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As Patent Firms Fall, D.C. Boutiques Stay Strong

Jenna Greene
Legal Times
03-28-2003


When Silicon Valley's Skjerven Morrill voted last month to dissolve, it seemed to confirm an increasingly widespread assumption: IP boutiques are a vanishing breed.

In recent years, more than three dozen intellectual property shops have been consumed in mergers. Other boutiques have folded in the face of increased competition from general practice firms. And the spectacular implosion of Brobeck, Phleger & Harrison shows the peril of over-reliance on one sector for clients.

But it's different in Washington.

"D.C. firms are a little more stable," says Hildebrandt Inc. consultant Lisa Smith. "They've carved out a distinct niche and, in most cases, will survive."

Washington IP firms have used their proximity to the U.S. Patent and Trademark Office to dominate patent and trademark prosecution. Still, local boutique leaders are paying close attention to the fates of their competitors and adjusting their strategies accordingly.

To R. Danny Huntington, chairman of 100-lawyer Burns, Doane, Swecker & Mathis in Alexandria, Va., the recent demise of Los Angeles' Lyon & Lyon illustrates the risk of relying too heavily on IP litigation. "Their biggest problem was they moved the focus to litigation," then couldn't maintain the business, he says.

Jorge Goldstein, managing partner of the District's Sterne, Kessler, Goldstein & Fox, agrees: "They got eaten alive by the general law firms."

Indeed, as the value of corporate intellectual property has soared, competition for IP litigation, which can yield millions in legal fees, has gotten much more intense.

IP litigation can be "life and death" for a company, says consultant Peter Zeughauser of the Zeughauser Group in Newport Beach, Calif. With so much on the line, "the outside-counsel hiring decision is now made in the general counsel's office, not the IP counsel's office, where it used to be."

Instead of the in-house patent lawyer calling up his friends at the IP firm that handles the company's patent applications, the general counsel is tapping the lawyers he works with most often -- those from general practice firms. Plus, hiring a well-known firm provides cover if the matter doesn't go well.

Zeughauser predicts, "Except in limited circumstances, we're going to see a significant segmentation in the market, with patent prosecution on one hand and firms that do high-stakes IP litigation on the other hand."

WHAT THEY DO BEST

Huntington at Burns Doane says his firm is feeling the competition, and while litigation still accounts for one-third of its business, the emphasis these days is on patent prosecution. "We're concentrating on trying to build work within the U.S., developing relationships with clients, getting to know the individual inventors," he says.

Burns Doane is also stepping up marketing efforts -- one of Lyon & Lyon's reported shortcomings. And it brought on World Intellectual Property Organization veteran Albert Tramposch to build a trademark practice based on the recently ratified Madrid Protocol.

"Our vision is that we think there is an alternative to the general practice firms," says Michael Blanchard, the firm's first-ever executive director.

Sterne Kessler has also kept its focus on prosecution. "We've stayed true to what we do best," says Goldstein. The problem with Lyon & Lyon, he adds, was that they "focused too much on litigation as the core business, then sat there and said, 'We have work, we'll always have work.'"

With 50 lawyers and 30 technical experts, Sterne Kessler also does strategy and opinion work, and has served as co-counsel to firms such as Williams & Connolly in patent litigation.

Conventional wisdom is that firms can't make much money doing patent prosecution, but name partner Marvin Spivak of Alexandria's Oblon, Spivak, McClelland, Maier & Neustadt says his firm's profit margin for prosecution rivals that for litigation.

Oblon consistently leads the nation in number of patent applications filed and issued. When the firm handles an application, it's almost like an assembly line, with different specialists working on different pieces. Oblon also employs a huge staff -- 345 administrators and secretaries for 90 lawyers and 15 technical experts.

In 2002, says Spivak, the firm had "the best year ever," filing more than 5,000 applications at the PTO. In part, that's because competition has actually lessened, he says, as "smaller patent firms have disappeared or merged into larger firms, and the large firms are not willing to commit to the infrastructure necessary to do a large volume of applications. We've had more and more clients coming to us."

When Spivak looks at the fate of Skjerven and Lyon & Lyon, as well as Brobeck, he notes that all were "involved in a lot of startups, venture capital dot-coms, and a large number of them folded." He adds, "You have to look very carefully at who you are taking on as clients."

FRIENDS AND RIVALS

Another issue for Skjerven, Lyon, and Brobeck was the inability to find a merger partner once problems mounted. Since 1996, merger has been an increasingly common option, with 38 IP firms picked up by general practice firms, says Hildebrandt's Smith. Notable acquisitions include the District's Cushman, Darby & Cushman, which merged with then-Pillsbury, Madison & Sutro, and Houston's Arnold, White & Durkee, acquired by Howrey & Simon.

Both Oblon and Burns Doane report turning aside numerous overtures from larger firms looking to merge.

"We didn't see anything in it for us," says Spivak. "We'd be subject to their management and control, and there were potential conflict problems."

Still, Oblon has no intention of ceding litigation to the general practice firms. In ads, the firm highlights its role in the landmark Festo case, in which name partner Arthur Neustadt argued before the Supreme Court on behalf of the Shoketsu Kinzoku Kogyo Kabushiki Co. Currently, about half of Oblon's work is litigation work, Spivak says.

Also continuing to emphasize litigation is the District's Sughrue Mion, which typically files the second-highest number of patent applications each year. Partner Neil Siegel recently won a victory in an infringement case for the Nidek Co., and the firm represents Daiichi Pure Chemicals in several patent cases.

Managing partner Cindy Weber says the 100-lawyer firm has competed effectively for work by stressing that "you need the underlying substantial expertise to litigate these cases the way they should be litigated."

Hildebrandt's Smith is skeptical about whether technical prowess will sustain a litigation practice in the long run. "Clients see more of a distinction between litigation and prosecution," she says. "IP boutiques tend to view general practice firms as not equivalent, not of the same [technical] quality. Some boutiques still have their heads in the sand on this. Clients want real litigation experience."

THE BIG PICTURE

The boutique best known for litigation expertise -- if you can call a firm with 325 lawyers a boutique -- is Washington, D.C.-based Finnegan, Henderson, Farabow, Garrett & Dunner, both Smith and Zeughauser agree.

One of its marquee names is Donald Dunner, who helped create the framework for the U.S. Court of Appeals for the Federal Circuit. Another name partner, Ford Farabow Jr., serves as lead counsel for GlaxoSmithKline in a patent infringement case. And the firm is opening its eighth office, in Taiwan.

Managing partner Christopher Foley admits Finnegan took a hit when dot-com work dried up, but says its client base was sufficiently balanced that there was other work to do. About 55 percent to 60 percent of the firm's work is litigation, says Foley, with the rest in prosecution and client counseling. When the firm prosecutes patents, he adds, it doesn't try to match prices with lower-cost competitors.

"Sophisticated clients understand that the time to spend money is upfront, not down the road when you're in litigation," says Foley.

When Foley looks at the demise of Lyon & Lyon and Skjerven, one problem he sees is a lack of cohesiveness. "When one partner in a particular group left, others followed."

At Finnegan, he notes, only three partners in its 37-year history have jumped to rival firms. Burns Doane; Oblon; and Sughrue have also lost very few partners. That kind of bond, which has little to do with intellectual property or any other practice area, may ultimately be the reason that IP boutiques in the Washington area thrive.
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