For many years, I have had countless communications with patent and trademark lawyers regarding expanding their law firms through partnering with non-lawyers. This might include working with patent agents, as well as venture capital firms. Each of these, though have their own considerations, and are briefly discussed below. These inquiries for ethics advice have only increased since recent rule changes in Arizona (and regulatory sandboxes in other states). While non-lawyer ownership has often been frowned about by lawyers, it is gaining traction due to access to justice concerns, as well as business considerations. Bottom line, there is a distinction between non-lawyers and non-practitioners, and much thought should be placed into the structure of these partnerships.
Professional Independence of a Practitioner
Before we dive in, it is helpful to understand the framework of the prohibitions. The USPTO Rules of Professional Conduct (“USPTO Rules”) prohibit sharing fees and non-practitioner ownership of law firms. See 37 CFR § 11.504. This rule follows the prohibition in most states and the ABA Model Rules, with the major exception that “practitioner” in the USPTO Rules is the substituted term for lawyer. See ABA Model Rule 5.4. This is key because, under the traditional ABA and state view, a lawyer cannot share legal fees or make a non-lawyer a partner (i.e., a paralegal) – full stop. However, the definition of practitioner under the USPTO Rules includes not only lawyers licensed in their respective states, but also registered patent agents, and those granted limited recognition (i.e., law students and non-immigrant visa holders). See 37 CFR § 11.1. Note, while we examine these issues together, it should be noted that there are further nuances between ownership/partnership restrictions, as well as fee sharing.
So what does this mean for patent agents? Under a traditional reading of the state regulatory structure, a registered patent agent is unable to practice law. However, the Supreme Court corrected this misapprehension many years ago and noted that not only to patent agents practice law, but they are permitted to do so even when not licensed to practice law by the state from where they practice. See, e.g., Sperry v. Florida, 373 US 379 (1963). That seems to set up the ability of a patent agent to practice law, and set up their own patent firm. But what about the lawyers who want to practice with these patent agents? Sperry is once again instructive in stating that: “[a] State may not enforce licensing requirements which, though valid in the absence of federal regulation, give ‘the State’s licensing board a virtual power of review over the federal determination’ that a person or agency is qualified and entitled to perform certain functions, or which impose upon the performance of activity sanctioned by federal license additional conditions not contemplated by Congress.” 373 US at 385 (internal citation omitted and emphasis added).
While practitioners have generally sought ethics advice from counsel regarding this, some states have caught on to this issue by issuing ethics opinions. See, e.g., VA LEO 1843 (“Thus, the federal regulations permit forming partnerships and sharing fees between attorneys and registered patent agents to the extent the shared fees arise from the practice of patent law before the USPTO. As a result, the requestor can join the practice of a non-lawyer patent agent either as a registered active Virginia lawyer or an associate member of the Virginia State Bar, as long as that practice is devoted solely to patent law before the USPTO”). However, questions remain regarding the general sharing of fees for non-patent matters (i.e., trademark law, as well as other different practice areas of the firm). This is often an analysis that our firm is called up to perform regarding whether a regulator would view this fee sharing as permissible under the regulatory structure, or an “end run” around fee sharing.
Other Non-Lawyers and Non-Practitioners
While patent agents may be able to rely on a Supremacy Clause analysis, how do non-practitioners fit in the mix? Recently, I have had a number of clients (most of whom are experienced practitioners) inform me that they are in the process of sitting for the Arizona bar exam, or contemplating the same. Not because they are snowbirds or looking to retire there, but because of one key rule change—Arizona’s removal of Rule 5.4. The idea, in part, is that by becoming licensed in Arizona, these lawyers believe they would be able to partner with invention promotion companies and others to either share fees or raise funds and have equity owners of law firms who are non-practitioners (and therefore also non-lawyers).
A deeper analysis must be done beyond this writing, but many facts and rules must be examined before opining on this issue. Namely, state versions of the Choice of Law rule (Model Rule 8.5) must be looked at for the predominant effect. While the USPTO did not adopt such a rule, there are clues from other ethics opinions. For example, the District of Columbia has long allowed non-lawyer ownerships, though in very particular and narrower circumstances. Opinions from the ABA and others describe the analysis for how fee sharing and non-lawyer ownership work when they may conflict with another jurisdiction’s laws. See, e.g., ABA Formal Op. 91-360 (“A lawyer who is licensed both in a jurisdiction that prohibits partnerships with nonlawyers, as in Model Rule 5.4(b), and in a jurisdiction that permits lawyers to form partnerships with nonlawyers, but who practices only in the latter jurisdiction, should not be subject to the prohibition of the jurisdiction where the lawyer does not practice.”); see also ABA Formal Op. 464 (“… a division of a legal fee by a lawyer or law firm in a Model Rules jurisdiction with a lawyer or law firm in another jurisdiction that permits the sharing of legal fees with nonlawyers does not violate Model Rule 5.4(a) simply because a nonlawyer could ultimately receive some portion of the fee under the applicable law of the other jurisdiction.”).
While the above opinions predate Arizona’s rule changes, one voluntary bar association has opined on this issue with some particularity, analyzing both foreign alternative business structures, as well as the Arizona rule changes. In December 2021, the New York State Bar Association, Committee on Professional Ethics, opined in a very detailed opinion that: “[a] New York lawyer may not be a partner, associate or employee of a law firm in New York or in another jurisdiction that has direct or indirect ownership by nonlawyers in accordance with the rules applicable in that jurisdiction, unless the lawyer is lawfully practicing in the other jurisdiction and principally practices in such jurisdiction, and the predominant effect of the lawyer’s conduct is not clearly in New York.” See NYSBA Op. 1234. In coming to this conclusion, the Committee reviewed a number of earlier opinions regarding predominant effect. In other words, where the state has no reason to be involved, it won’t. However, once the state is involved (i.e., because the law firm or lawyer are practicing New York law, or are practicing from New York), then the prohibitions of New York’s rules will control.
We would be remiss if we did not discuss the USPTO’s position on this. Afterall, could there be a Sperry or Supremacy Clause argument? Indeed, the USPTO Rules have spoken, though more clarification could be forthcoming. As noted above, the rules prohibit such fee sharing or non-lawyer ownership of law firms. See 37 CFR § 11.504. Even under a careful analysis of a state’s version of Rule 8.5 (choice of law), it would appear the predominant effect of any such conduct of preparing and filing patent or trademark applications would be before the USPTO. As such, the USPTO Rules would likely control, and therefore prevent the sharing of fees with non-practitioners (i.e., investors who are not patent agents).
While the landscape of the “business of law” is changing, patent and trademark practitioners must be mindful of their various obligations. For example, even if one particular jurisdiction allows a certain type of conduct, the practitioner should be mindful of two other key areas: (1) the jurisdiction where the predominant effect is; and (2) the jurisdiction from where the practitioner practices, as both are crucial in any analysis. In some instances, such as with sharing fees or ownership with registered patent agents, the analysis may be similar, but with others, such as non-practitioner ownership unrelated to patent agents, the analysis of predominant effect is crucial.
1 thought on “Non-Lawyer Ownership Of IP Firms: What Practitioners Need To Know”
Emil Ail — Thanks for presenting your thoughts in your article “ Non-Lawyer Ownership Of IP Firms: What Practitioners Need To Know.” Articles like your can help bring certainty and uniformity for patent agents, patent lawyers, and patent law firms.
Christopher M. Turoski
Director, Patent Law Programs
University of Minnesota Law School
CTuroski@umn.edu | he/him | 612-625-4819 | http://z.umn.edu/chris-turoski
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