Patent Law

A New Kind of Patent Boutique?

By Gary Odom and Jordan Kuhn

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.

One solution that libertarians would favor for increasing the supply of talent is to deregulate the profession.  Publicly traded corporations, investment banks, and consulting firms hire from both business schools and law schools.  (In fact, private equity accounts for part of the brain drain that's driven associate salaries up at top law firms.)  But law firms hire only from law schools.  Why should that be?  State bar exams have little or nothing to do with practicing securities or patent law.  The multi-state portion of these exams is based on the common law of England from over 500 years ago!  It has to be -- that's the only body of law in English that doesn't change from year to year.  The corporations that got Congress to create exceptions for patent agents and CPAs to practice before their respective administrative agencies knew that there was nothing special about law schools a long time ago.  When will our profession give up our pretentious game of arguing that law is so different from any other kind of professional practice?  The benefits of cross-disciplinary work would more than outstrip the costs of less uniformity in our thinking about legal doctrine.  I would love to try the experiment of teaching business students a single class on how to read case law and then sending them off to a firm as summer associates without telling the firm which students were business and which law school students.  How many law firms would be able to tell the difference by the end of the summer?

But deregulation won't happen so long as a small group of professionals continue to earn their living working for the state bar associations and ABA.  This group is small, but vocal and well-connected in politics.  In effect, they're no different from the toll-booth workers unions in Illinois.  Nobody wants toll-booths; but nobody has enough energy and time to fight as hard as the toll-booth workers.  Thus year after year and decade after decade nothing gets done.

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.

Full post as published by The Patent Prospector on April 20, 2008 (boomark / email).