Thayne Forbes, joint managing director and expert witness at Intangible Business, examines ways that lawyers can leverage intellectual assets to not only benefit the managmenet of law firms, but also win and develop clients

Introduction
Trademarks and names are incredibly powerful and valuable assets. Other types of IP also have significant value, be it patents, copyright, software or customer lists. IP contributes significant value to businesses in all sectors and industries. Law firms are no exception.

Take Halliwells. When Halliwells went into administration in July 2010, it wasn’t because its brand or reputation had been damaged. It was largely due to the recession impacting turnover by 14 per cent, from £78m in 2008-09 to £67m for 2009-10, while its costs remained high, particularly due to substantial property obligations from a deal done at the top of the boom market in 2007. The same is often the case in other industries; businesses often fail not because their brands lose relevance but because of operational inefficiencies.

While the administrators said “Halliwells has a great reputation”, it looks like its name will not remain following the sale of divisions to rival firms. Its reputation, however, would have contributed significantly to its successful sale and transition and still have value to its ex-partners and employees. The brand would also be valuable if a group wanted to revive it.

There are a number of different strategies law firms can employ to help safeguard and build their own brands and businesses. Increasing knowledge and understanding of how to leverage IP assets not only benefits the management of law firms but also with winning and developing clients by providing commercial strategies to help develop and solve client issues.


1. Ways to leverage your own IP assets

The function of the brand
Attitudes towards law firm brands are beginning to change. The prevalent view has been historically that business is generated by individuals and the firm’s name is largely irrelevant  – partly a result of being only a few decades ago that marketing for law firms was not allowed and even less time ago that the same was true for barristers. The current view is that law firm brands and marketing play a much larger role – way beyond the production of branded pens, umbrellas and note pads.

A firm’s reputation is pivotal for three key purposes: recruiting top-class people, attracting and retaining clients and charging appropriate fees. Quality and trust are essential components of any law firm’s brand. The law firm market is, simply, split into the Magic Circle firms, Silver Circle firms, regional and sole practitioners. Beyond size, it can be hard to differentiate between them. However, some firms have succeeded in carving out niches and are known for something other than their size or location, such as Rouse for IP, Schillings for reputations, Herbert Smith for litigation, Farrer & Co as solicitor to HM The Queen.

There is always conflict between the role of the individual and the role of the brand. Usually the brand plays a more dominant role - a controversial view that is often understandably disputed by lawyers who believe it is more due to their abilities. The ideal situation is for the firm to be less dependent on individuals for generating and developing work and more reliant on the brand. This avoids the practise of whole teams jumping ship, or an individual disturbing the status quo, like when Fiona Shackleton became an individual celebrity divorce specialist rather than Farrer & Co which she then left – taking this celebrity status with her.

Charging for using IP
One way of leveraging the value of your IP is to make your people pay for it. Once its value has been determined and justified, an internal charging mechanism can be put in place to force those using the brand to pay for it, usually by means of royalty payments. This is common practice in many other commercial organisations. It has the benefit of forcing people to recognise and appreciate the value of the brand they were previously using for free. It also helps build a justified pot of money which can then be invested in continuously building the brand.

The brand contribution made by different departments would vary according to the strength and value of the brand in their sector. For example, the shipping department in a firm known for shipping could pay 20% of earnings whereas as the property department in the same firm may pay just 5%. Overseas offices should also be subject to the same charging structure, paying for the use of the brand. This enables managing partners to continually monitor the health of their brand by territory and department from not just an income perspective but by the measures that the brand is comprised of – the firm’s values.

As the brand charge is linked to the firm’s turnover, not profit, it reveals the best and weakest performing units. For instance, if the shipping unit’s profit without the charge is £5m this could be masking operational inefficiencies as including a charge of say £10m would reveal an actual £5m loss.

