Patexia Insight 54: Is Patent Prosecution Becoming a Commodity?

As we prepare to release our first Patent Prosecution Intelligence Report, we have been hearing from many of practitioners that it is getting much harder to run a profitable practice these days, if they are only doing patent prosecution. This week, we plan to dive into some of the challenges this sector is facing, examine the changes in the landscape and further explore some of the solutions that profitable firms are using.

In the last five years (2014-2018) more than 1.8M patent applications have been filed. Examining the applications by USPTO Art Units and application type, we noticed that more than 90 percent of applications are for utility patents while less than 9 percent are related to design and plant patents.

 

 

 

 

 

Patent prosecution in the US has changed a lot over the last decade. Based on most recent numbers, more than 73 percent of applications are filed by large entities (i.e. a business with more than 500 employees). Since these entities usually file many applications per year, to control the cost, there has been a shift away from the standard hourly billable. Many of these companies now negotiate flat fee or alternative fee arrangements with their patent counsels. In most of these arrangements, the client pays a flat fee of between $8,000 to $12,000 for initial application filing and then between $1,500 to $3,500 per office action. Simple utility applications and design patents even cost less, while bio-tech and life sciences are typically more expensive.

On the other hand, to attract the best talent, top firms have been raising the entry-level salaries for their associates over the past few years. Now in major metropolitan areas, best firms offer $180,000 to $190,000 for junior associates. This includes top boutique as well as AM LAW 100 firms. As a result, all associates, including those in patent prosecution departments of these firms receive higher salaries. This puts even more pressure on the prosecution groups which may operate on a flat fee model with most larger clients.

This flat fee model, poses some challenges to the profitability of the firm since every year the salary of the associates will go up by $10,000 to $20,000 but the firm is not able to re-negotiate their fees with their clients due to cost sensitivity of the client and also fierce competition. That means, if the same associates work with the same clients (which is usually the case), the profit from those clients will go down year over year, even if they send the same amount of work.

The legal industry in general has been consolidating rapidly over the past several years. Our recruiting and merger group at Patexia has seen that the mid-market law firms (e.g., 50 to 200 attorneys) are gradually being absorbed by larger firms as AM LAW 100 firms are expanding their operations globally to take advantage of globalization as well as the growth and rise in Asian market. This has made the top firms’ competition for profitability even harder. As a result, many larger or widely profitable firms are either staying away from low margin practice areas or are dumping those practices. For example, firms such as Quinn Emanuel with a very strong IP litigation practice, has not touched prosecution at all, while some other highly profitable firms such as Paul Hastings have decided to reduce and let go of their prosecution practice over time.

While this has made it difficult for more traditional large firms to compete in the patent prosecution space, it has opened up the door for new and efficient firms who are more flexible when it comes to embracing new business models. Here, we summarize some of the solutions we have seen that firms are adapting for their prosecution groups in this competitive market:

• Expanding to less expensive cities - Some firms are looking at opening new offices or acquiring established practices in more affordable cities (e.g., Atlanta, Phoenix, Denver, etc.) and are moving out of the expensive metropolitan areas (e.g., California or New York).
• Leveraging satellite offices - With cloud computing and accessibility of tools and docketing software from almost anywhere, small and mid-size firms are now more open than before to let their attorneys work from home (e.g., Schwegman Lundberg, or Rimon Law are two firms with flexible policies).
• Leveraging contract attorneys and patent agents - While many larger firms have a very strict policy when it comes to hiring and salary structure (e.g., they do not hire a prosecution associate with 8 years of experience and pay him/her salary of the first year associate even if the person is fine with that), we have seen firms are more open to use contract attorneys or patent agents with years of experience and different hourly rates that are not the permanent part of their firms.
• Leveraging offshore resources - When it comes to cost cutting, some firms are getting more creative to use offshore resources for part or most of their work. For example firms in India now offer application drafting, creative work (drawings), response to office actions, etc. on top of other services such as prior art search. Some firms have incorporated them permanently into their prosecution practice to increase profitability.
• Artificial intelligence (AI) - While AI is still in its infancies when it comes to application drafting, we have seen some startups forming around that and promoting AI-based tools for application drafting (e.g., TurboPatent). We believe, at least, some minimum use of AI-based tools such templating software, drafting USPTO papers or preparing engagement letters will become increasingly popular in the coming years. Aside from that, use of patent analytics such as those provided by Patexia to analyze the behavior of examiners or best practices (e.g., interview or type of response to Office Actions) will become part of the everyday life of patent attorneys which will help make their world more efficient.
• Mergers and Acquisition - One of the most practical ways to control cost and improve profitability is intelligent acquisition or synergistic merger. We have seen substantial rise in law firms’ mergers and in particular small and large IP firms (e.g., Fitzpatrick Cella joined Venable)

Patexia has been active in legal recruiting for IP professionals (attorneys and experts) and has been advising clients on how to improve their profitability using analysis of patent and examiner data in bulk. In fact, many firms have already been contacted by us to verify their data on Patexia (only if they were among the top 500 most active firms in the last five years). And some firms have already pre-ordered a copy of the upcoming prosecution report.

Our data shows 5,430 active law firms in the last five years who have received at least one or more patents for their clients out of 1.68M patents issued to 100K+ entities from 2014 to 2018. In this report, we have analyzed the top performing firms from three different aspects: success, efficiency and activity and in three categories of high-tech, bio-tech and overall. The top 500 firms will be named in the report and the top 100 will receive performance badges that can be displayed on their websites.

In case your firm has not been contacted by us but you believe you should be among the top 500 firms, please let us know. In the coming weeks, we plan to identify the firms that have been abandoning prosecution practice. Stay tuned...