Patent Attorneys vs Lawyers – Aliens vs Cowboys?
Posted at Legal Practice Intelligence - 26 September 2016
by Stephen Butler*
The last two years have seen the ASX listing of three Australian patent attorney enterprises (IPH, Xenith IP and Qantm IP) on what has been a fairly successful basis, if increase in share price, profitability and P/E ratios are anything to go by.
At the same time, we have seen the share prices of firms such as Slater & Gordon and Shine Lawyers slump considerably and one business, Integrated Legal Holdings (ILH), just plain disappear.
Ever wonder what a patent attorney is and why it is an attractive vehicle for capital investment?
The patent profession is a subset of the legal profession, a niche within a niche. Patent Attorneys specialise in the protection of intellectual property (IP), an area of the law that is usually resilient to fluctuations in the economy. People need to protect their IP in good times and bad.
The patent professional usually has two areas of training: the law, to be able to understand and address the legal issues and processes, and, engineering, to be able to understand the technology of the patent they are working with.
But what makes a patent attorney firm a more attractive vehicle for investment than a law firm?
Nature of the Work Performed
The first area of difference between the two businesses is the nature of the work itself. Lawyers’ fees are typically time based. There is increasingly a push to alternative fee arrangements to improve profitability but in essence a lawyers’ revenues tend to be constrained by availability of expertise and people. Of course, some practice areas can be systematised and AI could be around the corner to push down costs but a key profit driver for a law firm is still leverage.
Patent Attorneys do time based billing to a certain extent, e.g. drafting specification, responding to examiners reports, contentious work, but it is not the main volume of transactions. The billing volume comes from small value, high profit transactions that occur during the life of a matter e.g. examination requests, acceptance notice received, registration fee paid, renewal paid and extension requests. These are transactions that can repeat over the prosecution an IP matter. The work here is quite mechanical.
These items are typically billed on a fixed fee basis. Often this work will not even involve the attorney except for reviewing and approving documents produced by support staff and/or a good workflow system.
National Phase Filings
A particular lucrative area of business for a patent attorney is what is known as a national phase filing. Australia is a net importer of intellectual property. In fact, almost 90% of patent registrations in Australia are for overseas registrations. These registrations are fundamentally an extension of work that has already been performed in the originating jurisdiction and hence little effort for the attorney is required even though the process attracts a substantial fee.
The following table shows the numbers of national phase filings (and hence market share) by firm for 2015/16 financial year:
As we can see the 3 listed patent businesses now hold 53% of this market with the 3 biggest unlisted firms holding 26%.
All of these types of transactions are process driven and specialist systems can allow the creation of documents, generation of fees, billing, calculation of follow up dates and even the electronic lodgement of all details with IP Australia using their B2B facilities.
Hence a key profit driver for patent attorneys is technology and process automation. Capital investment into such a business can be made with a clear return. Transaction volumes (that have a high gross margin) can increase dramatically with only a minimal increase in costs.
Another difference between the two professions is that a law firm’s matters usually close within a defined time period (even if some litigations last for a long time) where as a registered patent case will be open for 20 or 25 years and a trademark potentially in perpetuity. Work has to be done to maintain these cases - principally the payment of renewal fees - which is a recurring revenue stream for the firm without the need for a lot of business development. Again this is a mechanical process usually not requiring any involvement from the attorney.
The management decisions here revolve around managing risk versus lowering cost because if a date is missed and an IP right is lost then the firm opens itself up to litigation and negligence claims. Once more good systems and processes can address both issues although some firms outsource this area of the business because of these issues.
The profit driver once more is process and workflow automation. The aim is to build the creation of letters, documents and invoices to require as little manual intervention as possible. Incorporate special standing instructions and other requirements for specific clients into those processes and the handling of renewals becomes scalable at an enormous extent (read high profitability). Hence the existence of a range of renewal outsourcers in the market.
This can be contrasted to law firms where more client work typically needs more people to get the work done. Profit relies on leverage, with the partner dealing out work to lower paid lawyers, and pushing them to work as many hours as possible!
The next difference from a law firm is the location of its client base. Most law firms, outside of the largest ones, only deal with local clients. A patent attorney firm however, even the smaller ones, would have 40-90% of their business coming from overseas, depending on the focus of their practice.
The result of this is that while the accounts must be held be in A$ for reporting purposes, the overseas clients usually want to be billed in their home currency or selected currencies such as Yen, Euro and Sterling. Local clients of course wanted to be billed in A$.
Equally, when an Australian client is filing overseas, disbursements arrive in the home currency of the agent engaged or some other agreed currency. These needs to be billed to the client in A$ and hence the management of realised foreign exchange gain or loss is a key factor.
The profit driver here is the ability to manage the foreign exchange and make money on this by maintaining foreign currency bank accounts, forward buying currency and other hedging techniques on exchange rates. Almost a full treasury function is required and if handled well, further profits can be created without being constrained by human capital.
The Nature of the Client Relationship
The next difference from general law firms is that with patent work a foreign agent instructing the firm is a client on one case and a supplier on another case when they are acting for an Australian client in their local jurisdiction.
This means that quality of work is critical not just from a client service perspective. The client can also be a large referrer of business to the firm. Once more, great technology and processes are key and hence capital investment can drive improvements in quality as much as capacity.
Maintaining the relationship with key agents is critical and hence patent attorneys are usually frequent travellers to both cement existing relationships and grow new ones.
The Asian Market
All of the publicly listed patent businesses have highlighted the Asian marketplace as a focus for business growth.
The Qantm prospectus lists a compound annual growth rate (CAGR) for patents filings worldwide at 5.8% over the last 15 years. It also lists a CAGR of 11.1% for patent filings in South East Asia over a similar period so this is a market that you want to be in.
If we leave China aside, the majority of patent filings within Asia are foreign originating, as developed countries look to protect their assets in emerging economies. In China, driven by government incentives, local filings are enormous but there were still over 150,000 foreign originating filings (12 months 2015) as foreign companies hedge against the risk of future infringement by Chinese businesses.
Australian firms are perfectly positioned to become a centralised “hub” for filing IP matters in South East Asia. To obtain regional protection, US and European businesses don’t want to have to deal with multiple organisations, speaking multiple languages in multiple jurisdictions with different levels of sophistication and quality.
They want a single, English speaking organisation to manage their IP in the region and they are willing to pay a premium for that. If the Australian firm can also apply the same principles of process automation and funds management, then the results can be lucrative.
So with patent attorneys we have specialist, highly profitable businesses that operate in a generally recession-resistant market with high growth opportunities in the Asian region.
They have typically been run in a conservative manner with minimal capital investment because of the limitations of the partnership structure.
Capital investment can be used to create and improve systems to increase production capacity with only a minimal increase in operating expenses, at the same time minimising risk. Effective treasury facilities can also facilitate further profits.
If I had unlimited funds, I know where I would be investing.
*About the Author
Stephen Butler is the CEO of Red Rain (www.redraincorp.com), a software and consultancy business that operates in the legal profession with firms in Australia, NZ, the UK, the US, Asia and South Africa. Stephen has over 25 years’ experience with law firms and patent firms in particular. Projects have been mainly around implementing systems such as workflow, billing, accounting, process automation, marketing but also business reviews, work practice reviews, system integration, custom developments and management reporting.
© 2016 Legal Practice Intelligence
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