Tag: legal innovation

Innovation in the Legal Sector

Innovation is a big deal.

It’s been a big deal ever since customers rewarded differentiation and punished companies that failed to maintain their creative edge.

I never fully understood the role of innovation until I spent time as a post-graduate research fellow at the Kellogg School of Management’s Center for Research in Technology and Innovation (CRTI). I spent time at the CTRI (three years) after completing my law degree at Northwestern Law School.

In law school I never heard much about innovation and was never exposed to the subject in courses, or in any of my assigned readings. In hindsight, I now realize this was, and still is, a major failing of traditional legal education. Much has changed, however, since I graduated. More and more law schools emphasize entrepreneurship and clinical practice. Some law programs have fully and bravely embraced innovation as a major component of their curricula.

The role of innovation in the legal sector has yet to be fully analyzed, so in this blog post I’ll try to classify the different types of innovation occurring in this industry. Before I do that, however, I have to address: what is innovation?

Although it might seem easy to identify and define innovation, it’s surprisingly difficult. According to economist Joseph Schumpeter, widely regarded as the most important writer on the topic, innovation is a process initiated from “new combinations” initiated by entrepreneurs who unleash the gales of creative destruction within the economy. As a matter of degree, some innovations are incremental and others radical, as the important work by Harvard Prof. Clayton Christensen demonstrates. Studies show that the vast majority of innovation that captures value in the marketplace is incremental, although radical innovations get the majority of headlines, particularly when they displace existing businesses and become disruptive. As pointed out by Schumpeter and others, innovation is not the same as invention, since the vast majority of inventions (e.g. patents) are not commercialized and are thus worthless. Innovation has to possess some commercial validation and success.

These are core definitional aspects, but what captured my interest were the organizational factors behind innovation success and failure. Through my readings and conversations with CRTI faculty members and fellows I came across important organizational perspectives. For example, during most of the industrial era firms employed an internally-focused view of innovation. This closed R&D perspective often yielded a hermeneutic culture that led those within the firm to view outside innovations with skepticism, or outright disdain. This approach (which still exists among some firms) yields the infamous “not-invented-here syndrome” which is a bias against external innovations. This closed perspective proved dangerous and untenable as we shifted into the Knowledge Economy. In this context, licensing innovations externally from startups, universities and independent inventors proved to be a successful innovation model. The research of Prof. Henry Chesbrough yielded important insights into the practice of open innovation, which relies on knowledge transfers.

For me, one of the greatest insights on innovation came from CRTI faculty member Prof. Mohan Sahwney, a globally recognized innovation thought leader. In his 2006 MIT Sloan Management Review article “The 12 Different Ways for Companies to Innovate” he and his co-authors laid out a framework called the “Innovation Radar” that helps companies look at innovation from multiple perspectives along four major dimensions:

Offerings (What)

Customers (Who)

Process (How)

Presence (Where)

As the article points out, product-centered companies often myopically emphasize offering-related innovations and neglect the other three major categories. Successful innovators such as Home Depot innovated along the lines of Customers as it targeted a new DIY home repair customer segment. Dell was able to capture value by innovating along the Process dimension by creating new manufacturing methods and a direct-to-consumer sales model. Redbox innovated along the Presence dimension since it introduced the concept of DVD rentals at an entirely new location (supermarkets). The holistic “business innovation” perspective offered by the Innovation Radar offers a comprehensive tool to diagnose where innovation occurs and how it leads to value capture and differentiation. The article magnificently discusses these four major aspects of innovation and introduces eight other dimensions that build from the four major categories and which altogether comprise the “Innovation Radar”:

Innovation Radar

Source: Sawhney, Wolcott & Arroniz (2006)

Richard Susskind, Ray Worthy Campbell and Michael Katz and others have all written about, and in some cases helped pioneer, legal services innovation. The legal services industry is facing rapid transformation and innovation. In fact, legal hackathons are becoming increasingly popular and offer a platform for engineers and lawyers to brainstorm and develop new ways to simplify the legal system.

