Legal capabilities and competitive advantage: an application on IP management

Firms’ value chain activities are everyday intersected by legal issues that managers are obliged to face and to manage since law imposes many duties to firms, such as environmental regulation, taxes, employment and labor laws, etc.. In spite of this, for many years managers have underestimated the role of legal capabilities within the firm. The reason why is maybe due to the general perception of law as a constraint for managers striving to create and appropriate value (North, 1990) and of legal counselors as professionals always acting in the interest of public and governments (Ring, Bigley, D'aunno, & Khanna, 2005; Wallace & Kay, 2008) or in their own (Sundaram & Inkpen, 2004) rather than in the one of the firms (Ladinsky & Grossman, 1966; Reed, 1969). This perception, that was quite widely diffused among Top Management Teams, was overcome in the early 2000s, when many scholars, especially in the legal fields, hypothesized the chance for lawyers to positively contribute in the achievement and sustainment of a competitive advantage for firms (Bird, 2008, 2010, 2011; Siedel, 2000). At the same time, managers started to consider legal tools as a part of market strategy (Edelman & Suchman, 1997). Drawing upon this empirical evidence, a new research stream emerged, the so called“proactive approach of law” (Siedel & Haapio, 2010, 2016).Accordingly, legal strategies are imagined as pursuing to exploit opportunities that new international regulatory frameworks and their uncertainty (Malhotra & Morris, 2009) offer to firms. In more details, companies may benefit from the non unanimous application of statutes and law made by Courts (Jones, 2000) in the exclusive interest of clients. As a consequence, firms started including legal capabilities as a source of competitive advantage and thinking how to extract value from legal functions (Bird, 2008). It is not surprising to find out that managers are strongly advised to hire attorneys within their firms and to empower them to manage and solve many in-house issues such as contracting activities (with clients, suppliers and competitors), governance forms (delegating them in the choice whether a limited liability company or a corporation is the most suitable solution for the business), taxes, real estates, licenses and management of Intellectual Property Rights strategies. Furthermore, lawyers are also required to work effectively outside of the legal system (Rosen, 2000), to develop relationships with legal decision-makers (Tsang, 1998), to build networks and alliances (Tracey & Phillips, 2011). This dissertation focuses on the active and positive contributions that legal counselors can provide to the management of the firm in the achievement and sustainment of a competitive advantage delineating the existence of legal capabilities concerning the exploitation of legal tools and the mixture of strategies, deeply focusing on the Intellectual Property (aftermath, IP) Management activities. Notwithstanding the huge amount of prior work on sources of competitive advantage (Barney, 1991; Teece, Pisano, & Shuen, 1997), legal capabilities havealmost been underestimated. The resource based view of the firm (Barney, 1991; Peteraf, 1993) stresses the relevance that each resource which is rare, valuable, inimitable and difficultly substitutable can be useful for firms in achieving a competitive advantage. The same characteristics should be as well owned by capabilities, meant as special types of resources embedded within the firm purposed to improve the productivity of other resources possessed by firm (Makadok, 2001). This dissertation intends to explore how legal capabilities may maximize the value of other resources, and specifically the value of IP tools within firms. This choice is consistent with the relevance IP toolsachieved in the last decade, more specifically the surge of patent applications and grants and, in turn, the growing number of patent lawsuits (Hanel, 2006). Therefore, IP management is a newly emerged stream of literature which calls for more scholarly attention in order to provide an integrative framework of IP tools (such as patents, trademarks, secrets and copyrights) within overall business model design and corporate strategies (Al-Aali & Teece, 2013). In order to profit from innovations, firms have to pursue proper strategies (Dai, 1996) aimed at protecting IP tools and appropriability chances for firms. The goal of this dissertation is provide some empirical evidence on how and why legal capabilities strategies can be crucial in shaping proper strategies which may contribute to lower a firm’s net costs and/ or to increase its revenues beyond what would otherwise be expected (Barney & Arikan, 2001). With the exception of Bagley (2006, 2008, 2010, 2016), the “legal astuteness capability” is a neglected issue in the capabilities literature and this knowledge gap calls for more scholarly attention, In spite of the demonstration of