« Avoiding Consistency Traps | Main | Facile Treatment »

April 20, 2008

A New Kind of Patent Boutique?

The state of the legal profession is in flux. The exogenous forces of globalization and technology are straining and breaking the traditional business frameworks for the provision of legal services. How might the future look?

On Friday I attended a panel on the "State of the Legal Profession" held at Stanford Law School. The panel was well-designed, with a variety of perspectives from lawyers in-house, at law firms, in academia, or in public interest. It's hard to get six lawyers to agree on anything, but it seems that everyone more or less agreed that the traditional law firm business model is not holding up well in the 21st century.

There are many reasons for this, one of which -- the inaccuracy of the billable hour as a metric for the value of legal services -- I've discussed in a previous entry on my personal blog.  Another reason that was obvious after hearing the panelists is the relatively inelastic supply of talent graduating from law schools every year.  That pool of talent hasn't grown much in decades, even as the demand for legal services has exploded.  Public interest advocates are seeing more and more people opt for pro se representation in court or no representation in transactions (see, e.g., subprime mortgage lending).  Law firms are raising salaries higher and higher to attract talented associates, but also increasing leverage (i.e., the ratio of associates to partners) in order to continue attracting talented partners (profits-per-partner being a key metric for partners in deciding where to work).  Meanwhile in-house counsel is facing increasing pressures from company management to keep down the costs of legal bills as global competition narrows the margins on products and services.  Another time I may elaborate on how some big law firms are beginning to resemble a Ponzi scheme in this regard.  And anyone keeping tabs on the credit market knows how ugly deleveraging can get.

So what can be done?  There's no choice for now but to get more efficient with the supply of talent that we've got.  My earlier post gave a suggestion for how more efficient incentives could reduce costs for certain kinds of transactional work.  But it didn't elaborate on how rebundling of ownership and control is capable of solving a whole class of principal-agent problems in legal services.  A similar solution could be used by many companies to reduce the costs of procuring and enforcing patents.

The basic contractual framework for accomplishing this is simple, although the practical execution is difficult, requiring human capital with a high-level of expertise in three different, (now) weakly-overlapping professional disciplines.  Instead of paying a law firm by the hour (or paying a high fixed-rate) to prosecute patents, clients could pay a much lower (or zero, or negative) fixed-rate for their work, and then give them a slice of any future royalties earned on the portfolio.  Lawyers who (a) believe in the value of their services, (b) understand the technology patented, and (c) believe in the prospective value of the market that the patents are meant to cover should be willing to accept lower rates in exchange for a slice of future profits.  The trouble is that there just aren't that many lawyers who understand law, technology, and venture capital investing.  And the ones that do (think of senior partners at big law firms) generally are too comfortable with the status quo.

Not every company is going to feel comfortable with doing things differently, especially if the current system is meeting their needs.  Nonetheless the potential is there for forward-looking clients and entrepreneurial patent lawyers to innovate on the traditional business model, and maybe even lead the way into a better model for legal services in every market.

UPDATE: Thanks to IPKat I have learned that the French bar is in the middle of a protracted struggle to keep scientists and engineers out.  Not surprising, but comforting to know that we're not the only ones with this problem given the implications that our excessive domestic regulations have for the United States in competing in a global economy.

Posted by Michael Martin at April 20, 2008 2:51 PM | Patents In Business

Comments

The problem with giving the attorney a portion of the royalties is that not all patents are obtained for licensing purposes. Many patents are obtains for defensive purposes. Thus, when would the attorney ever make anything for the time put into drafting and prosecuting the patent. Second, it takes years for a patent to issue. It may take even longer for any royalty payments to be received. Most attorneys, especially in small boutiques, do not have the funds to survive while waiting for 3 or more years to be paid. That model may be appropriate in some special circumstance but as a whole it is not practical.

Posted by: jay at April 20, 2008 8:08 PM

What jay said.

Not to mention that enforcement of the patent (and, come to think of it, choosing not to abandon the case during prosecution) is at the discretion of the patent owner, as it should be.

If the incremental cost of filing a case is low (or zero or negative, as you suggest), then clients will file lots of cases. Because the incremental cost of enforcing a patent is high, clients will enforce few.

The billable hour may be inaccurate as a practical matter, but the number of hours does correlate with the amount of effort that a lawyer puts into a case. I do not believe it to be the source of all ill in the law firm model.

Rather, I think we'll continue to see a devolving of law firms, with respect to patent practice. Many corporations now hire experienced lawyers who are in their own or small firm practice -- lower rates, yet greater skill and experience. I think this will continue.