Here is a brief attempt to identify some (not nearly all) of the innovations in the industry introduced since I graduated from law school nearly ten years ago, and that apply to the four major Innovation Radar categories:

Offerings (What):

  • One of the key elements of legal practice is the ability to conduct comprehensive legal research. Casetext and FastCase are two recent innovators that use a crowdsourcing method for legal research
  • The art and science of effective legal practice often hinges on giving accurate predictions about the merits of a case. Lex Machina and IBM’s Watson supercomputer offer big data predictive analytics services to lawyers.
  • Previously, only attorneys could dispense legal advice under state bar rules. The state of Washington has pioneered a new category of Limited License Legal Technician, a non-lawyer who can provide legal advice in limited areas of practice.

Customers (Who):

  • Lower income individuals and small businesses were traditionally priced out of legal services, but the innovative delivery methods offered by companies like LegalShield offer a prepaid plan to market low-cost services to these customers.
  • LegalZoom also services lower income individuals and small businesses and offers monthly rate plans and standardized forms online.

Process (How):

  • RocketLawyer is a pioneer in crowdsourcing legal advice among various attorneys through its website.
  • The Avvo website is a question and answer (Q&A) website that also crowd sources legal advice from attorneys.
  • Many innovative companies have perfected techniques for managing the e-discovery process during litigation and have developed new technologies to manage this complex legal process.

Presence (Where):

  • Wal-Mart has started to offer fast and affordable legal services at some of its locations.
  • Several of the companies identified here, such as FastCase offer apps that are available for use on mobile devices

The period of rapid innovation and transformation in the legal services industry is here. It’s both interesting and exciting to watch it unfold, and to see innovations occur among all the dimensions of the legal services business system.

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Judge Rakoff Holds Bank and Regulator to a Higher Standard

The Wall Street Journal just ran a noteworthy article on Judge Jed Rakoff’s path-breaking judicial opinion.  Judge Rakoff, a federal trial court judge who sits in the Southern District of New York, recently refused to approve a settlement between the Securities and Exchange Commission (SEC) and Citibank because the settlement omits any facts that would justify its approval as one that furthers the public interest. Judge Rakoff makes known his views on the public policy implications of the case when he discusses “the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives.”

Refusing to approve the settlement would either compel the defendant to admit wrongdoing, or force the SEC to drop the case, or litigate it. By failing to approve a settlement reached willingly by both parties as a matter of public interest, Judge Rakoff has departed from a customary practice. If the decision is sustained on appeal, it might create an important legal precedent that could curtail the harmful practices that are committed by some professionals in the financial industry.

Strategically, Citibank would likely refrain from appealing the case to avoid creating binding future precedent that would apply to itself and others in the financial industry. One might think that the SEC, as a public institution charged with protecting consumers, would be more inclined to appeal the matter to actually establish the precedent.

As the Wall Street Journal article suggests, however, the SEC often has settled cases with defendants in the financial industry as a practical compromise to avoid risks and expense. It is clear, based on Judge Rakoff’s ruling, that he believes practicality and expedience were not enough to warrant subverting the public interest.

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Research Spotlight: Beyond the Board of Directors

In a Wake Forest Law Review article, FSU Law professor Kelli Alces provides a novel and intriguing recommendation to re-shape how corporations are governed in America. Her recommendation is to eliminate the board of directors as the ultimate decision-maker. From a legal realism perspective, which looks at human behavior as a driver of legal outcomes, it is worth rethinking the value and efficacy of the board as the supreme governing body in Corporate America. As professor Alces mentions:

“A firm’s investors and other influential constituents use their contract rights against the firm to influence management and monitor management more carefully than the board can to protect their interests and investments in the firm.”

Delaware corporate law and other statutes, however, require that corporations be governed by a board with some independent members. Investors and entrepreneurs who want to opt out of this structure may opt for the limited liability company, or LLC. LLCs, unlike corporations, do not require a board as the ultimate overseers of business decisions. Under LLC law, the owners may delegate or assign responsibility among themselves, or to managers.

