Make or break: why Lovells is ditching referral firms in global IP drive

Is entry into the US and Japan total madness or entrepreneurial genius?

With the rapid international expansion of its IP department, Lovells is making a bet on an unconventional practice area in unstable times.

The practice has grown globally by 50 lawyers to a total 270 in the past 12 months and at the end of last year the firm launched IP groups in New York and Tokyo in what was one of its biggest overhauls of a single practice area. Lovells launched its US IP practice with the hire of partner Veronica Mullally from Orrick Herrington & Sutcliffe in New York in September 2007. Two months later Lovells merged with Japanese firm Kubota Law & Patent, giving it a Japanese IP law capability for the first time.

In January Lovells swooped on Linklaters‘ Warsaw office, hiring IP partner Krystyna Szczepanowska-Kozlowska for an IP push into Central and Eastern Europe.

On the surface they look like just a few carefully timed lateral hires, but in fact they represent the transformation of Lovells’ IP practice from a European into a global department.

No UK firm has ever attempted to break off its referral relationships and try to crack the frenetic US IP market alone. Lovells has judged that the potential gains outweigh any downsides.

Burkhart Goebel, global head of Lovells’ IP practice, says: “Not being in the US has been a thorn in our flesh. It’s the most competitive IP market in the world. You always see the downside, which is the loss of the referral business. Over decades you build up these relationships and they’re at risk.”

Lovells wants to compete instead and build up a team of litigators in New York to try to scratch the surface of the biggest IP market in the world. There is more IP litigation in the US than in any other country, and it often comes at higher rates.

Like any good gambler, Lovells studied the form before putting its stake on the table. The firm has a few trophy US clients such as Budweiser, Merck, Schering-Plough and BlackBerry maker Research In Motion, which feed work into the European practice. The firm surveyed them before jumping in to the US.

“We went to our US clients and we asked them, ‘Who would you hire?’. The options were to take an entire boutique in or hire partners,” Goebel says.

The responses steered the firm to take on partners. Not easy for a UK firm with an average profit per equity partner (PEP) of £572,000, around half that of many US IP competitors such as Latham & Watkins.

“A big-hitting patent litigator is really out of reach of our remuneration system,” Goebel admits. “We target the level below, the young and hungry partners. We tell them we’re happy to share clients and that has an attraction in the US.”

As a result the US team will have to be built up slowly, contrasting with the local way of doing things, where head-turning moves are the norm. When Cadwalader Wickersham & Taft launched an IP team in New York around the same time, it hired high-profile Morgan & Finnegan partner Christopher Hughes, for example.

The Japan venture is a similar gamble and former referral firms there will see Lovells as a threat. One of the firm’s IP competitors in the UK says: “I think there’s a role in helping local Japanese lawyers without competing with them. We’re interested in Japan, but opening isn’t something we would do necessarily.”

But Lovells’ move does tie in neatly with its US venture. Japanese clients see the US as a huge market and will go to great lengths to protect their substantial IP assets there. The same goes for US companies with investments in Japan. If the work starts to flow between the two practices, the gamble will have paid off. But if not, the damage to the referral network could throw a spanner into the entire practice.

Few firms are willing to follow Lovells down its global IP path, but the firm believes there are four underlying factors that will guarantee a return on its bet and leave its competitors cursing.

First, the value of IP assets such as patents, trademarks and copyright has increased considerably compared with the value of other corporate assets over the past few years. Lovells is banking on that translating into fees for the IP department.

Goebel says: “Even at a board level it becomes the core asset of a company. There are many more financial assets these days to leverage those assets.”

Second, with the increase in value, companies are much more willing to exploit their IP assets on an international scale. Lovells hopes to get a big piece of this nascent market by marketing itself as a global IP firm.

“Companies want to exploit their IP portfolio on a global level,” says Goebel. “This is still a young market and there’s a long way to go for it to develop.”

The third factor is the battle for copyrighted media content in the digital age – an age that does not respect geographical boundaries. Readers, viewers and listeners have greater access than ever to entertainment, and companies from different sectors are competing to provide it.

“You have telecoms, print media, even energy companies all competing,” Goebel says. “There’s a battle over the content and that’s a market with a lot of growth.”

Finally, the global IP market is fragmented and there are few big players on a truly global scale. “You still have a market that cries out for consolidation,” explains Goebel. “A typical IP market is 60 per cent in the hands of boutique firms and that’s the type of market you want to invest in.”

Lovells’ global IP expansion is a high-risk strategy. If it fails the lack of future referrals could effectively banish the firm from the US and Japanese IP markets and hurt it in Europe.

But the odds are in Lovells’ favour, not least because IP is a practice area with room for international growth, with the magic circle shrinking their IP practices. There is room for a global player. Lovells is crossing its fingers.