One I know is paid as well as any patent litigator because he is that good and he works for clients that demand quality patents.  Sure, they would like quantity, but there are those companies that still would rather have quality over quantity.  They recognize that their business model is built on intellectual property and without adequate protections the company would cease to exist, or have hundreds of competitors and water down the market to the point where existing would be inconsequential.

I suspect there will be continued downward pressure on prosecution costs, at least so long as the Department of Commerce does not enforce the US export laws that almost certainly could kill India outsourcing.  The same is true so long as Internet businesses are allowed to openly represent inventors and small businesses without a license.  But what can be done? Those that are likely most at risk are the those who work for clients who are constantly applying downward pressure on your fee.  You can only go so low, and if they want you to go lower then you need to be working on Plan B.

Yes, I understand when Mega Corp. walks in and says we want you to prepare and file 100 nonprovisional patent applications for us this year, the temptation is enormous.  Then when they say “and we want to pay $3,500 per application” your heart sinks.  If it can’t be done then JUST SAY NO!  You are never going to make it up on volume.  The only thing you will do is crash and burn faster.  Let Mega Corp. go to India and get the quality that they are willing to pay for.  Eventually we all know they are going to have massive losses, trade secrets spread like wildfire, patents that are worth less than worthless or an Administration that finally realizes that outsourcing of jobs that could and legally should stay in America is not helping job growth numbers.  Eventually things will crash.  In the meantime you need to do what you must, but lay a strategy to take your firm through to a better place.

No business, including law firms, has ever gone wrong by cutting back on overhead in a responsible way.  Now that doesn’t mean charging $.25 for a can of soda if soda had previously been provided free to employees.  I have known firms to do exactly that, and it is counterproductive and kills morale, which is the wrong thing to do when things are going poorly.  But right now office space is cheap in many parts of the country, so take advantage of that if you can.  And do you REALLY need to be in downtown New York, downtown Chicago, downtown Washington, DC or downtown San Francisco?  Of course not.  With Internet, e-mail, faxes and airplanes you can be located most anywhere, including a whole host of low overhead locations that are close to airports.

There are also a lot of out of work or under employed junior attorneys and patent agents that could be used on a contract basis to lower costs somewhat and maybe even attract more work.  Also take a look at your application preparation processes and see if they can be streamlined.  Try and work with inventors in a collaborative manner, it saves time and creates a better product.  On top of that, if the inventors are too busy, too important or just don’t want to work with you that should be a signal.  They obviously are not that interested in the success of their patent portfolio, which should be a sign that when the going gets tough you will be cut first.  It is also indicative of the attitude of those that want more work for less cost.  Somehow they always want it to come out of your end, don’t they?

Struggling to cover overhead expenses can be like trying to get from point A to point B while running on a treadmill.  I am not suggesting that everyone run for the hills, firms dissolve and attorneys leave as if the ship is sinking.  Nevertheless, a comprehensive audit of your firm, its clients, fixed costs, variable costs, processes, office space and more will pay dividends long term.  We all spend a good portion of time counseling clients what they should do to move ahead, and just because the State Supreme Court won’t let you operate your business in certain responsible business ways that they perceive as unethical doesn’t mean that you can’t exercise good business judgment.  Analyze where you are at and how to get to where you want to be.

Just like investing in the stock market, diversification is the key.  Firms need to diversify, and I suspect lack of diversity of client base is what has caused and will cause problems.  Whether it is leveraged too much on one stream of business (been there, done that) or your clients share a common characteristic, lack of diversification means the walls start moving in all at the same time.

I believe the days when it was GREAT to have a name brand tech giant as a client are probably gone. They are too worried about costs and seem in many cases not to care about quality.  With the recession over and whatever recovery we will have showing signs of being underway, there will be a new wave of start-ups with exciting technologies and funding.  Yes, funding!  There are trillions of dollars sitting on the sidelines, waiting for a better economy to come on line.  So positioning yourself and your firm to get work from technology start-ups that care more about quality than quantity, and are far more concerned with quality than costs, could be just what the doctor order for medium and large patent boutiques.