Professor Alces’ paper is accessible on the Social Science Research Network (SSRN), here.

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Letter or Spirit?

Business Insider posted a story recently about Facebook and the news the company has made working with Goldman Sachs to obtain significant capital investment without going public.

The story boils down to Facebook wanting to trade stock for a capital infusion. There is no shortage of people wanting to invest in Facebook stock. A thorny issue arises, however, if the number of Facebook stock owners of record increase to 500 or more individuals. If that is the case, Facebook must comply with the Securities and Exchange Commission (SEC) disclosure laws, which are expensive to comply with and  reveal sensitive financial and strategic information. Facebook is not quite ready for that step and has enlisted the financial experts at Goldman Sachs to engineer a special purpose entity that would buy up to $1.5 billion in Facebook stock and become the owner of record.

The rub lies in the fact that Goldman Sachs would then sell the shares to potentially hundreds of private client investors. The Business Insider story discusses that Facebook and Goldman Sachs may have legal grounds under the SEC rules to argue that the transaction does not increase shareholders beyond a single owner, the special purpose entity. The rule, however, may prove to be a sword of Damocles, since the SEC rule does not allow the transaction if the stock issuer knows, or has reason to know, that the special purpose entity is used primarily to circumvent the rule concerning 500 shareholders or more. By engaging in the transaction, Facebook may be heading for going public and complying with the SEC disclosure laws without listing on a major stock exchange.

As a professor, I found this to be a good case to discuss in class, not just because many students enjoy hearing about Facebook. The case also illustrates an important point about a bigger issue facing business and legal regulation. The point is whether a business should strive to comply with the letter of the law, or go beyond this and seek to comply with its spirit. The SEC rule mentioned above has a built-in provision that guides enforcement of the law’s spirit. Many other important regulations lack this type of provision, however.

Ultimately, the whole issue of compliance with the SEC’s disclosure rules triggered by reaching 500 shareholders or more may amount to little more than a smokescreen for Facebook. The transaction with Goldman Sachs using the special-purpose vehicle places a much higher value on Facebook stock. Those who invested in Facebook prior to this transaction just saw their paper net worth increase substantially. Also, at the time of Facebook’s inevitable public offering and listing on a stock exchange, whoever is the lead book runner and investment banker to the transaction (Goldman Sachs?) will have strong precedent and argument to sell the stock to the public (the rest of of us) for at least as much as it was valued during this most recent transaction.

As with most legal issues involving Facebook, this is a case worth watching.

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Louis Vuitton Wins a $32 Million Trademark Judgment

That’s a pretty big sum for a trademark infringement case, litigated in a federal court in Northern California. What is interesting is it wasn’t levied against some knock off artists directly. Instead, the charge was contributory infringement (kind of like aiding and abetting) against web site hosts that allowed fake L.V. hand bags to be sold via the Web. This ruling will potentially have a big impact in the world of online retail. The case bears some similarity to Napster, which dealt with copyrights and online music exchanges.  In the L.V. case, however, it will be much harder in the future for fake goods sellers and their web hosts to escape unnoticed. This is, in sum, a big victory for trademark owners.

The full business wire story is here.

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The Patent Piler

I met Allan Tokuda when I was a Teaching and Research Fellow at Northwestern University. I was helping teach a course on Innovation and Invention in the engineering program. Allan was one of the brighter and more inquisitive students. I knew he had some remarkable qualities when, before class one day, he took out a Rubik’s Cube. He could consistently scramble the puzzle and solve it in less than two minutes.

Allan and I eventually put our minds together to attack the problem of patent claim language and its obfuscating qualities. Allan brought top notch software coding and logical analysis. I brought my knowledge of claims and claim structures and the problems lay people and inventors routinely face when they try to read these sentences. Patent claims, for those new to patents, are the legal definition that describes the property boundaries of a patented invention. Patent claims are what get litigated in court and are located at the very end of the patent document.

The result of our combined efforts is something called the Patent Piler (at this Website). It is an open source project and resource guide that allows anyone to look up a patent by the patent number, search and compare any of that patent claims with other claims in the patent. Here is an image of how it works.