Internal licensing is commonplace and a much talked about strategy in many international commercial organisations, particularly with IP-driven businesses in the telecoms, pharmaceutical, technology, fashion and retail sectors. It is found to be an effective brand management tool with added tax and operational efficiency benefits. Firms such as BP, Nestlé and Vodafone have transferred their brands into offshore vehicles from which they are licensed to their operating units, and this provides a good platform for internal licensing.

Financial IP management
There are a number of options available to leverage the brand and IP assets still further. Commercial structures can be developed to transfer a firm’s IP to a special purpose vehicle (SPV) and focus on its development there.

The internet has changed the way many law firms receive work, with many lead-generating websites appearing such as Contact Law, Quality Solicitors, Find Law or Search4Solicitors. Many law firms have also established their own lead-generating websites which have proven very successful. For instance, Bartletts has www.bartlettslaw.co.uk, www.workrelatedinjury.co.uk and www.landlordsolicitor.com; Irwin Mitchell has www.irwinmitchell.com, www.holidayclaims.com, www.patientlawyers.com, www.mesotheliomamatters.com and www.theheadinjurysite.com; and Withers has www.withersworldwide.com and www.employmentrights.co.uk.

Ownership of IP assets such as these domain names or customer databases can be transferred to a separate company. This new SPV can then charge a fee to the law firm for leads received and pay the firm a fee for managing the operation under license. Leads which the law firm is unable to fulfil could then be sold on to other law firms.

While this structure may generate tax efficiencies, the key benefit is operational efficiency. The assets can be managed more efficiently as a discrete function, allowing partners to focus on client services, managing the practice and enhancing their traditional relationship-based marketing activities. In addition, its structure enhances the appreciation of the contribution these assets make to the firm, it is appealing to outside investors and can be built as a stand-alone entity, thereby spreading the risk.

Law firm brands could also be transferred to an SPV in much the same way, which has similar management, operational and financial benefits. This can be used in many ways, for example: to help attract outside investment; or reduce and manage pension deficits by providing the IP as security to the trustees for pension contribution obligations. These are common strategies for commercial organisations seeking management and tax efficiencies through their IP assets.

Investment, expansion and extension
The 2007 Legal Services Act invites external investment and ownership of law firms as well as allowing firms to provide non-legal services. When alternative business structures (ABSs) are permitted from October 2011, outside investors will be attracted to strong, powerful brands. Two top 30 firms are already putting structures in place for private investment, according to Barclays Corporate. This is likely to open up the legal market making it a much more competitive and brand-focused environment.

Franchising a law firm’s name and operational capabilities is one option available to extend a firm’s reach. This model has been popular with not only fast-food and retail businesses but also schools and universities, such as Harrow and Harvard, in China. If a UK law firm has a particularly strong reputation or brand, this could be a more cost effective solution to expansion than establishing an owned office.

Licensing is a common route for many consumer-facing and business brands. Many law firm brands have resonance with a particular consumer group – such as Farrer & Co. with the aristocracy. In this example, Farrer & Co. would have an opportunity to extend the relevance of its brand to other related areas, employing the capabilities of others through a considered licensing programme. This may appear initially a little far-fetched but while a Farrer & Co. branded fragrance is clearly a step too far, how about a Farrer & Co. wealth management conference, fund management service, premium auction house, or book on estate management? This could be developed very carefully over time, extending its relevance and client base, reducing its reliance on its legal services alone and leveraging two of its most valuable assets: its brand and customer relationships.

2. Ways to leverage clients’ IP assets

These same principles can be applied to clients’ businesses. Understanding the following strategies which leverage IP asset value will help win new clients and develop existing ones.

Business management
All businesses have IP of some description. Much of this can be protected legally through registered rights, such as trademarks, design rights and patents, and some is protected by unregistered rights such as copyright or common law rights. Along with the basic registration services, IP requires continuous protection and enforcement. Competitive activity also needs be monitored.

Risk management
Legal teams should help manage their client’s IP-related risks. For example, if a client’s IP is being infringed by a dozen different companies, with differing risks and potential damage, but budget is available to pursue only two, which two do you go after? A risk assessment looks at the potential implications of pursuing infringements and assesses where most damage is likely to be caused to the client’s business and reputation, and ultimately its value. This is then coupled with the likely costs and probability of success to arrive at an outcome where resource can be allocated most effectively to protect the client’s IP.

