Balancing Newly Divergent State, USPTO Ethics Rules

This article appeared in Law360 on September 23, 2020. (Subscription Required)

The rules of ethics adopted by each state are often said to be based upon or modeled after the American Bar Association’s Model Rules of Professional Conduct.

While the ABA model rules provide a template for states to consider when adopting their own ethics rules, the states frequently tweak or rewrite the ABA model rules to suit their own interests.

Last month, a pair of jurisdictions did more than tweak their version of the model rules. The Arizona Supreme Court eliminated its version of ABA Model Rule 5.4 — which prohibits lawyers from sharing legal fees with nonlawyers — while also allowing nonlawyer paraprofessionals to provide limited legal services.[1]

The other jurisdiction, Utah, established a “regulatory sandbox,” which creates a two-year pilot program to explore nonlawyer ownership and investment in law firms.

These recent changes are welcome news for nonlawyers who desire to invest in the legal services industry but who have been prohibited from doing so. In addition, these rule changes may also be of interest to lawyers who want to attract and retain talent while also exploring outside investment sources. Utah and Arizona are the only two states, along with the District of Columbia, that depart radically from the ABA model rules.

So how does an intellectual property practitioner who is subject to the ethical rules of multiple jurisdictions, such as a state bar and the U.S. Patent and Trademark Office bar, know which rules apply to his or her conduct? The answer, unfortunately, is not so simple.

A Different Kind of Conflict: Among the Ethics Rules

When it drafted its model rules, the ABA was cognizant of the possibility that practitioners licensed in multiple jurisdictions may face a conundrum when different jurisdictions applied different versions of the same rule.

For example, suppose a lawyer is licensed in both Arizona and California. Under the ethics rules in Arizona, as effective Jan. 1, 2021, the lawyer would be permitted to share fees with nonlawyers. But California prohibits that very same conduct.[2] Can the lawyer do that which is permitted in Arizona in light of the prohibition in California? Or will the lawyer have to answer to their California ethics violation even though what he or she did was seemingly compliant with Arizona law?

These are tricky questions for those practitioners who are admitted before multiple bars. IP practitioners face a similar dilemma. Patent and trademark practitioners are subject to the USPTO Rules of Professional Conduct, as well as the ethics rules of their state bar, or multiple bars.

The ABA’s Choice-of-Law Provision

The ABA recognized this conflict of laws issue and adopted Model Rule 8.5, which discusses both the disciplinary authority of that jurisdiction, as well as the choice of law used. Model Rule 8.5(b), which concerns choice of law, states that when the attorney’s conduct is in connection with a matter before a tribunal, then the rules of the jurisdiction in which the tribunal sits applies.

Outside of the litigation context, what ethics rules apply to the conduct gets murky — Rule 8.5(b) states that for other conduct — presumably, not conduct before a tribunal — the applicable ethics rules are the “rules of the jurisdiction in which the lawyer’s conduct occurred, or, if the predominant effect of the conduct is in a different jurisdiction, the rules of that jurisdiction shall be applied to the conduct.”

Under Model Rule 8.5, lawyers not admitted to practice in the jurisdiction in which they provide legal services, i.e., out-of-state lawyers, may still be subject to the disciplinary authority of the jurisdiction in which they are deemed to have practiced or in some other jurisdiction in which the predominant effect of the alleged misconduct occurred.

Particularly now during the COVID-19 era, lawyers are frequently working from their primary or secondary residences. This scenario is often referred to as the “butt-in-seat” rule, meaning that your physical presence defines where you are practicing law.

For lawyers who engage in litigation, or desire to do so, in a forum in which they are not admitted, the multijurisdiction practice rules are relatively easy to follow. Generally speaking, the out-of-state lawyer can appear temporarily on a case-by-case basis by permission of the tribunal, typically by way of a motion pro hac vice.

For those courts that have adopted Model Rule 8.5(b) for a litigation matter, the out-of-state lawyer agrees to be bound by the rules of professional conduct of the jurisdiction in which they are practicing by permission. Under Model Rule 8.5(b)(1), the rules applicable to the lawyer’s conduct will be the ethics rules of the tribunal.