Posted by: pikkumatti at April 21, 2008 6:57 AM

Jay and pikkumatti,

I agree that such a patent boutique would not be appropriate for every client and every matter. In particular, any company that sees the current hourly fee arrangement as fair will not be interested. But there are plenty of clients out there that can't afford qualified patent counsel. Those clients might be more willing to split the pie, especially when that aligns their outside counsel's interest with theirs. Not a solution for the entire market by any means; but then no law firm ever is.

To address a more specific point by pikkumatti: if the patent boutique were actually the legal owner of a patent portfolio, it would have discretion to abandon applications (or the enforcement thereof) without violating any rules of professional conduct.

...so what's the difference between this kind of patent boutique and Intellectual Ventures, RembrandtIP, Altitude Capital, or contingency fee counsel like Niro Scavone?

Posted by: Michael Martin at April 21, 2008 7:26 AM

I'm not saying the contingency arrangement would never work. I know people that do this once in awhile.

My point is that the market will not favor this type of arrangement as the solution to the question "So what can be done?" that the original post seems to think it is. That's all. You're asking companies to give up their rights to exclusive exploitation of their IP (in your response), and you're asking patent attorneys to work for free (in the short term) based on their initial guess of the market value of a technology that they are learning about as they write. I don't see that working to any substantial extent.

Posted by: pikkumatti at April 21, 2008 8:35 AM

At least in the patent field, inventors have a choice as to whether to (1) go it pro se; (2) engage a patent attorney to write, file and prosecute; or (3) engage a patent agent, at a much lower hourly rate.

Where is the problem here?

Posted by: bierbelly at April 21, 2008 9:02 AM

bierbelly (and all),

You're right that there's no problem on the prosecution side. The supply of talent there isn't a problem -- in addition to patent agents in the U.S., there are plenty of good ones now in India.

But I still think the success of new business models like RembrandtIP, AlsetIP, Altitude Capital, and others demonstrates that there are unmet client needs on the enforcement side. Creative and non-risk averse lawyers are going to find ways to meet those needs.

Posted by: Michael Martin at April 21, 2008 9:16 AM

Michael, a few comments.

First, I nominate "Big law firms are beginning to resemble a Ponzi scheme" for understatement of the year.

Second, I don't think you can use Rembrandt etc. or Niro to model the prep/proc side of the business. These groups come in once it's already clear (a) what rights they presumably have or will be acquiring in the form of a patent and (b) the amount of $$ they might be able to squeeze from a party with lots of money by asserting those patents. If they spend a few million every year for a much larger payout every two to three years (plus the licensing revenue that the period victory induces from defendants who'd rather pay than expend resources fighting), it's a no-brainer for them, just as it's a no brainer for Pfizer to spend millions trying to keep Teva off the market to protect a drug that's making hundreds of millions of dollars a year. But up front, at the time the application is being drafted, it's iffier (in the case of pharma, much iffier), which is why what Pfizer is willing to spend on prep/proc is only a fraction of what it would be willing to spend in litigation (at least until it becomes clear that a particular app covers a very promising compound). So why would I as a prep/pros person want to work on the basis of delayed gratification which may never pay out? Maybe if I thought a client had a good product and a good business model and good people who could bring a product to market, I'd be willing to take part of my pay as equity, but otherwise why would I want to work for free?

Remember too that there's a risk to me by working at an hourly rate: I pass up the opportunity have equity in something big, in exchange for the security of getting paid today. This is something I sometimes point out to (cheapskate) clients who in effect want me to work for free, without even offering me equity (which I probably wouldn't take anyway): they're coming to me b/c they want to make lots of money. If they eventually make lots and the patent I got them plays a role in that, I don't share in their riches; if they want someone who's willing to work for free in the hope that there's a larger payout later, they're free to look for that sucker, er, practitioner.

Posted by: Federally Circuitous at April 21, 2008 12:52 PM

Right on, FC!

I hear this all the time, "This is the greatest invention of all time. It's so great, the big companies will pay me millions of dollars to not make it because it will put them out of business if I do!!! So how much will it cost me to get a patent?"

"Well, it generally could cost anywhere from $10k to $20k."

"What?! I can't afford that!!!"

Like you said, let some other sucker do that work.

Posted by: PT at April 21, 2008 1:59 PM

Thank PT. I *am* aware of at least one case where the attorney took equity and the gamble paid off. But you and I both know that probably 95% of patents are commercially worthless; I'll settle for my hourly fee, thank you. (If one of my clients invents a foolproof method for predicting the future, maybe I'll change my tune. But then I'd switch careers and become a stockbroker.)

