McKool Smith has declined opportunities to take an ownership position in the patents the firm litigates. While the law is unsettled as to the ethical boundaries, our firm has avoided such investments because of potential ethical concerns, as well as strategic considerations related to the attractiveness of the case to the jury.

The structure of the attorney-client fee agreement has become increasingly flexible in recent years. Today’s engagement letters often employ alternative fee agreements, sometimes implementing hybrid arrangements wherein the attorney is paid a reduced hourly rate but receives a “kicker” on contingency.

Among patent litigators, it is not unheard of for attorneys to invest in their clients’ patent portfolios in exchange for a fee or an owner’s share of the recovery. The ethics of such arrangements have not been thoroughly analyzed, and we believe they ultimately may be disallowed.

A Texas attorney looking for guidance as to the ethical ramifications of investing in the patents he litigates will find the rules ambiguous. U.S. Patent and Trademark Office (PTO) Code of Professional Responsibility §10.64 expressly permits a practitioner to “take an interest in the patent as part or all of his or her fee.”

However, Texas Disciplinary Rule of Professional Conduct 1.08(h) states that an attorney “shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client. . . .” Modeled after American Bar Association Model Rule 1.8(i), the Texas rule carves out exceptions for contingent fees and liens to secure an attorney’s fees but is otherwise strictly applied.

As the comments to Texas Rule 1.08(h) suggest, the underlying concern is that a lawyer maintain his duty to exercise independent and unbiased judgment on behalf of his client.

It is unclear whether the PTO Code of Professional Responsibility is even applicable outside the context of patent prosecution, and neither the Texas courts nor the Professional Ethics Committee for the State Bar of Texas have opined on the applicability of Rule 1.08(h) to a litigator’s patent investments. However, the waters surrounding this issue are murky enough to give patent practitioners pause before considering acquiring a financial interest in any patent they expect to litigate.

Jurisdiction and Judge

Independent from the ethical ramifications are strategic considerations which arguably weigh in favor of avoiding these kinds of arrangements. Depending on the jurisdiction and the judge, the fact that an attorney has a financial interest in the patent-in-suit may be disclosed to the jury. In cases in which there is no exclusive licensee, the attorney likely would be a party plaintiff, and an attorney with a direct proprietary interest in the subject of the litigation risks losing credibility with the jury.

In addition, the traditional relationship between attorney and client is impacted when an attorney becomes an owner of the patent he litigates. Once the attorney becomes an investor in the patent, is the client still the boss? In the event of disagreement, who has the authority to make the final call?

For these reasons, our firm has never been comfortable taking an equity interest in the patents we assert.