Patent Piler
Patent Piler

The tool, as shown above, highlights the differences between claims in the same patent.

Why is this useful? Oftentimes the most confusing thing about reading patent claims is distinguishing why one claim is different from another. One claim might be different from another due to a difference of just a few words.

The software also does useful things like break down claims by their type, for example methods, products, chemical compounds  or machines. The software also allows you to select independent claims, those claims which stand by themselves and are modified by subsidiary claims, called dependent claims.

Try it out for yourself. If you don’t have a specific patent to analyze, try inputting this curious patent number in the box: 6584450

If you like to code and want to make reading patent claims easier, try improving the source code, it is freely available at this site.

A quick note: for now the software runs great on Firefox, not so great on Internet Explorer.

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What A Business Plan Competition Judge Looks For

Successful entrepreneurs write good business plans. Good business plans win competitions.

I routinely conduct business plan competitions in my entrepreneurship class. As part of the job, I have to recruit savvy and successful entrepreneurs to serve as judges for each competition. Someone who I have often asked to judge is Dan Brown, President of Loggerhead Tools and inventor of award-winning and blockbuster products like the Bionic Wrench. Dan is a true entrepreneur and master of industrial design, patenting, marketing and merchandising.

This year, I want to give my students a leg-up and show them what expert judges look for in a business plan competition. So, naturally, I asked Dan. Here is what he replied.

Dan’s Top 10 Business Plan Presentation Topics:

1. Is there a market opportunity? Does your product or service address an unmet or underserved need and add value to customers?

2. Identify and claim your white space. Have you identified a market segment best suited to establish a strategic foothold for launch?

3. Claim an opportunity gap. Have you realistically identified your competition,  and is there an opportunity for sales based on a value-added strategy?

4. Carefully define the wow-factors. What are the customer-getting differences that add value and compete for the customer’s attention and dollars?

5. Are there opportunities for intellectual property protection? Look at patents, trade names, trade dress and other brand-reinforcing strategies. Do a thorough intellectual property search to be sure there will be no unpleasant surprises after launch.

6. Research several competitive benchmarks and quantify the cost and sales drivers necessary for success in the market.

7.  Have a thorough and realistic development, investment and sales budget, with a realistic cost analysis for development, tooling, and commercialization. Know your costs.

8. Develop a roadmap. Develop an actionable plan that identifies the resources, costs and time required to complete product development and commercialization.  Failure to plan is planning to fail.

9. Generate a simple pro-forma (forward-looking) 3-year sales forecast of investment, cost, and projected revenue with a cash flow analysis. Do you show a return on investment?  Do the numbers support your plan?

10. Assemble a winning management team and advisory board that can succesfully complete the development, commercialization and management of your business.

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Kauffman Foundation Lecture

I just finished leading an intellectual property workshop for entrepreneurs here in Houghton, MI. The event was sponsored by the SmartZone, a local high-tech business incubator.

The FastTrac TechVenture Program is a learning program administered by the Kauffman Foundation. Here are some of the topics covered in this program:

  • Determine market opportunities and business strategies and pursue them successfully.
  • Define your target customers.
  • Develop a solid marketing plan.
  • Learn to assess and build a top management team.
  • Calculate the funding needed at each stage of your business and discover the best ways to access it.
  • Learn the importance of protecting your intellectual property through licenses, patents, trademarks, and copyrights.
  • Hone your elevator pitch and investor presentation.

One question was asked, and I think it would be useful to highlight. A participant asked,  “If a small technology entrepreneur has a valuable idea, what can they do to save money and protect their idea from a large company that just takes it without permission?”

Here’s a brief checklist:

1. Make sure you are an expert in your technology space. The more you know what the state of the art is, the less time and money you will spend defining your invention during the patenting process.

2. Understand the nature of your intellectual property rights. If you have a broad and solid patent, you can obtain, or threaten to obtain, a speedy injunction to stop competitors from copying your technology.

