Better Late Than Never: PTO Updates, Expands Ethics Advice On Client Intermediaries

Michael E. McCabe, Jr.Communications, Competence, Conflicts of Interest, Invention Promoters, Office of Enrollment and Discipline, Patent Ethics, PTO Ethics Decisions, Unauthorized Practice of Law0 Comments

This post is the second in a three-part series reviewing how the USPTO interprets and applies its ethics rules to U.S. patent and trademark practitioners who represent clients by working through non-practitioner client intermediaries.

In re Mikhailova and USPTO’s Expanded Ethics Guidance

Three decades after the OG Notices, the USPTO published a final order in the matter of In re Mikhailova, Proceeding No. D2017-08 (USPTO Dir. June 6, 2017).  This matter was a disciplinary proceeding involving a patent agent who provided legal services for clients who were referred to her from an invention promoter.  These entities are businesses that are not licensed U.S. law firms.  They are, in the patois of the PTO, “non-practitioners.”

The Mikhailova matter involved a fairly typical promoter arrangement.  An inventor contracts with a promoter to represent the inventor, who is interested in obtaining a patent and marketing or selling their invention.  Part of the fee the client pays to the promoter is for patent legal services.  The promotion company, which cannot itself render USPTO legal services, refers the patent work to a USPTO patent practitioner–either a patent agent or registered patent attorney.  The patent practitioner is instructed by the promoter to provide a specific service for the client, such as preparing and filing a provisional or non-provisional patent application.  Sometimes the patent practitioner communicates with the client directly regarding the client’s invention, and sometimes the practitioner communicates with the intermediary.  After the service is provided, the practitioner invoices the promoter at a previously-agreed upon fixed fee for the service provided.  The promoter pays (or is at least expected to pay) the practitioner for his or her legal services.

The USPTO has taken an active interest in applying its ethics rules to practitioners who represent clients through invention promotion intermediaries.  We have previously discussed this issue in earlier posts.  See Top Seven Ethics Risks When Patent Practitioners Work With Invention Marketing Companies (Mar. 2, 2017); OED Cracks Down on Patent Practitioners Working With Invention Promoters (Oct. 23, 2016).

The proceeding in Mikhailova ended with a settlement agreement between the practitioner and the OED, which was accepted by the USPTO Director and the terms of the settlement were incorporated into a Final Order.

Settlements of disciplinary matters are relatively common matters.  The agreements themselves include an agreed upon statement of facts, joint conclusion of law, and an agreed-upon sanction.  A notice of the discipline is subsequently published in the Official Gazette and is also made available in the OED’s “FOIA Reading Room” on the USPTO’s website.

The Final Order entered upon the settlement agreement in Mikhailova is, in many respects, unusual.  What makes it different is that the “Notice” portion of the Final Order includes far more information than the usual summary of conduct and citation to the ethics rules violated.

Indeed, the USPTO went out its way to include in the Mikhailova “Notice” a rather lengthy, and extremely helpful and informative, narrative about the ethical duties of practitioners who provide legal services under circumstances where “a non-practitioner third party . . . refers inventors to registered practitioners to provide the patent legal services purchased by inventors from the third party.”

Although the PTO’s narrative addresses the invention promoter as one example of a third-party non-practitioner referral source, the analysis plainly is not limited to this situation.  On the contrary, the broad language of the USPTO’s “Notice” would seem to apply in many situations where  a patent practitioner receives a referral from, and is paid, by a “non-practitioner third party.”  Indeed, the guidance would appear to apply in many respects when the “non-practitioner third party” is a foreign associate or client liaison.

According to the USPTO’s Notice, the following ethics rules, many of which are interrelated, “apply to such situations.”

Conflicts of Interest.  The Notice states that “prior to entering into a practitioner-client relationship with an inventor who is referred by a non-practitioner third party, the practitioner should consider the various conflicts of interest that already exist or may arise during the relationship. See generally 37 C.F.R. §§ 11.107 and 11.108.” There are several different types of conflicts that need to be considered in this arrangement:

  • Conflicts between the inventor and other inventors previously referred to the practitioner by the non-practitioner third party.
  • Conflicts between the inventor and the practitioner due to the practitioner’s personal financial interest in continuing to receive inventor referrals from the non-practitioner third party.
  • Conflicts arising from the fact that the practitioner is being paid by the non-practitioner third party.