Posted by: Federally Circuitous at April 23, 2008 2:22 AM

Posted by: Lawrence B. Ebert at April 23, 2008 3:52 AM

Lawrence:

You failed the "competent to analyze blog entries" test. I didn't write this entry. Michael Martin did. I was even polite enough to not comment on it.

What did I write that put your knickers in a twist?

Posted by: Patent Hawk at April 23, 2008 8:01 AM

A comment of sorts to Michael Martin/"PatentHawk the blog" may be found at

http://ipbiz.blogspot.com/2008/04/plenty-of-lawyers-available-to-staff.html

Whether "patenthawk.com/blog" passes branding 101, trademark 101, or Raffles v. Wichelhaus is a topic for the blogmaster. If you allow stuff on the blog with which you don't agree (? --> I was even polite enough to not comment on it), the ambiguity is yours. A related issue may be found in commentary on the ill-fated patent troll tracker about Niro. Was Frenkel responsible for the (tasteless) comments of others?
Opinions differ.

Individually, I would have trouble with ANYONE who thinks Gary Boone invented the integrated circuit doing ANY patent work for me. Is that platinum work, or fool's gold work? Again, opinions differ.

April 24

Posted by: Lawrence B. Ebert at April 24, 2008 3:42 PM

Thanks for reading, Mr. Ebert.

You wrote: "If you allow stuff on the blog with which you don't agree (? --> I was even polite enough to not comment on it), the ambiguity is yours."

By the way, Michael Martin does not work for me. He's just been blogging on the Patent Prospector because he wanted to.

I suppose the Patent Prospector byline: "an open forum..." has no appeal to you. Or perhaps your thought it just a rube ruse, like Fox News "fair and balanced."

Upon reflection of your insight, it now seems to me such tolerance smacks of a pandering democratic urge at comity most unbecoming. Practically positively anarchist.

That posted blogroll listing on The Patent Prospector: a real sleaze move, huh? I noticed you wouldn't stoop so low on your blog to mention other bloggers in the patent community.

So, I must apologize for forebearing others opinions, and even going so far as to allowing others to express themselves on a forum sponsored by my organizations.

Michael Martin, either learn to toe the line or put a sock in it, pal.

Thank you Mr. Ebert.

Posted by: Patent Hawk at April 24, 2008 9:20 PM

Concerning your words --I noticed you wouldn't stoop so low on your blog to mention other bloggers in the patent community. --, had PatentHawk (the person) bothered to check, he would have found PatentHawk (the blog) is explicitly cited in 53 posts on IPBiz (Patently-O 60 times).

IPBiz does not have a blogroll, but does mention other bloggers in the patent community. The two are different concepts. Blogrolls sound in the mutual backscratching of citation daisy-chaining in the science (and academic legal) communities: "I'll cite you if you cite me." Many patent blogs (NOT including patenthawk the blog) do not mention IPBiz, likely for that reason. As one specific story, shortly after IPBiz discussed the topic of citations to blogs, by law review articles, using Patently-O as an example (Patently-O being the most cited patent blog), IPBiz (listed as "Ebert") was removed from the Patently-O blogroll ("friends"). On the flipside, Patently-O lists
troll tracker TWICE as a friend, even though that link, for most mortals, is now useless. In the end, do you think your comment about "stoop so low" was a platinum concept? It might appear that patenthawk the person elevated form over substance, a base metal concept.

I don't understand your point about --Michael Martin does not work for me--. First, no one said he did. Second, are you implying that if he did, you would not post his material? Third, the issue is the posting on patenthawk the blog of material with which patenthawk the person (apparently) does not agree. Many news organizations post a spectrum of views, but they typically have disclaimers like "the views expressed ..." Otherwise, one has the maxim "silence implies consent." (Thomas More lost his head anyway.) I seem to remember that when Martin posted (the day after the "Gary Boone invented the integrated circuit" discussion) there were a few warnings in his post. In the end, it's your blog.

The text --Individually, I would have trouble with ANYONE who thinks Gary Boone invented the integrated circuit doing ANY patent work for me.-- was directed to how I do business, not how you do business. I generally find it useful to know "who" made an invention, "when" they made it, and "what" the consequences were, all of which were missing in Lemley's law review article "Patenting Nanotechnology."

Posted by: Lawrence B. Ebert at April 25, 2008 4:01 AM

@Federally Circuitous

"Remember too that there's a risk to me by working at an hourly rate: I pass up the opportunity have equity in something big, in exchange for the security of getting paid today."

As Berkshire-Hathaway has demonstrated year after year, and deal after deal, you don't have to accept more risk if you are able to distinguish between equity worth owning and equity worth leaving on the table.

Posted by: Michael Martin at May 8, 2008 9:57 AM