Thursday, May 8, 2008 Volume 6, Issue 18 |
 This Week 1. Derek Schutz (Redwood Analytics) assesses the economics of law firms and how it impacts new partners 2. Christopher C. Larkin (Seyfarth Shaw LLP) examines the likelihood of confusion in trademark law Next Week's All-Star: DPeter Brown (Baker & Hostetler LLP) 1. Derek Schutz: As a new partner, you are still a lawyer, but remember that a law firm is a business
PLI: Lawyers can be unprepared for the realities of partnership. How do you manage your practice most effectively? How do you make an economic impact at your firm in your new role? How do you increase the size of the profit pie so you can get a bigger piece?
DEREK SCHUTZ: To start affecting the profits of their firm, legal professionals must understand one basic reality. Law firms, for all their cultural intricacies, are businesses, and like all businesses their profitability is guided by a number of basic factors or drivers. Understanding these drivers, and more importantly their interaction with one another is the first step to the holy grail of larger profits.
Production Value: In this context, production does not refer to utilization (which is discussed next) but rather the long term expectations of full capacity and set market rates. In the short term, you may be able to exceed your expected production levels, but in the long term, production value grows by a) increasing the number of individuals available to work; b) increasing the number of hours expected from the current individuals; and/or c) increasing the standard market rate. Note that each of these options has repercussions and may or may not be available at any given time.
Utilization: Utilization measures the portion of actual billable hours relative to the hours you are expected to work. If you expect to work 2000 hours and you only achieve 1500 hours you have lost 25% of your potential revenue simply by not having enough work (or choosing not to accept work). While having an extremely poor utilization rate is not a best practice, it is often useful to have some excess capacity. Why? Consider what happens if you are at or above capacity long term. If a particularly "juicy" bit of work comes up, your availability to represent the client becomes limited, quality of work may not be to your firm's standards, or you may have to make some sacrifices in choosing to take this case.
Realization: At its most basic level, realization measures the value of work you have accepted versus the expected value of your time. It can be thought of as pricing demand for your work. If you feel your work is in demand, your realization should be relatively high, if it is not, then conversely, you could see a lower realization. As long as you have priced your time reasonably, realization rates are a very good indicator of your relative contribution margin percentage.
Leverage: In this framework, leverage refers to the art of staffing matters to optimize profit margins. Leveraging work allows for an individual's time to be spent on work which is most appropriate for their skills and tenure. For example, proper staffing of a case will free up an attorney with specific expertise to work on premium work, while allowing for more junior attorneys (or other staff) whose skills are more in line with a particular job, to work on those matters. To fully appreciate the value of leverage you must realize that profitability is not synonymous with revenue and that a highly leveraged matter that brings in little revenue often is more profitable then a poorly leveraged matter that brings in a lot of revenue.
Time: Time refers to the speed that it takes to receive cash on the work that is done. Within this category, there are two main concerns that affect profitability. The first, and by far the more critical of the two, is the probability of collection as inventory (work in progress or receivables) age. Intuitively, most people understand that as inventory ages there is a greater likelihood of default (if you receive a bill a year after work was done, you are less likely to pay it then if you received a bill promptly).
The second concern with time or speed of payment comes from an economic perspective (the time value of money). A dollar received today is worth more than a dollar tomorrow, whether it be in your personal finances or business.
A word of caution when viewing data relevant to the topics above: improving one of these drivers, but ignoring the others may not improve your profits. Agents of profitability do not work in a vacuum, but rather in concert with each other. For example, one of the easiest ways to improve utilization is to accept work at a highly discounted rate, work you would otherwise not accept. The outcome of this is a definite improvement in utilization, but a drop in realization. The resulting profitability now becomes a measure of the rise in productivity versus the fall in achieved rates. The closer we get to the margins the more important it is to have a reliable method that is able to determine where the tipping point lies.
Finally, knowing what to do and how to proceed when you reach your conclusions becomes the most important step. Historical data should be used to manage future performance by understanding the results of prior decisions. Remember that information is only truly valuable if used to instigate action.
While the actions you take will be undoubtedly influenced by factors beyond your control, managing your business effectively within your constraints will go a long way to ensuring an economically sound practice. Fortunately, if you understand the fundamentals, many firms have financial staffs and/or tools you can leverage. They will enable any partner, new or experienced, to efficiently control their bottom line and focus more time on the practice of law, rather than the business of law.
CHRISTOPHER C. LARKIN: In theory, there are numerous factors that are relevant to the determination of likelihood of confusion under the seminal decision in In re E.I. duPont de Nemours & Co., 476 F.2d 1357, 177 USPQ 563 (CCPA 1973). As a practical matter, however, the limited evidentiary record on the ex parte examination of an application typically results in the examining attorney's focusing on the similarity of the marks and goods. The PTO has developed form paragraphs addressing these two duPont factors and summarizing the law that examining attorneys are instructed in the Trademark Manual of Examining Procedure ("TMEP") to apply. Frequently-applied principles are discussed below. Most of them limit the flexibility of the applicant in responding to a § 2(d) refusal.