Of particular note when considering the nature of the practitioner-foreign associate business relationship is the probability of the existence of a business conflict of interest.  Foreign associates can have very deep, extensive, and long-term business relationships with their U.S. counterparts.  The Notice in Mikhailova expressly addresses this concern: “Such conflicts may also include those between the inventor and the practitioner due to the practitioner’s personal financial interest in continuing to receive inventor referrals from the nonpractitioner third party.”

Notably, with regard to the payment of legal fees by the intermediary (which implicates 37 CFR 11.108(f)), that arrangement is allowed provided that: (i) the lawyer maintains the duty of confidentiality, (ii) there is no interference with the lawyer’s independent professional judgment, and (iii) the lawyer receives “informed consent” of the client, confirmed in writing.  “Informed consent” includes disclosure to the client of how much the PTO practitioner was paid by the third-party.

Informed Consent Waivers – The USPTO noted that conflicts may be waivable, but only if (among other requirements) the practitioner obtains “informed consent” from the client, confirmed in writing.

“Informed consent” does not simply mean “I consent.”  The Notice, following the definition of “informed consent” set forth in the PTO Rules (37 CFR 11.1), explains that “Informed consent means the agreement by a prospective client to be represented by a practitioner after the practitioner has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the client being represented by the practitioner.”   In other words, details must be provided–both good and bad–to “inform” the client’s “consent.”

In light of the ethics guidance in Mikhailova, it would seem that it may be necessary for a practitioner to obtain “informed consent” to waive the business conflict caused by a practitioner’s financial interest in continuing to receive referrals from an intermediary.  Informed consent may especially be required where the practitioner receives repeat business from the non-practitioner referral source, the third-party pays the client’s fees and/or the U.S. counsel is expected to provide reciprocal referrals to the intermediary.

Fee-Splitting – The Notice in Mikhailova further states that a practitioner shall not share legal fees with the non-practitioner third party that refers the inventors to the practitioner. See 37 C.F.R. § 11.504(a). The Notice further explains:

Under circumstances where a non-practitioner third party regularly refers inventors to registered practitioners to provide the patent legal services purchased by inventors from the third party, practitioners may unwittingly violate the fee-sharing prohibition if the practitioner does not know the amount the inventor has paid to the third party for patent legal services. If the entire amount received by the third party for the practitioner’s compensation is not distributed to the practitioner and any undistributed compensation held by the third party is not returned to the inventor, then the practitioner has likely impermissibly shared fees with a non-practitioner. Hence, a practitioner is reasonably expected to question carefully the inventor and the referring non-practitioner third party about the amounts being charged to the inventor for the patent legal services to ensure the entire amount is remitted to the practitioner.

Exercising Independent Professional Judgment – The Notice in Mikhailova also addresses the practitioner’s duty to exercise independent professional judgment.  This means:

Where a non-practitioner third party refers inventors to registered practitioners to provide the patent legal services purchased by inventors from the third party, the practitioner may not merely fill a purchase order. Instead, the practitioner must independently assess the suitability of the sought-after patent protection and communicate his or her assessment to the inventor.  By remaining passive and merely providing the patent legal services purchased by the referred inventor, a practitioner may be found to have formed a de facto partnership with the non-practitioner and also may be assisting the company to commit the unauthorized practice of law.

Client Communications –The Notice in Mikhailova further explains that a practitioner is ethically obligated to communicate with the inventor (or presumably, if the invention is assigned, the assignee).  The USPTO explained that “ethical communication between a practitioner and an inventor requires the practitioner to consult reasonably with the inventor about the means by which the inventor’s objectives are to be accomplished; keep the inventor reasonably informed about the status of the application, including informing the inventor promptly of Office correspondence; and explain a matter to the extent reasonably necessary to permit the inventor to make informed decisions regarding the prosecution of the application.  See § 11.104; see also § 11.102(a).”

Unauthorized Practice of Law –The Notice in Mikhailova also warns about the danger of passivity and “merely providing” the patent legal services that the client requested from the intermediary.  That practice could implicate the unauthorized practice of law by the non-practitioner middleman who may “induce” a client to apply for a provisional, non-provisional, or design patent application.  The Notice reminded that, “[a] practitioner shall not assist a non-registered individual to practice before the Office in patent matters. See generally 37 C.F.R. § 11.505.”