While the impact on out-of-state practice is clearer for matters involving tribunals, it is less clear which jurisdiction’s ethics rules are applicable when the lawyer makes no appearance in the matter — he or she is not admitted pro hac vice. Perhaps he or she is providing behind the scenes assistance, never intending to appear before the tribunal. Or he or she is engaged in transactional working, opinion matters, licensing matters and other forms of IP practice.

According to ABA Model Rule 8.5, the rules of the jurisdiction where the conduct occurred — back to the physical presence issue — or where the predominant effect is, will apply. The rest of paragraph (b) provides an apparent safe harbor when there are conflicts between two jurisdictions, to allow the lawyer to conform to the more permissive rules if that is where “the lawyer reasonably believes the predominant effect of the lawyer’s conduct will occur.”

USPTO’s Failure to Address This Issue

Unfortunately for intellectual property practitioners, when it revamped its ethics rules in 2013 to emulate the ABA Model Rules, the USPTO failed to adopt anything similar to ABA Model Rule 8.5.[3]

Because the USPTO has no choice-of-law structure within its ethics rules, an IP practitioner who engages in a practice that is permitted by his or her state bar may nevertheless run afoul of the USPTO ethics rules, regardless of where the conduct occurred or where the predominant effect of their conduct will be felt.

And, making matters more interesting, the USPTO defines itself as a tribunal so that everything that constitutes practicing before the USPTO is arguably before a tribunal. Does that mean that the USPTO’s rules always apply and not any other ethics rules of another tribunal? The answer is a hearty maybe.

The USPTO’s refusal to adopt a choice-of-law rule akin to Model Rule 8.5 means that patent or trademark practitioners are still bound by the USPTO’s ethics rules even when their conduct has nothing to do with practice before the USPTO.

Furthermore, even if the IP practitioner’s conduct is permitted by the lawyer’s state bar, he or she may still have to modify their practice to conform with the USPTO’s more stringent ethics rules or risk being disciplined by the federal agency. Patent and trademark practitioners licensed in one of those few state jurisdictions that permit fee-sharing with nonlawyers must still conform their conduct to the USPTO Rules of Professional Conduct.

When Are You Engaged in the Practice of Law Before the USPTO?

The multijurisdictional practice rules also beg the question: What constitutes the practice of law? This is a simple enough question but has defied uniform definition. Compounding the multijurisdictional practice concern for IP practitioners is the fact that the USPTO takes a broad approach on what it means to be practicing before the USPTO.

One might think at first that practice before the agency literally means what it says: that the practitioner interfaces with the office, files papers, makes an appearance, argues to the office, and otherwise openly and notoriously represents his or her clients in front of the USPTO, which by rule is a tribunal.[4]

According to the USPTO’s regulations:

Practice before the [USPTO] includes, but is not limited to, law-related service that comprehends any matter connected with the presentation to the [USPTO] or any of its officers or employees relating to a client’s rights, privileges, duties, or responsibilities under the laws or regulations administered by the [USPTO] for the grant of a patent or registration of a trademark, or for enrollment or disciplinary matters.[5]

Under a perverse interpretation, the USPTO rule could be read to mean that a nonregistered practitioner, i.e., a trademark attorney, is prohibited from advising a client regarding the potential coverage of a matter by a design patent, since “consulting with or giving advice to a client in contemplation of filing a patent application or other document with the [USPTO]” constitutes the practice before the USPTO in patent matters.[6]

An alternative definition — and the one that the authors believe is correct — is that the phrase “practice before the Office in patent matters” simply defines who is subject to the disciplinary jurisdiction of the USPTO.

The USPTO’s “practice before the Office” definition is very broad indeed. Unlike most jurisdictions, the USPTO rule removes any physical location requirement from “before the Office” — one can be practicing “before the Office in patent matters” by simply talking to a client about the possibility of filing a patent application.[7]

Conflicting Rules Conundrum

The USPTO’s broad view of its own jurisdiction aside, that still does not answer the question of what happens if a practitioner is subject to two or more sets of ethics rules and, based upon the language of those rules, in one state the lawyer is acting unethically and in the other state she is not.