3. Patent litigation can be very expensive, with a full patent trial costing millions of dollars. A technology entrepreneur can share the expense of a patent trial with a contingency fee patent litigator. Several law firms specialize in taking these cases if: the inventor has a strong patent, there is a clear case of infringement, and the accused infringer has deep pockets. Here is one law firm that specializes in these cases.

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The anti-Creative Commons

A few weeks ago I was part of a panel on intellectual property controversies at Michigan Tech. One of the comments I made on the panel is that most intellectual property law innovations have been developed by regular people taking intellectual property law into their own hands. For example, Creative Commons, Science Commons and Open Source Software are all innovations created by information creators and users, not lawmakers on Capitol Hill or the judiciary.

A reader recently submitted the website: myfreecopyright.com, which I’ve dubbed the anti-creative commons. Like the legal innovations listed above, this is yet another resource that allows creators to engage their online i.p. and the law in a user-friendly way.

The difference, a big one, is that the myfreecopyright site allows you to notify others of your copyrighted content and allows you to register and date the work through their database. This is achieved in three steps: 1. Upload the work by allowing the site to subscribe to your content; 2. A digital fingerprint of the work is created; 3. The work is registered on the database.

Why go through this? Here is what the myfreecopyright site says:

“You should provide evidence of your Copyright on all public displays of your original creations so that nobody can claim they thought your creation was part of the public domain. The Public Domain consists of original creations available Copyright Free to the whole public. Copyright Infringers often claim the public domain defense, and can be let off the hook, if no public display was with your original creations defining your Copyright.”

What I find so interesting about this is that the Library of Congress is the official place for authors to register federal copyrights. Authors obtain copyright when they create the work in a tangible medium, but they can register it. Authors register their works to have the right to sue in federal court and obtain the high damages stipulated by federal laws. The myfreecopyright site does not register your copyrights in the Library of Congress, and does not help you locate and pursue infringers. It does (as mentioned above) put everyone on notice that you have claimed a copyright and have registered it in a public database, which hinders unauthorized users from claiming the public domain defense. This is another private technology solution to intellectual property law. In this way, it’s another example of how everyday folks are innovating and engaging their intellectual property, participating in what I call law 2.0

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Pimp My Trademark

I recently watched the MTV show “Pimp My Ride“, in which people with junkers contact the show with the hopes of getting their cars souped -up. The show I happened to watch involved a pretty beaten up Honda Civic. During the car’s transformation, the team installed Lambo doors on the Civic. Lambo doors are car doors that swing up like those in the famous Lamborghini models from the ’80’s (just think of Miami Vice).

I recalled seeing a trademark at one point owned by Lamborghini on the motion of its doors. I did a little research at the U.S. Trademark Office and found the live trademark registration # 2793439 owned by Lamborghini. Here is the image of the trademark as it is currently registered to the company:

Image of car doors swigning up to open.
Image of car doors swinging up to open.

This registered trademark was issued to Lamborghini in 2003 and “consists of the unique motion in which the door of a vehicle is opened. The doors move parallel to the body of the vehicle but are gradually raised above the vehicle to a parallel position. The matter shown in dotted lines is not part of the mark.”

Did Lamborghini license this trademark to the folks involved in MTV’s program? If not, did they commit trademark infringement?

It seems that several companies make and sell kits that allow mechanics to transform any old regular car doors into the pimped out Lambo doors. Most of the kits I have seen advertise the doors as “Lambo doors”, giving proper attribution to Lamborghini as the pioneers.

Back to the trademark infringement. It seems to me that the kit manufacturers would not be infringing the trademark shown above since they are only selling the specialized hinges that make the car doors rotate upwards. That is a functional product (subject to patent laws) and not trademark, which only extends to source identity. If you go back the trademark listed above, Lamborghini owns the right to how car doors actually move on an actual car. So, perhaps the person who owns the car commits the trademark infringement every time they open and close their car doors!

Is Lamborghini going to do the same thing the recording industry has done and go after individuals? Let’s hope they have better things to do.

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