Breadth Of PTO Ethics Opinion Could Alter How IP Firms Interact With Foreign Associates

Michael E. McCabe, Jr.Communications, Competence, Conflicts of Interest, Patent Ethics, PTO Ethics Rules, Unauthorized Practice of Law0 Comments

This post is the last of a three-part series reviewing how the USPTO interprets and applies its ethics rules to IP practitioners who represent patent and trademark clients through non-practitioner intermediaries.

Where Are We Now: Evolution of PTO Ethics Opinions

Thirty years ago, the PTO issued (in 1987 and 1988) ethics opinions regarding very discrete questions concerning two aspects of ethics issues that arise when a U.S. practitioner communicates and services their clients by working through foreign agents and “client liaisons.”

Several significant developments have occurred since the PTO published its 1987 and 1988 Notices.

First, the USPTO changed its ethics rules.  Today, USPTO practitioner conduct is governed by the USPTO Rules of Professional Conduct.  The PTO’s current ethics rules include many provisions not found in the former Code of Professional Responsibility.  And while some of the new rules are similar to the old rules, even those similar rules have differences in their language that could be significant.

Second, over the course of the past twenty years, there has been a proliferation of businesses that represent clients–typically sole inventors and small businesses–who seek to monetize their inventions.  Those entities–invention “promoters”–contract with their clients to provide a combination of patent and non-patent services. For the patent services, the promoters contract with a USPTO registered patent agent or attorney to provide the services on the client’s behalf.  Some of these invention “promotion” companies have turned out to be fraudulent enterprises that prey on an unsophisticated client base hungry for validation of their ideas and false promises of financial rewards.  The USPTO has professionally disciplined patent practitioners who service their clients by working through these non-practitioner “middlemen.”

In June 2017, the USPTO published the Mikhailova decision.  The public notice published as part of the USPTO Director’s Final Order in that matter provides a thorough discussion of how the OED/USPTO expect practitioners to operate when they are representing clients through “non-practitioner third parties.”  While this guidance may have been written specifically with the invention promotion entity in mind, the Mikhailova decision does not state that it is limited to that particular arrangement.

According to Mikhailova, any legal services arrangement in which a USPTO practitioner interfaces with a “non-practitioner” third-party on behalf of a client must pass muster under a veritable maze of different Rules of Professional Conduct.   And yet the USPTO made a point to state that nothing in Mikhailova was meant to trump anything that was said in the 1987 or 1988 Notices.

Practice Considerations For Firms Interfacing With Foreign Associates

While the USPTO sought to preserve the 1987 and 1988 OG Notices, as discussed in part one, those Notices failed to address many of the issues addressed in Mikhailova.  

In light of both the old guidance (1987 and 1988 OG Notices) and the new guidance (Mikhailova), practitioners may want to consider whether or how their foreign associate practices are compliant.

Has The Intermediary Given Informed Consent? 

The OG Notices make clear that there must be an agreement between the foreign associate and the client whereby the client has “consented after full disclosure” to the representation.  Said another way, if there is an agreement between the client and the intermediary or foreign associate, but the client has not given its “informed consent”, then the agreement does not satisfy the USPTO’s requirements.

Informed consent (or “consent after full disclosure”) is a defined term in the USPTO ethics rules.  It means: “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.”

The ramifications for not complying with the USPTO’s “consent after full disclosure” requirement are unclear. One might see how the USPTO would take the position that an agreement between a foreign associate and their client that was formed without “consent after full disclosure” is not legally effective.

According to the 1987 Notice, “if there is, in fact, no agreement” (presumably meaning a legally effective agreement), then the U.S. practitioner is prohibited from “taking instructions from” or “relying on the instructions of” the foreign associate.  Instead, “the registered practitioner must communicate to the client/patent applicant.”

U.S. practitioners are responsible for: (a) knowing whether or not their client has an appropriate “agreement” with the intermediary to represent the client for the purpose of communicating about the USPTO proceeding to the U.S. practitioner; and (b) assuring themselves that before entering into such an agreement, the client received information sufficient to satisfy the “informed consent” standards of the USPTO.

