Updates from the USPTO and OED: Patent Issues (Part II): conflict of interest and Payment from third party

Part II of my series focusing on updates at the USPTO and OED will discuss the USPTO Rules of Professional Conduct (“USPTO RPC”) that relate to conflict of interest when the practitioner is being paid by someone other than the client. As a quick recap, in recent years the USPTO and OED have been stepping up enforcement of the USPTO’s Rules of Professional Conduct, particularly with regard to rules involving interactions between practitioners, clients and third parties. To assist in highlighting these rules I (as well as the OED) have focused on interactions involving Invention Assistance Companies (“IAC”), particularly where the IAC directly pays the practitioner on behalf of an inventor/applicant. If you missed Part I it can be read here.

As discussed in Part I, the non-practitioner rules (37 C.F.R. § 11.504(a)&(b)) require IAC’s to either refer clients to patent attorneys or patent agents (“practitioners”), and/or to contract with the practitioner on behalf of their clients. It is not per se illegal or unethical for third parties to pay fees for inventor/applicants, however, there are specific rules that must be followed for the relationship to comply with the USPTO RPC.

Conflict of Interest Rules for Payment by a Third Party
According to 37 C.F.R. § 11.108(f):
    A practitioner shall not accept compensation for representing a client from one other than the client unless:
       (1) The client gives informed consent;
     (2) There is no interference with the practitioner’s independence of professional judgment or with the client-practitioner relationship; and
       (3) Information relating to representation of a client is protected as required by § 11.106. [confidentiality]

Possibly the most important question a practitioner must answer when determining the ethical obligations associated with the conflict of interest rules is “who is the client.” To be clear, in the third-party relationship with the IAC, the client is always the inventor/applicant. The IAC is not the client. The practitioner’s ethical obligations of competence, communications, loyalty, independent professional judgment, and confidentiality are to the inventor/applicant, not the IAC.

The “informed consent” (37 C.F.R. § 11.108(f)(1)) should be in writing and signed by the client and the patent practitioner. Remember, that the client will always be the inventor and not the IAC. Regardless of the existence of an agreement between the practitioner and the IAC there should be a separate written agreement (preferably an engagement letter) directly between the inventor and practitioner setting forth who is the client, what the scope of the representation will be, how much the practitioner will charge for any services, when the representation ends (i.e., after filing, after prosecution, after payment of maintenance fees, etc.… ), and how the practitioner will be paid, especially if the payment will come from the IAC. While 37 C.F.R. § 11.108(f)(1) does not explicitly state the need to detail and breakdown the fees and services, the Federal Circuit in Bender v. Dudas 490 F.3d 1361 (Fed. Cir. 2007) has made it explicit that informed consent obligates a patent practitioner to provide these details in writing to the client.
The next portion of the third-party payee conflict of interest rule, 37 C.F.R. § 11.108(f)(2), requires that the acceptance of the payment does not cause “interference with the practitioner’s independence of professional judgment or with the client-practitioner relationship.” This rule does not create any new obligations, but reminds the practitioner of their duty to the client. An example of how this rule can be violated was demonstrated in In Re Mikhailova (D2017-18) when the Invention Assistance Company instructed the patent practitioner to file design patents for the inventors (for details on In Re Mikhailova see Part I). Whether the client wants or needs a design patent, in contrast to a utility patent or no patent at all, is a decision that must be made by the client based on information and discussions with the patent practitioner. The decision cannot be left to the IAC, and for the practitioner to not understand this distinction and rely on the instructions from the IAC is a violation 37 C.F.R. § 11.108(f)(2). As discussed in Part I of this series, the commercial interests of the IAC (e.g., cheap, fast and profitable) should not be a factor in the practitioner’s representation of the client. Delegating decisions related to the representation of the client to the IAC, intentionally or unintentionally, creates a conflict of interest. An additional concern arises when the practitioner is receiving numerous referrals from a single IAC or third party. In this situation, the practitioner must additionally provide written information detailing the extent of the relationship with the IAC (or third party), fully explain the relationship to the client, and allow the client to make an informed decision before agreeing to be represented. Practitioners should always be conscious that the practitioner’s relationship with a third party (referring multiple clients) could eventually result in an unwaivable conflict.

The above scenario, which actually exists in many factual recitations in OED opinions, is how practitioners (often solo practitioners with a poor understanding of the USPTO RPC) run afoul of the Conflict of Interest Rule. They do not understand who is the client and to whom they owe their ethical obligations. If the IAC is sending a practitioner 20-30 patent applications a month and telling the practitioner to file them “as is” the practitioner is almost certainly violating their ethical duties to the inventor. Practitioners erroneously view this business model as one in which the IAC is the “boss” who is providing large amounts of work, and the only necessity is to keep each project separated by docket number. Unfortunately, this is a gross violation of USPTO Rules of Professional Conduct. Each client must be treated separately, with an independent conflict of interest search, a separate engagement letter, direct communication between the practitioner and the client to determine the needs and goals of the client, and all communications, including the engagement letter must be maintained confidential.

Confidentially is the last portion of the third-party payee conflict rule (37 C.F.R. § 11.108(f)(3)). Practitioners have an ethical duty not to affirmatively disclose information related to the representation of the client (37 C.F.R. § 11.106). The fact that the client is also engaged with a third party in the filing of a patent application does not revoke the need or the obligation of confidentiality. The client may allow the third party to have access to certain communications between the client and the practitioners, however, this must be done with informed consent and in writing. Further, the practitioner must make it clear to the client that granting a third-party access to the practitioner-client communication may (and probably will) destroy confidentially.

Assuming all of the obligations and duties required by Rule 108(f) have been fulfilled, the practitioner must still understand the distinction between fee-splitting and payment by a third party. No legal fees may be split between a practitioner and any non-practitioner. The Invention Assistance Company can receive fees for their services from the client, but the fees paid by the client to the IAC cannot be one lump sum for the IAC and the practitioner that is later divided by the IAC. The fees paid to the IAC must have explicit details about what portions are going to the IAC for its non-legal services, what portions are going to the practitioner for their legal services, and what portions are going to the USPTO for filing fees. 100% of the legal fees must go to the practitioner. The IAC cannot take a percentage or a portion of the legal fees as payment for arranging the relationship. Moreover, if the payments made to the IAC occur before the practitioner is engaged (as often happens), the practitioner has an obligation to obtain copies of those documents to ensure that all legal and non-legal services have been separated. Lack of knowledge on the practitioner’s part with regard to fee-splitting (such as where payments were made to the IAC before the practitioner’s engagement) is not a defense.

Part III of this series will address additional aspects of USPTO Rules of Professional Conduct related to communication, referrals, and reciprocal discipline. Additionally, I will discuss how the third-party interactions with IAC’s are relevant to relationships with foreign associates and particularly foreign originated applications.

If you have any questions about patents, trademarks, and practitioner professional responsibility,
please contact me at [email protected] or visit my website at www.chiaraiplaw.com