Thanks Gene.

That is right. In most states a non-lawyer could not own a C-corp, LLC or any other entity wholly or as a shareholder if the company employes attorneys to provide legal services to third parties.

The thought process is this… in order to ensure that the client’s best interest is taken into account lawyers must be free to provide legal services without any check, balance or input of a non-lawyer. Essentially this is talked about within the legal community as having the “ethical ball and chain.” Anyone who has the same ethical ball and chain can partner together or be co-owners in a company. Without the same ethical requirements and obligations most states do not allow partnering or ownership of an entity that provides legal services. Basically those that regulate attorneys, namely the Supreme Courts of the various States, want to make sure that a business motive is not driving the representation decisions.

I know this sounds peculiar given that firms and attorneys operate as a business, and at least on some level do concern themselves with business matters and making money. We don’t do this for free after all. Having said that, there are times when an attorney would be forced to represent a client whether or not they are getting paid, and in these contexts you are ethically required to vigorously do everything you can to represent the client. You cannot ethically work less hard because there is no money coming in. If you do you are violating the ethics rules, which may seem minor enough, but as a general rule whenever there is an ethical violation you can expect claims of malpractice. They frequently go hand in hand.

The situation I am describing does happen, and more often then most attorneys would like to admit due to their own lack of business savvy. For example, you cannot leave a client hanging in a lurch and refuse services because they have not paid. As a general rule if you are not getting paid you need to promptly get out of representing the client and not wait until there is a cloud (or deadline) hanging over the client’s head to leverage continued representation to get payment. If you wait to long, it gets too close to a deadline, trial or response date (in the patent context) you have to move forward with representation because the Judge (or the USPTO) will not let you out. Over the last couple years it has gotten easier to get out of cases for patent attorneys and agents, but there are still ethical obligations.

There will be some kind of revolution in the document prep service industry eventually. Many, if not most, in my opinion are clearly engaging in activities that are the practice of law. The authorities, however, are not taking action. As is frequently the case when there is a violation and government inaction plaintiff’s attorneys are first to the table, hence LegalZoom getting sued in a class action. Look for more of this to happen and eventually the authorities to take notice. Also look for major liability to be placed at the feet of these companies, particularly in the patent field where an invention can be worth millions or billions. Errors create enormous liability and many patent attorneys and patent firms have gone out of business as a result of mistakes. I can’t believe it will be long for these types of errors to wind up surfacing.

I also think that moving forward the States will need to recognize the changing legal field and that those who offer certain services can and should be able to work cooperatively with attorneys. The safest model is to provide streamline tools and service to attorneys who outsource some clerical or administrative responsibilities.

I hope this helps.

Thanks for reading.

-Gene

“A lawyer man not practice in a legal corporation if a nonlawyer has an interest in the corporation as a shareholder, officer, or director. However, a fiduciary representative of the estate of a lawyer may hold the stock or interest of the lawyer for a reasonable time during administration. Also, a lawyer may not participate in such a practice if her professional judgment is subject to the direction or control of a nonlawyer.”
-Rules of Professional Conduct, 5.4(d)

I see. But it seems to be an “internal” control imposed by the BAR on the practicing lawyer, rather than a government applied law on the business owner. That clears up my confusion. I couldn’t fathom how the government could legally restrict a corporation in that fashion.

Just to clarify though, you are implying that a non-lawyer can’t own a C-corporation that employs attorneys to provide legal services to third parties?

I say implying because you were writing in the context of partnerships.

In such a case, the attorneys would get a salary, and not be partners. The profits would be owned by the corporate entity. The CEO/owner(s)/non-practioners would be paid a salary from the profits that would be calculated from all activities of the corporation.

Its strange that a corporation can employ doctors and engineers, for example, but not lawyers to provide services to the public. I understand, but its strange to me nonetheless. Perhaps it has to do with agency law conflicting with the nature of a corporation. However, many lawyers are incorporated, and thereby they create a separate corporate entity anyway and, therefore, the same would be conflict.

I wonder how such document preparation services still function. A very successful one, by all accounts, is tmexpress.com. (I am in no way affiliated, I promise) They only refer out to attorneys if and when there is a research similarity for their clients mark, but only then. Otherwise, their website seems to imply that there is no attorney supervising the searches or preparing documents.