Disputes
As 80% of business value often resides in IP, every dispute should consider fully the potential impact on a client’s IP – even if the claim seems removed from it. The key question to always ask is ‘has their brand or reputation potentially been damaged?’ Damaged brand or reputational value can (and should) be quantified and presented as a head of claim. If such damage has been sustained and quantified, this opens up a whole new area which is likely to significantly increase the claim value and work required.

Reduce pension deficits
As company pension fund deficits are currently artificially high due to low asset values and increased liabilities, many companies are struggling to source sufficient cash flow to fund the required contributions. Pension funds are also at risk of losing their main source of income if the company is at risk of default. One solution to counter these risks which reduces the deficit, improves cash flow and provides security to the pension funds is to leverage the company’s IP.

John Lewis, M&S and Sainsbury’s have done this with property, ITV with its digital channel operator SDN, Interserve with PFI contracts, Diageo with whisky stocks and GKN used a mix of assets including its trademark. The IP is transferred into an SPV which the pension fund has rights over in event of default and the operating business pays a royalty for using the brand, which is used to fund a revised payment plan to the pension fund. In return for security, cash contributions can be temporarily lowered. The benefits to the pension fund include: reducing their deficit; and having security over a valuable asset they can sell in event of default. There are also benefits to the company including lower short term contributions and leveraging their IP value.

Attract finance
Transferring IP into an SPV also enables third parties to invest with the backing of a ring fenced and valuable security. Domiciling the SPV in a favourable jurisdiction can also have tax advantages. IP is an attractive asset for these sorts of transactions because they are relatively easy to value, separate, market and are usually free of existing financial obligations, unlike property for instance which is often encumbered.

Franchising
Many retail businesses are built through franchising which relies heavily on IP such as software, design rights, trademarks, copyright and know-how. Developing and protecting clients’ franchising strategies and interests is an important way of building relationships with clients and generating new revenue streams for both them and you.

Licensing
Licensing covers many aspects of IP, from a record label’s copyright, an engineering firm’s software, a pharmaceutical company’s patent or lifestyle brand’s trademark. All these types of IP require detailed agreements governing how third parties use your client’s IP. There are also many other aspects of licensing requiring legal involvement, such as ensuring adequate protection, collection of royalty payments and monitoring for any infringements.

Restructuring
Group restructuring often requires the valuation and consideration of IP assets. If a business is to be demerged or sold then its IP may need to be transferred in order to effect this. However, this is fraught with difficulties given the unique and constantly changing attributes of IP. This often gives rise to legal issues which can be overcome with timely legal input.

Inter-company payments
Large, international companies often have complex structures for cross-border, internal payments. This often reveals many transfer pricing issues which require prevention and resolution, such as ensuring all transactions are carried out on an arm’s length basis with adequate documentation to substantiate it. IP is one of the most contentious areas of transfer pricing-related disputes with tax authorities. Being aware of the issues will benefit clients, potentially saving them substantial risks and costs.

Acquisition due diligence
IP due diligence is an important component of any acquisition. This due diligence covers everything from checking the validity of the IP rights, identifying potential risks to advising on appropriate IP value. Assisting clients at this early stage of company ownership provides an excellent route in to assist the client with other related services in the future. This is not always done as fully as it should be, and then the problems only arise later when deal related decisions can no longer be reversed.

Importance and opportunity
IP is generally one of the most valuable assets within the organisations of both law firms and their clients. Understanding how IP generates value and being able to spot opportunities will benefit not only law firms themselves but also their clients. IP should not just be confined to the IP department. All lawyers in all departments should be aware of its importance, pervasiveness and the opportunities and threats it presents.

Thayne Forbes
Thayne Forbes is joint managing director and expert witness at Intangible Business, the IP valuation consultancy.