Some IP practitioners are unaware of the ethical rules regulating the practice known as “fee-splitting.” In this context, “fee-splitting” refers to the situation where a first USPTO practitioner divides a portion of a client’s fee with a second practitioner who is from a different firm as the first. According to 37 C.F.R. Section 11.105(e), a division of fees between practitioners who are not in the same”firm” is only proper if three requirements are satisfied:
(1) the division of fees is proportional to the services performed by each practitioner, or each practitioner assumes joint responsibility for the representation;
(2) the total fee is reasonable; and
(3) the client, in writing, agrees to the arrangement, including the share each practitioner will receive.
For purposes of the USPTO’s ethics rules, a “firm” means “a practitioner or practitioners in a law partnership, professional corporation, sole proprietorship or other association authorized to practice law; or practitioners employed in a legal services organization or the legal department of a corporation or other organization.” See 37 C.F.R. Section 11.1.
Unethical IP Fee-Splitting
A USPTO practitioner who splits fees with a practitioner from another firm without complying with the requirements of Section 11.105(e) of the Office’s ethics rules is subject to professional discipline. An example of unethical fee-splitting in the IP context is discussed in the USPTO’s disciplinary decision styled In re Lehat, No. D2013-04.
In that case, a client paid attorney Steven Lehat $5,000 to prepare, file and prosecute the client’s patent application. Mr. Lehat, who was not registered to practice before the USPTO in patent matters, sub-contracted the work to another practitioner, to prepare the client’s patent application. Mr. Lehat paid the other practitioner $3,000 for his services and pocketed the $2,000 difference.
Shortly after the work on the patent application began, the client demanded a return of the full $5,000. The sub-contracted patent practitioner had already begun working on the application. When the stop work order came in, the patent practitioner believed he was entitled to $800 for his services, and he returned $2,200 to the first attorney. The first attorney refused to return any of the funds (either the $2,200 balance of he had paid to the second attorney or the $2,000 which he pocketed) to the client.
The client filed an ethics complaint with the USPTO’s Office of Enrollment and Discipline, which filed disciplinary charges against Mr. Lehat. The OED asserted among other things that Mr. Lehat had engaged in unlawful fee-splitting without client consent, and that the total fee charged was unreasonable. Mr. Lehat ultimately was publicly reprimanded by the USPTO. See our post here for a further discussion of the Lehat matter.
In short, whenever a practitioner is considering sharing a fee paid by a client with someone outside of the practitioner’s firm, he or she must be mindful of the ethical implications. Secretly sub-contracting out legal service work to someone else outside the practitioner’s firm violates Section 11.105(e) of the USPTO’s ethics rules.
It should be noted that the fee-splitting rule does not apply when both practitioners are employed by the same “firm.” The bar generally does not regulate how a law firm internally allocates or divides a fee paid by a client as between practitioners within the firm. However a law firm internally decides to divide revenue received from its client, the firm still is subject to 37 C.F.R. Section 11.105(a), which requires among other things that a practitioner “shall not . . . collect an unreasonable fee . . .”
ABA Formal Guidance For “Safekeeping” Payments Between Non-Firm Lawyers
Assume that attorneys from two separate law firms lawfully enter into a fee-splitting arrangement with their common client, following the requirements set forth in 37 C.F.R. Section 11.105(e). Assume further that one of the law firms receives, either from the client or a third-party, the fee and that the fee has been earned (that is, for example, the legal services have already been provided). How should that law firm handle the fee?
Guidance on this issue was issued recently by the American Bar Association’s Standing Committee on Ethics and Professional Responsibility, Formal Opinion 475 (Dec. 7, 2016).
The ABA’s guidance addresses the intersection of the fee-splitting rule (ABA Model Rule 1.5(e), which mirrors USPTO ethics rule 37 CFR Section 11.105(e), on the one hand, and ABA Model Rule 1.15(a), regarding the lawyer’s duty of safekeeping client property. The latter rule and its USPTO equivalent (37 CFR Section 11.115(a)), provide in relevant part that a lawyer “shall hold property of . . . third persons that is in a lawyer’s possession in connection with a representation separate from the lawyer’s own property.”
The ABA opinion concludes that when lawyers are dividing a fee pursuant to Rule 1.5(e), and one of the lawyers receives an earned fee, the other lawyer “holds an interest in the earned fees” and thus “should be treated as a third person” under Rule 1.15. The ABA noted that, pursuant to Rule 1.15(d):
Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property.
Thus, in this scenario where attorneys from two separate law firms have properly agreed to split a client’s earned fee, the attorney who receives the fee must:
(1) deposit the funds in which another lawyer holds an interest in a trust account separate from the lawyer’s own property;
(2) promptly notify the other lawyer of receipt of the funds;
(3) promptly pay the other lawyer the agreed-upon portion of the fee; and
(4) if requested, by the other lawyer, provide a full accounting.
If there is a dispute between the receiving lawyer and the lawyer with whom the receiving lawyer is dividing the fee, the receiving lawyer must, in accordance with ABA Formal Opinion 475, keep the disputed funds separate from the lawyer’s own property until the dispute is resolved.
The ABA’s latest ethics opinion provides welcome guidance for lawyers who were uncertain about the proper handling of earned client funds that are subject to a fee-splitting arrangement. This is not a trivial concern; the improper handling of trust funds is a frequent source of bar discipline. Furthermore, some bar counsel have argued that a lawyer subject to Rules 1.15(a) and 1.5(e) must first transfer the earned funds from the lawyer’s trust account to the lawyer’s operating account before they ethically could pay the other lawyer their portion of a split-fee. Hopefully, the ABA’s guidance on this issue should put any such assertions to rest.