Anyway, I’ll keep up with your website from here on out. Keep up the good work.

And again, thanks for the reply.

There are indeed rules that say a non-practitioner cannot own a law firm. There are ethical rules and laws in every state that require only those admitted to practice as attorneys before the State Supreme Court can engage in the practice of law and offer legal advice. There are also rules in almost every state that prohibit lawyers from splitting fees with non-lawyers. What this means is that a lawyer cannot partner with a non-lawyer and split fees. So it would be impossible for a non-lawyer to be a partner or owner in a business (i.e., firm) engaged in the practice of law or offering legal advice. This is true because any profits left over from a law firm would be as the result of attorneys fees. Such profits could only be split with those who are also attorneys.

In some states I believe there has been some movement on this rule, at least with respect to allied professions, such as CPAs who can work with and even partner with attorneys. This is, however, the extreme minority view.

To answer your questions, the trouble is the ownership and the right to profits or a share of profits derived from legal work. You can be employed by a firm to do marketing and business administration, and as a part of your compensation you can have benefits, including retirement benefits, but you cannot be an owner or shareholder.

For better or for worse, tried and true business principles cannot be applied to the practice of law.

-Gene

Private management and ownership of business, of any type, is legal. That is, if I am an MBA (or not), I can open a medical clinic and hire doctors. I can open a dentists office and hire DDS employees. This is done every day. Theoretically, I can own a law firm and hire attorneys.

I don’t have to be a practitioner for any of this, but just own the means of production and the business license. When it comes down to it, marketing expertise, a space to do business and capital/cash flow are the only means of production needed for almost any business. Owner expertise / practioner status in the business, while it would help to keep your employees happy and your business successful, technically wouldn’t be necessary for ownership or success. Non-practioner ownership is a fundamental cornerstone of the capitalist business model.

Is this rule saying that this non-practioner owned business model is prohibited when it comes to IP legal services? I can’t own a business with paralegal and attorney employees/contractors to process trademarks/patents?

What if I am a paralegal/owner that contracts/hires attorneys to provide supervision?

What if I am completely hands off, except for the marketing and business administration?

It seems as if there are some basic conflicts, lack of depth, or unclear intent within this rule.

The problem with the invention broker relationship (in general) is that the invention broker acts as a middle-man between the Attorney and the Client, and as a result, the client is not choosing their own attorney or getting unfiltered advice from the attorney (not that it makes much difference, the attorney generally says whatever the invention broker tells them to say or writes for them in many cases).

Kudos to your for disclosing your relationship to LegalZOOM. I have mixed feelings about legalZOOM. On the one hand, I admire their “empower the people” approach to the law – by attempting (at least) to demystify the legal process and allow individuals access to their own legal system.

That being said, applying for a Patent is not as simple as applying for a name change or an uncontested divorce. Drafting claims is a nightmarish process to the uninitiated, and I see no easy way to make this something that the lay person could tackle.

I’ve had some legalZOOM cases cross my desk – from desperate clients who used the legalZOOM “forms” and now were being rejected and wanted me to “fix” their home-made applications.

I’ve found that taking such “parachute” cases is a nightmare, so I routinely turn them down. In most cases, the home-made Patent applicant can’t be saved, anyway.

I guess perhaps that is one good legalZOOM might be doing. Joe PRO SE has an invention that probably isn’t patentable anyway. He files using legalZOOM, messes it all up, gets rejected and ends up abandoning the case. A lot cheaper than the $20,000 an invention broker would charge.

But perhaps LegalZOOM should stay out of the patent business and concentrate on legal issues that really ARE just a matter of filling out forms.

One other thing – these invention brokers are SURVIVORS, so don’t count them as out of business just yet. One company had over 3,000 design patents pending when it was shut down – charging $10,000 apiece to the clients for their “services”. Do the math – that’s $30 MILLION a year. You and I are in the wrong business!

The larger companies easily take in $100 MILLION a year or more. Do you think they are going to walk away because of some silly RULE? They will ride some worn-out Patent Attorney like a cheap pony, and when he gets caught by OED, they’ll dump him and find some other fool to file their papers for them.

Or, like one firm I ran into, they will just do the bogus “reports” (want your Census SIC code? That’s $500!) and “marketing” and then refer the patent side to some patsy attorney who goes along with the deal.

They will survive, you can count on that.

Again, good article.