The right of a U.S. patent practitioner to communicate with a client through an intermediary is contingent upon the existence of a valid agreement.  Consequently, it is imperative that U.S. counsel communicate with their foreign associates and similar intermediaries to ensure that the necessary agreements are in place, and adequate disclosures to the clients are made, before legal services are rendered to the referral source.  U.S. counsel who remain willfully blind about such issues risk violating the USPTO’s ethics rules.

Is There a Business Conflict With the Foreign Associate?  

USPTO Practitioners have a significant financial interest in continuing to receive referrals from their foreign associates. Some foreign associates may refer many different clients or matters to a practitioner.  And a number of foreign associate-U.S. law firm relationships have lasted for decades and have generated millions of dollars in revenue for the practitioner.  In addition, many foreign associates have an expectation that the U.S. counsel they choose to work with will refer IP work back to them when U.S. counsel has a client that wishes to obtain patent or trademark protection in the foreign associate’s country.

This business arrangement raises a concern that a regulator at the USPTO would find that the personal interests of the practitioner in maintaining the foreign associate relationship create a conflict of interest.  Pursuant to 37 C.F.R. § 11.107(a)(2), a practitioner “shall not” represent a client if there is “a significant risk that the representation of one or more clients will be materially limited by . . . a personal interest of the practitioner.”

Given the potentially lucrative and longstanding relationships that some IP firms have with the foreign associates, it is reasonable to conclude, as the USPTO observed in the Mikhailova case, that a business conflict of interest exists between the client and the practitioner “due to the practitioner’s personal financial interest in continuing to receive inventor referrals from the non-practitioner third party.”

This conflict can be waived, but only if the client gives “informed consent, confirmed in writing.”  In the case of the foreign associate, such informed consent may require disclosure of the length and duration of the relationship, the numbers of cases that the foreign associate has referred to the practitioner, and reasonable alternatives available to the client—such as having the services provided by a practitioner that does not have a business relationship with the foreign associate.

Notably, this observation is not inconsistent with the USPTO’s 1987 or 1988 OG Notices.  Neither of those OG Notices addresses the later-adopted conflicts of interest rules codified in 2013 in the USPTO’s Rules of Professional Conduct, including “personal interest” conflicts.

Does The Foreign Associate Referral Client Conflict With A Current or Former Client? 

Apart from business conflicts, patent practitioners are subject to the usual conflicts rules that apply, including direct adversity conflicts with current clients.  Those who receive referrals from foreign associates are not exempt from the conflict of interest rules.

The USPTO expects practitioners to conduct adequate conflict checks to ensure that they are not representing another client seeking the same, or a substantially similar variant, to another client’s patent or application; the client is not “directly adverse” to another firm client; or the matter is not “substantially related” and adverse to a matter the U.S. practitioner worked on for a former client.  As for the process of conflict checking itself, specifically subject matter conflicts, the OED expects IP law firms will conform to the standards set forth in Maling v. Finnegan, 473 Mass. 336 (2015).

As a matter of course, practitioners should determine if the referral is looking to target another company’s product or process.  The U.S. practitioner may be in the dark as to whether the client is looking to target a third party.  It behooves U.S. counsel to communicate, either with the foreign associate or directly with the client, to identify potential targets of the client’s application.  This may help avoid a future conflict of interest or malpractice claim if in fact the U.S. counsel unwittingly prosecutes patent claims that are intended by the client to read on another company’s product or process.

Do You Know Your Client’s Objectives?

Working through an intermediary does not absolve U.S. counsel of their obligations to know what are the client’s objectives and how those objectives are to be accomplished.  The request for legal services may make it clear what the client is seeking to accomplish.  If the foreign associate referral states that it desires a design patent, for example, it may be useful for U.S. counsel to ensure that their client understands the different scope of protection afforded by design patents as compared to utility patents.

There are many opportunities during the course of a patent representation to communicate with the client, and even if it is permissible to communicate through a foreign associate, the communication is necessary.  Some firms, for example, have prepared detailed checklists or letters communicating to the client on issues such as identifying the correct inventor and USPTO’s duty of disclosure.  The U.S. firm should not assume that the foreign associate will communicate such matters on its own to the client.