1987 And 1988 OG Notices Live On

The Mikhailova decision expressly references the 1987 and 1988 OG Notices.  With regard to those earlier notices, the Office stated:

a practitioner may communicate with someone other than the client in cases where there is a bona fide corporate liaison or a foreign agent who conveys instructions to the practitioner. In such an arrangement, the practitioner may rely upon instructions of the corporate liaison or the foreign agent as to the action to be taken in a proceeding before the Office so long as the practitioner is aware that the client has consented to have instructions conveyed through the liaison or agent.

The decision further states that “nothing in this notice should be construed as contradictory to the discussion” in the 1987 or 1988 OG Notices, and that “this notice is to be read as providing additional, specific guidance to practitioners under circumstances where a non-practitioner third party refers inventors to registered practitioners to provide the patent legal services purchased by inventors from the third party.”

In other words, according to the USPTO:

(1) the guidance provided in the 1987 and 1988 OG Notices still applies to practitioners who interface with foreign associates and similar types of intermediaries; and

(2) the additional guidance provided in Mikhailova also applies to practitioners who interface with foreign associates and similar types of intermediaries unless that guidance is “contradicted” by the 1987 or 1988 OG Notices, in which case the latter controls.

As discussed in part one of this post, many questions were not addressed in the 1987 and 1988 OG Notices.

For example, the 1987 Notice provided no indication of what level of detail or “information” must be “disclosed” to the client for the client to  “consent after full disclosure” to be “represented by the liaison or agent.”  This is an issue for which clarification would be helpful.

As noted in Mikhailova, “informed consent” (which is no different than “consent after full disclosure”) is a defined term meaning “the practitioner has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the client being represented by the practitioner.”  Thus, while reaffirming the 1987 Notice, the Mikhailova decision provides no insight into the required foreign associate-client “agreement” and the need for the client to give “informed consent” to the intermediary working with U.S. counsel.

The 1987 Notice also never considered or discussed the providing of “instructions” by unlicensed individuals in the context of UPL rules or the duty of competence.  Unfortunately, the Mikhailova decision, in confirming the continued vitality of the 1987 Notice, did not attempt to deconstruct the whole “authority to give instructions” by non-licensed intermediaries issue or explain the meaning of that Notice in terms of the current USPTO Rules of Professional Conduct.  Clear guidance on what a foreign practitioner, who is not licensed by the USPTO, is authorized to do in terms of engaging in the practice of law before the Office would be helpful.

It is somewhat difficult to understand the continued vitality of the 1987 Notice “instructions” rule in light of the many post-1987 USPTO disciplinary decisions that reaffirm the importance of the ethical duty of counsel to exercise independent professional judgment.  The old OG Notices appear to be saying that practitioners who work with a particular type of intermediary — a foreign associate or a client liaison — are held to a different (more lenient) ethical standard than those who work with other types of intermediaries.  But that surely could not be what the USPTO intended to say in the Mikhailova decision.  See IP Counsel Who Blindly Follow Client “Instructions” Risk Loss of Law License (Mar. 20, 2015).

Summary of Mikhailova

In Mikhailova, the USPTO did an excellent job in providing a detailed analysis of how the Office interprets many of the USPTO Rules of Professional Conduct in the context of practitioners dealing with non-practitioner client intermediaries.  The rules in this area are complex and nuanced.  That guidance is incredibly valuable and should be read by every practitioner.  Indeed, even those practitioners who do not interact with “middlemen” will learn a lot about the USPTO’s ethics rules and how those rules interconnect with one another by just reading the guidance provided in this decision.  This decision is one of the most informative of any USPTO ethics decision in recent memory both in terms of its scope, level of detail, organization, and clarity.  It is a great resource.

It would be helpful if sometime in the future, the USPTO could find an opportunity to provide further guidance regarding the concerns addressed in this article about some of the questions left unanswered by the 1987 and 1988 OG Notices.  Clarification is in order especially in light of the fact that the old OG Notices were written under an old ethics code that was replaced in 2013 with the USPTO Rules of Professional Conduct.

If the USPTO still intends to follow the “guidance” from those old OG Notices, then additional direction or analysis would be instructive for practitioners who interface with non-practitioner intermediaries, particularly with respect to the issues of whether a non-practitioner foreign associate is authorized to provide patent-related legal services for their clients, why that practice is not considered UPL, and why U.S. counsel is free to rely on legal instructions from such unregistered individuals.

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