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Doing Business with Clients Could Result in No Legal Fees

By Kelso L. Anderson, Litigation News Associate Editor – February 8, 2016

 

Attorneys who enter into business transactions with their clients for legal representation in lieu of attorney fees are ethically obligated to advise their clients to seek independent counsel to assess a transaction’s propriety. Otherwise, attorneys risk losing any remuneration emanating from the business transaction. Priest v. Coch et al. ABA Section of Litigation leaders believe Priest serves as a prophetic reminder to litigators to follow all ethics rules when engaging in business with clients.


Initial Agreement and Representation
The plaintiff in Priest was Law Offices of Peter H. Priest, a North Carolina law firm specializing in patent law. Starting in 2004, attorney Priest and his firm represented the defendants, Gabriel Coch and Information Patterns, LLC (IP), in the filing and prosecution of a patent for a computer program for geo-collaboration and Internet-based mapping. Coch and two partners founded IP to develop the program. In 2005, Priest’s firm filed a formal patent application for the program with the United States Patent and Trademark Office (USPTO).


The initial fee agreement between the firm and the defendants for drafting and filing the patent application was capped at $10,000, and was exhausted and paid in 2006. Three years later, the firm received a communication from the USPTO, rejecting the subject matter claimed in the patent application. At the firm’s expense, Priest filed a response to the communication with the USPTO and received a Notice of Allowance in February 2010 that a patent would be issued for the program upon the payment of certain fees.


Business Transaction in Lieu of Legal Fees
In March 2010, Priest and the defendants met to discuss entering into an agreement regarding how to generate revenue through licensing the patent. To compensate the firm for the work done from 2009 onward, the parties agreed in principle that Priest and his firm would continue to prosecute and maintain the patent and pay 25 percent of the costs of doing so, with the remaining costs to be shouldered by the defendants. In return, Priest would receive 25 percent of the proceeds he helped generate from licensing the patent.


Priest drafted and signed the parties’ agreement and would subsequently testify that he orally notified the defendants to seek independent counsel to review the agreement. Although he submitted an executed copy of the agreement to the defendants, he did not receive a signed copy of the agreement back. No words in the agreement addressed the sale of the patent, nor did the agreement convey any interest in the patent or IP’s business to Priest or his firm.


In June 2010, the USPTO issued a patent for the program. Despite his efforts, Priest was unable to secure a patent license. Defendant Coch grew dissatisfied and contacted a patent broker to sell the patent. Priest agreed to hold his exclusive licensing rights in abeyance pending the patent’s sale, and even assisted the broker in making minor edits to sales packages, sending files to potential purchasers, and participating in telephone conferences as the patent’s prosecuting attorney. Before long, the broker sold the patent for $1 million.


Ethics Failure Prevents Fees
After the sale of the patent closed, Priest demanded $200,000 for himself and his firm, which amounted to 25 percent of the net sales revenue. The defendants refused to pay, because Priest did not sell the patent and, in their view, the agreement only entitled Priest’s firm to 25 percent of net revenues based on Priest’s own efforts. Priest then sued.


The Court of Appeals of North Carolina affirmed the trial court’s judgment in the defendants’ favor, relying principally on the trial court’s interpretation of North Carolina’s Rule of Professional Conduct 1.8(a) and the plaintiff’s express failure to follow that rule. North Carolina’s Rule 1.8(a), and its model rule analog, requires a client to be advised in writing to seek independent counsel when a lawyer enters into a business transaction with the client. The appellate court rejected the plaintiff’s argument for recovery based on quantum meruit, or the terms of the agreement.


“The Section of Litigation has long warned about the risks and need for lawyers to be extra careful in complying with the applicable ethical rules when doing business with clients,” emphasizes Irwin H. Warren, New York, NY, cochair of the Section’s Ethics & Professionalism Committee. Warren encourages lawyers to revisit a report issued by the ABA’s Task Force on the Independent Lawyer, which details various legal conflicts and ethics rules when lawyers and clients do business together. “This decision sends a strong warning to lawyers that they must comply fully with those rules,” Irwin adds.


Echoing Warren’s sentiment, Scott E. Reiser, Roseland, NJ, cochair of the Section’s Ethics & Professionalism Committee, states that his “impression is that the court was focused specifically on whether the firm had followed [Rule 1.8(a)’s] writing requirement.” The ethics rules for patent attorneys permit business arrangements between attorneys and clients, says Robert M. Asher, Boston, MA, cochair of the Patent Subcommittee of the Section’s Intellectual Property Law Committee. “Nevertheless, the lesson may be that attorneys must abide by the ethical rules of all the bars within which they practice,” Asher concludes.


Keywords: Rule 1.8(a), ethics, patent, business agreement, client


 
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