For example, take the Arizona attorney who decides to enter into a fee-sharing relationship with a nonattorney. While that conduct will be permitted by Arizona law in the future, the lawyer would still face potential discipline from the USPTO and State Bar of California, which prohibit such arrangements.

Intellectual property lawyers based in Arizona, as well as Washington, D.C., and Utah, to some extent, may feel that they are unable to exercise rights under their state law license — and which the states have found are beneficial to the public — for fear of being disciplined by the federal government.

If there is a conflict of laws between a federal law and state law, then as a general rule under the supremacy clause of the U.S. Constitution, the federal law governs. This concept has been applied in the context of state bar attempts to prohibit patent lawyers from practicing patent law in their state without a state law license.

More than 50 years ago, in Sperry v. Florida, the U.S. Supreme Court ruled that a registered patent practitioner who was not admitted to practice law in the state where his physical presence was, Florida, when he practiced federal patent law, did not violate Florida’s unauthorized practice of law rules.[8] Under federal law, a patent practitioner is free to open a practice for federal patent law wherever his physical presence may be, at least in the U.S. — we don’t know what the result would be if he decided to open an office in a foreign country.

There are authorities that have expanded the rationale of Sperry to permit nationwide federal trademark practice, and nationwide practice of law before other federal agencies, subject to meeting certain requirements. Practitioners whose physical presence is in a state where they are not licensed, relying upon Sperry supremacy, must be sure that they don’t stray from their lane. Even a one-off matter involving state law could trigger unauthorized practice of law allegations, and Sperry is no help there.

Back to the Arizona versus California topic — if that nonlawyer were a patent agent, the answer is simple under Sperry and the USPTO’s rules — the fee-sharing proposal would not be permitted. However, unfortunately, it remains to be seen how the general choice-of-law Rule 8.5 — and the absence of such a rule at the USPTO — will be interpreted with major changes to fee sharing.

Sperry is helpful for IP practitioners, but only to an extent. In fact, for those who would otherwise be permitted to fee share pursuant to Arizona law, the federal law supremacy concept could apply in a way that negates the benefits the state regulators sought to achieve.

While the USPTO regulations have a small note in the definitions section that attempts to provide clarity, it is unclear how discretion will be used to decide what federal objects are or ought to be.[9] Simply put, the USPTO could argue that the Arizona IP lawyer’s conduct is subject to the USPTO Rules of Professional Conduct, and therefore they are in violation and subject to discipline.

In light of this uncertainty, a balanced approach is needed, and express guidance from the USPTO regarding more permissive state law would be helpful. Until then, IP practitioners who may have offices in jurisdictions that have adopted progressive ethics rules should consider the implications of their conduct in light of the USPTO’s own rules — particularly considering its failure to adopt a choice-of-law rule.

Emil J. Ali and Michael E. McCabe Jr. are partners at McCabe & Ali LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Effective January 1, 2021.

[2] See, e.g., Cal. Rules of Prof. Conduct R. 5.4.

[3] See 78 FR 20188 (“The USPTO declines to adopt the ABA Model Rule regarding disciplinary authority and choice of law. The disciplinary jurisdiction of the Office is set forth in § 11.19. The USPTO Director has statutory, under 35 U.S.C. 2(b)(2)(D) and 35 U.S.C. 32, and inherent authority to adopt rules regulating the practice of attorneys and other persons before the USPTO in patent, trademark, and nonpatent law.”).

[4] See 37 CFR § 11.1.

[5] See 37 CFR § 11.5(b).

[6] Id.

[7] See also 37 CFR § 11.19(a).

[8] See Sperry v. Florida, 373 U.S. 379 (1963).

[9] See 37 CFR § 11.1 (“Nothing in this part shall be construed to preempt the authority of each State to regulate the practice of law, except to the extent necessary for the United States Patent and Trademark Office to accomplish its Federal objectives.”).

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