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Businesses have been “swimming in a sea of law” as they navigate increased regulation, varying international legal regimes, assorted lawsuits and the impact of stiffer legal penalties for infractions.1 As a result, senior executives have increasingly recognized that legal capabilities are crucial for ongoing corporate success, and they understand the importance of working with legal counsel. Indeed, one study found that 43% of U.S. companies had lawyer-directors in 2009, a notable increase from 24% in 2000.2 Other research has found that corporations generate tangible returns, such as higher stock market valuations, when they employ attorneys who serve as board members and when top corporate officers have legal knowledge.3
Paradoxically, the processes through which corporate legal departments provide competitive advantage remain poorly understood. The prevailing wisdom recognizes the need to incorporate legal considerations into top-level business decision making, but all too often executives still view the law as a constraint on managerial decisions, primarily perceiving it as an issue of cost and compliance.4 This limited perspective of the law, however, does not explain how some leading companies have managed to deploy their legal departments to shape the legal environment in order to secure long-term competitive advantage.
Consider, for example, the Walt Disney Company. Faced with the eventual expiration of its media copyrights, Disney executives transferred the value of that intellectual property into thousands of newly registered trademarks for various characters, names and images.5 This legal strategy achieved two important goals. First, it shifted the company’s property to a legal regime that offers an indefinite lifetime. Second, it facilitated the expansion of name and character merchandise licensing, which now accounts for a global, multibillion-dollar, high-profit-margin business. Without a working knowledge of the law, however, this shrewd strategy never would have been properly executed, and considerable shareholder value would have been lost. And Disney is but one of many companies that have successfully deployed sophisticated legal strategies to capture the profits of innovation-related activities, particularly in the field of intellectual property management.6
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1. C.E. Bagley, “Winning Legally: How Managers Can Use the Law to Create Value, Marshal Resources and Manage Risk” (Boston: Harvard Business Review Press, 2005).
2. G. Tett, “More U.S. Lawyers Move to Boardrooms,” Financial Times, Feb. 21, 2013.
3. R.C. Bird, P. Borochin and J.D. Knopf, “The Value of the Chief Legal Officer to the Firm,” working paper, Storrs, Connecticut, January 2014, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2379612; L.P. Litov, S.M. Sepe and C.K. Whitehead, “Lawyers and Fools: Lawyer-Directors in Public Corporations,” Georgetown Law Journal 102, no. 2 (January 2014): 413-480; and D. Somaya, I.O. Williamson and X. Zhang, “Combining Patent Law Expertise with R&D for Patenting Performance,” Organization Science 18, no. 6 (November-December 2007): 922-937.
4. InsideCounsel, Blickstein Group and Huron Legal, “Findings From the 5th Annual Law Department Operations Survey,” supplement, InsideCounsel (December 2012).
5. J.G. Conley, “Patents Come and Go: Trademarks Are Forever,” Executive Counsel 2, no. 2 (March/April 2005): 23-24. http://www.ssmic.com/UploadedFiles/file/Executive_Counsel_6_page_pdf_of_pdf.pdf.
6. For example, see G. Pisano, “Profiting From Innovation and the Intellectual Property Revolution,” Research Policy 35, no. 8 (2006): 1122-1130; and J.G. Conley, P.M. Bican and H. Ernst, “Value Articulation: A Framework for the Strategic Management of Intellectual Property,” California Management Review 55, no. 4 (summer 2013): 102-120.
7. R.C. Bird, “Law, Strategy, and Competitive Advantage,” Connecticut Law Review 44, no. 1 (November 2011): 61-97; R.C. Bird, “Pathways of Legal Strategy,” Stanford Journal of Law, Business & Finance 14, no. 1 (fall 2008): 1-41; D. Orozco, “Legal Knowledge as an Intellectual Property Management Resource,” American Business Law Journal 47, no. 4 (winter 2010): 687-726; D. Orozco and J. Conley, “Shape of Things to Come,” Wall Street Journal, May 12, 2008; C.E. Bagley, “Winning Legally: The Value of Legal Astuteness,” Academy of Management Review 33, no. 2 (April 2008): 378-390; G. Siedel and H. Haapio, “Proactive Law for Managers: A Hidden Source of Competitive Advantage” (Farnham, United Kingdom: Ashgate Publishing, 2010); and G.R. Shell, “Make the Rules or Your Rivals Will” (New York: Crown Business, 2004).
8. There is a broad and established body of knowledge and research related to nonmarket strategy that examines the impact of regulation on firm performance. See, for instance, D.P. Baron, “The Nonmarket Strategy System,” Sloan Management Review 37, no. 1 (fall 1995): 73-85.
9. R.L. Nelson and L.B. Nielsen, “Cops, Counsel, and Entrepreneurs: Constructing the Role of Inside Counsel in Large Corporations,” Law & Society Review 34, no. 2 (2000): 457-490.
10. See, for example, A.J. Hawkins, “Parking Tickets: All in the Cost of Doing Business,” Crain’s New York Business, May 26, 2013; and “Delivery Firms’ Big Ticket Item: Parking Fines,” nbcnews.com, September 1, 2006.
11. For example, companies have been experimenting with alternative billing arrangements and other methods of quantitatively tracking legal expenses.
12. J.P. Johnson, “Defensive Publishing by a Leading Firm,” working paper, Ithaca, New York, October 2014, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=606781.
13. Pisano, “Profiting From Innovation.”
14. C. Sternitzke, “An Exploratory Analysis of Patent Fencing in Pharmaceuticals: The Case of PDE5 Inhibitors,” Research Policy 42, no. 2 (March 2013): 542-551.
15. InsideCounsel, Blickstein Group and Huron Legal, “Findings.”
16. K.G. Rivette and D. Kline, “Rembrandts in the Attic: Unlocking the Hidden Value of Patents” (Boston: Harvard Business Review Press, 1999), 127.
17. Ibid., 127-129.
18. D. Mock, “The Qualcomm Equation: How a Fledgling Telecom Company Forged a New Path to Big Profits and Market Dominance” (New York: AMACOM, 2005).
20. Qualcomm Inc/DE, “Form 10-K (Annual Report): Filed 11/06/13 for the Period Ending 09/29/13,” http://files.shareholder.com/downloads/QCOM/3440071886x0x775985/9AD9A4C8-248B-478F-A245-E7DB719690E6/QUALLCOMM-2013-AR.pdf.
21. The board of directors or CEO may decide that the chief compliance officer must report directly to the board or CEO rather than the general counsel. This may occur as a result of a settlement with regulators, or if the company wants to elevate compliance issues to the highest levels within the organization.
22. J. Peppard, “Unlocking the Performance of the Chief Information Officer (CIO),” California Management Review 52, no. 4 (summer 2010): 73-99.
23. Bagley, “Winning Legally.”
24. In Harley-Davidson’s case, a separate business unit was created in Ann Arbor, Michigan to take advantage of Michigan’s favorable tax laws related to intangible properties and to consolidate intellectual property management activities in one location.
25. A. Bhaskarabhatla and D. Hegde, “An Organizational Perspective on Patenting and Open Innovation,” Organization Science, http://pubsonline.informs.org/doi/abs/10.1287/orsc.2014.0911.