Following Client “Instructions” Still Permissible – But Is It Permitting UPL?

In Mikhailova, the USPTO repeated that its “guidance” was not intended to be inconsistent with the 1987 or 1988 OG Notices.  And those Notices stated in relevant part that a practitioner may rely upon the instructions of the corporate liaison or the foreign agent as to the action to be taken in a proceeding before the Office.

What is unclear is whether the USPTO meant to say that it is okay for non-practitioners to engage in the unauthorized practice of law.  Neither OG Notice addressed this issue of “following instructions” of unlicensed representatives in the context of the unauthorized practice of law.

Moreover, in Mikhailova, the USPTO repeated its guidance that it is unethical for a USPTO patent practitioner to “assist a non-registered individual to practice before the Office in patent matters.”  See generally 37 C.F.R. § 11.505.

If the intermediary is drafting the substantive papers on behalf of the client for the U.S. counsel to just file in the USPTO, it is not clear why that would not constitute aiding the unauthorized practice of law.

Even if “instructions” come from the client through the foreign associate, that does not give a free license for the U.S. counsel to blindly follow such instructions.  Particularly in an area as complex as U.S. patent law, where entire cases can turn on the placement of a comma or the meaning of a single word, U.S. practitioners can not simply rubber stamp someone else’s work product.  The “I was just following orders” excuse is not a defense to a claim that a practitioner must act competently and exercise independent professional judgment.  Neither of the OG Notices addresses the issue of whether a practitioner’s reliance on legal instructions from an unlicensed individual is consistent with the practitioner’s duty of competency.

Are You Engaged In Unlawful Fee-Splitting With a Foreign Associate? 

In Mikhailova, the USPTO stated that where a non-practitioner intermediary “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.”  This would occur, according to the USPTO, if the intermediary charged the client more for the practitioner’s legal services than the intermediary paid the practitioner for those services.

The USPTO further stated that “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”, in violation of 37 C.F.R. § 11.504(a).

The 1987 and 1988 OG Notices did not address the issue of fee-splitting.  But according to the USPTO’s decision in Mikhailova, a practitioner has a duty of inquiry to both the intermediary and the client.  The 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.”

In many cases, the U.S. counsel bills the foreign associate, and the foreign associate pays U.S. counsel’s bills.  But U.S. counsel do not routinely check with the client to determine how much the foreign associate billed them, the ultimate client, for the U.S. counsel’s services.  If the foreign associate “upcharges” the client for what the U.S. practitioner was actually paid, then that could raise an issue of whether the U.S. firm was (perhaps unwittingly) engaged in fee-splitting.

This part of the Mikhailova ruling is not inconsistent with either the 1987 or 1988 OG Notices.  Neither of those Notices discusses the issue of fee-splitting.  All those Notices state in relevant part is that the practitioner may be paid by the intermediary for the practitioner’s services provided on behalf of the client. The OG Notices do not state that it is permissible for the foreign associate to upcharge the client for the U.S. practitioner’s legal fees and expenses and keep the difference between the amount received from the client and that paid to the practitioner.

Conclusion

In the process of regulating attorneys who provide legal services for patent promoter intermediaries, the USPTO has made some fairly broad statements regarding how it expects practitioners to deliver patent and trademark legal services to clients working through non-practitioner third parties.  The breadth of the language used by the USPTO could easily be read as applying to how U.S. counsel interface with foreign associates.  Therefore, it may be short-sighted to assume that the USPTO’s recent discussion in Mikhailova is intended only to apply in the context of IP counsel working through invention promoters.

IP firms who regularly receive referrals from, and work through, foreign agents would be wise to consider these developments.  In addition, the OG Notices from 1987 and 1988 impose specific requirements on practitioners who work through foreign associates and corporate liaisons.  If your practice includes working with foreign associates, it may be prudent to evaluate whether any changes may be necessary to ensure that your firm is complying with the USPTO’s ethics rules.

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