how much valuable this capability is for the firm, it has not been explained in which ways this capability can contribute in the achievement of a competitive advantage (Hsu & Ziedonis, 2013). To achieve this goal, this dissertation is structured in 3 Chapters. The first one is entitled “Don’t Forget of Lawyers: Legal Counsel as a Source of Competitive advantage” and aims to highlight the role of lawyers as a source of competitive advantage taking a resource-based view perspective (Barney, 1996). Therefore, in order to map the effective contributions of lawyers aimed in generating higher revenues (through the exploitation of advantageous contractual terms) or in reducing net costs and the so-called legal hazards, a co-word analysis has been run. The purpose of this chapter is to detect the main activities of the firm’s value chain where lawyers actually provide a concrete and positive contribution. The results show that these activities are stronger concerning IP Management, Personnel relationships and interpersonal and inter-organizational relations. The following chapters are aimed to provide demonstrations of effective potential applications of the wise application of law pursued to create revenues and to reduce costs. Both of them are deeply focused on Intellectual Property (IP) Management. Chapter II, entitled “Patent Designing Strategy: some empirical evidence on EP Patents” concerns how the “optimal patent” should be designed in order to reduce the risk of being involved in a patent infringement litigation and to increase its value. To define “patent value” we use Harhoff, Scherer and Vopel (2003) concept which includes all benefits that a patent holder might perceive from application. Previous studies, in fact, have depicted some possible strategies (Somaya, 2012) that may be pursued after the application phase: this paper, instead, provides some useful insights for practitioners in order to realize the patent that represents the best compromise between the trade-off given by the necessity of achieving the highest value and, on the contrary, the willingness of occurring in the lowest possible number of infringement litigations. The main assumption that stands behind this paper is that patent infringement litigation costs are very costly and for most of the firms they are prohibitive: consequently, a lawsuit represents an event that must be avoided. To do so, firms can resolve the potential conflicts through the so called ADR (alternative dispute resolution) tools or as it is addressed in this paper, taking some precautions in order to reduce at most the risk of being involved in a litigation. This study has been undertaken by considering the endogenous characteristics of patents. Law expertise in Intellectual Property Rights may contribute in the so-called IP value chain (Reitzig & Puranam, 2009) and, consequently, in the value creation activities. In this case, legal expertise contributes in reducing the risk of being involved in a costly infringement litigation and, consequently, in avoiding economic losses for the firm. Chapter III, entitled “Forum Shopping as an IP Management Capability: Some empirical evidence from European Firms” provides an example of offensive strategy to be pursued in patent infringement litigations. This under-explored theme is developed by taking a managerial perspective. First of all it is necessary to clarify what forum shopping is: in particular, for the aim of this paper, it represents an unfair but perfectly legal exploitation of jurisdiction and venue rules to affect the outcome of a lawsuit. In deed, even if patents are almost ruled by international treaties (such as for example Patent Cooperation Treaty– PCT – and European Patent Convention – EPC), all the procedural aspects concerning infringement are still regulated by national legislations, such that differences in the potential lawsuit’s outcome are possible. Within the general category of IP management capabilities, forum shopping represents a specific aspect concerning the firms’ ability to use legal astuteness to enhance the enforceability of property rights and, eventually, to improve the appropriability of innovative activities, by conferring to firms major possibilities in profiting from innovations. In this paper, forum shopping has been presented as an iconic representation of legal astuteness and as a dynamic capability since the continuously changing environment in which firms seem to be leveraged against competitors. Overall, the three papers intends to highlight the crucial role of legal capabilities in IP management and how firms may leverage some gaps and uncertainties in the global IP legal framework. The thesis provides both theoretical and practical contributions. Future research on these issues has the potential to pave new avenues for achieving anenhanced understanding of how relevant legal capabilities are and how firms may create and nurture them over time, by leveraging synergies among internal and external sources of competitive advantage.