Similarity of the Marks: The similarity of the marks is determined by a comparison of the marks, in their entireties, as to appearance, sound, connotation, and commercial impression. The comparison is made from the prospective of the average purchaser of the applicant's goods, who is deemed to retain a general, rather that specific, impression of trademarks, including the registrant's mark. The comparison is also limited to the mark as drawn in the application and as shown in any cited registrations; extraneous matters that are present when the marks are actually used, such as house marks and trade dress, are irrelevant. As a result, the applicant cannot rely upon features of its own actual use of its mark, or of the provable actual use of the cited mark, that are not present in the application or cited registration.
The degree of similarity required to support a finding of likelihood of confusion depends in part upon the similarity in the relevant goods or services. If the relevant goods or services are identical, a lesser degree of similarity between the marks is required for confusion to be likely.
Although marks must be compared in their entireties, examining attorneys often cite and rely upon a rule that one portion of a composite mark may be "dominant," and appropriately given greater weight in the comparison, because it has greater source-identifying significance than another portion. Generic or descriptive portions of a composite mark are usually not considered to be dominant. Words are generally found to dominate composite word-and-design marks because they are employed when the marks are spoken. The effect of this rule depends upon whether a common element of the applied-for and cited marks is a source-identifying feature, or an unprotectable element.
Examining attorneys also frequently invoke a rule that the addition of an element, such as the applicant's house mark or generic or descriptive matter, to a mark shown in a registration does not avoid confusing similarity. With respect to the similarity of marks in sound, examining attorneys also frequently invoke a rule that there is no single or "correct" way to pronounce a mark. This rule limits the applicant's ability to rely upon a single or promoted pronunciation of its mark to avoid aural similarity with the cited mark.
The PTO applies the so-called doctrine of "foreign equivalents" in the course of making § 2(d) refusals (as well as on § 2(e)(1) genericness and mere descriptiveness refusals). This doctrine requires the translation of foreign words from non-obscure languages into English for purposes of comparing them to English-language words in registrations. The equivalence pertains primarily to similarities in meaning of two marks, so applicants can still argue that differences in sight and sound may be sufficient to avoid a likelihood of confusion. The PTO also applies the doctrine of "legal equivalents," under which a pictorial representation and its literal equivalent may be found to be confusingly similar. As with the doctrine of foreign equivalents, the similarity flowing from the doctrine of legal equivalents primarily focuses on similarity in meaning, so again the applicant can argue, to some degree, that differences in sight and sound are sufficient to avoid a likelihood of confusion.
Applicants frequently attempt to show that marks are not confusingly similar by making of record third-party registrations of the same or similar marks, or of portions of the pertinent marks. Although examining attorneys frequently rely upon third-party registrations, without evidence of use of the registered marks, to show that goods and services may emanate from the same source, applicants' evidence of third-party registrations is usually given less weight or may be disregarded entirely unless the number and nature of the registrations make them probative to show, for example, that common portions of the pertinent marks are "weak" because they are generic or descriptive terms, or otherwise have significance with respect to the pertinent goods.
Similarity of the Goods and Services: The degree of similarity required for confusion to be likely depends in part on the degree of similarity between the relevant marks. If the marks are identical, the degree of similarity between the goods or services necessary for confusion to be likely declines.
The fundamental rule applied by the PTO on this factor, and the one that most significantly restricts the applicant's ability to argue against a § 2(d) refusal, provides that the comparison of the relevant goods or services must be based upon the identifications of goods or services in the subject application and the cited registration, regardless of what the parties' actual uses of their marks are. For example, if "shoes" is the identification of goods in an application or registration, and the application or registration contains no restrictions or limitation on the goods, or on the channels of trade or classes of customers for the goods, the identification will be deemed to include all goods that fairly fall within that identification, sold through all normal channels of trade and to all normal classes of customers for such goods. This rule would preclude the applicant from arguing, on the basis of extrinsic evidence, that its or the registrant's actual use of its mark on goods identified as "shoes" involves a narrower subset of those goods (such as hiking boots), sold through a narrower channel of trade (such as sporting goods stores), to a narrower class of sophisticated customers (such as outdoor enthusiasts).
Identifications involving terms such as "shoes" are not susceptible to narrowing by extrinsic evidence, but more complicated, technical, or otherwise vague identifications whose meanings are not self evident may be. Thus, it may be possible to introduce extrinsic evidence, based upon the testimony of executives or investigators, or Internet web pages, as to the actual nature, channels of trade, and classes of customers for goods or services whose identification contains some uncertainty and thus permits some explanation.
To show that goods or services are related, examining attorneys frequently rely upon stories from the LEXIS/NEXIS database showing that goods or services are used together, and third-party registrations of marks for both parties' goods or services. It is often difficult for applicants to rebut such evidence by "proving a negative," but applicants should carefully scrutinize the examining attorney's evidence to see if it is truly probative of this issue. For example, stories from foreign publications, or registrations based upon Section 44 of the Lanham Act (which are issued without proof of use in commerce) or involving the registration of retailer house marks, may not demonstrate that goods or services are related in the United States.
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