The Attorney-Client Relationship Can Be Harmful to a Startup if Not Managed Correctly

By Russ Krajec
May 19, 2016

clientThe attorney-client relationship is not well understood by clients, and sadly, sometimes not well understood by attorneys. There is a lot of weirdness in the relationship, brought on by the conflict between fiduciary duties and the need for the attorney to run their own business.

Nuances And Artifacts Of The Attorney-Client Relationship

The attorney-client relationship is one of the fundamental tenants of our system of jurisprudence.

The attorney is an agent of the client and has a fiduciary duty to the client. This is because the attorney is often representing the client in their moment of greatest need. The agency relationship means that the attorney must do whatever the client wants. The fiduciary duty means that the attorney is responsible for doing the best job possible for the client.

The artifacts of this relationship come out in weird ways that are heightened in patent law.

Don’t ask the barber if you need a haircut

A favorite joke: How can a patent attorney tell a good invention from a bad one? It is whether the check clears.

This joke highlights the misalignment of interests, but there is far, far more history and nuance behind it. The point is not that the attorneys are bad people, but that our system of representation works in a specific way and has wrinkles that are not readily apparent to the clients.

There is such an enormous financial potential of a single patent that throws the normal attorney-client relationship out of whack. A single patent might be worth hundreds of millions of dollars, and a single act by the patent attorney might ruin the entire thing. That is an enormous rock constantly hanging overhead, ready to fall.

The Attorney Is An Agent Of The Client

The agency relationship follows the “taxi rule”: taxis are required to take the next person in the queue and to drive them wherever they want to go. The taxi cannot pick and choose their fare, and once the person is in the car, the driver must take them to wherever they want to go, even if they change their mind. With patents, the rule comes out like this:

Everybody deserves their day in court, and every crackpot inventor with a perpetual motion machine deserves their day at the Patent Office.

Attorneys will decline to represent an inventor for only a small handful of reasons, but the most common one is a conflict. Patent attorneys are exposed to a company’s deepest, darkest (technology and business) secrets and cannot represent two companies that might compete, so they sometimes conflicted out of representing someone.

Clients often forget that they are merely one of many nameless, faceless inventors in the giant patent factory. For the clients, their patent represents their hopes and dreams and often a lifetime achievement personally and for their business. For the attorney, the patent is just one of hundreds and has no special value.

Of course, patent attorneys are trained to make the inventor feel special. The attorneys are taught to shake the inventor’s hand and say congratulations whenever the patent application is filed or when a patent issues. The inventors almost salivate on command when the attorney praises the inventors with statements like “this is one of the best inventions I have seen.”

All of these techniques are designed to build the inventor’s undying loyalty but often mask the attorney’s sloppy workmanship. The amazing thing is to see inventors who feel that they have a deep, intense, personal relationship with their attorney while the attorney barely knows who the inventor is.[1]

The Fiduciary Duty Of The Attorney

The fiduciary duty means the client can sue the attorney if the attorney does not act in the client’s best interest at all times. The attorney carries malpractice insurance just for this occasion.

investing-in-patents-2This is where a lot of weirdness comes out.

An attorney’s fiduciary duty prevents giving meaningful business advice.

Inside the business of patent law, small inventors are known as “walking malpractice suits.” Patent attorneys are taught to never give business advice. Instead, they merely explain all the options and make the client choose. Then the attorney is not on the hook.

Considering the liability of the attorney, this makes perfect sense. If an attorney tells a client not to get a patent, but five years later, that product is flying off the shelves, the attorney gets sued giving bad advice – and rightly so.

The attorney’s liability in this case is almost unbounded. The attorney will be liable for all the profits the client would have made for the next 17 years in every country of the world. The liability could reach into the billions.

But consider the alternative: if the patent attorney says “get a patent” and they are wrong because the patent never issues, the attorney might be on the hook for $56,000, the approximate cost of a patent. Their malpractice insurance will cover this exposure, but mostly the attorney will point to the examiner or some other factor as to why the patent never issued.

But there are more problems.

Divided Interests

The patent attorney serves many masters. On one hand, the patent attorney is supposed to represent the business, but the patent attorney needs to keep the inventor happy. Besides, the attorney has a business to run and needs to keep the lights on.

There is often conflict between what the inventor wants and what is good for the company.

The patent attorney works hand in hand with the inventor but represents the client. In general, the CEO of a startup is happy with the patent attorney when their CTO/inventor is happy with the patent attorney. The inventor tends to be the gatekeeper between the attorney and the actual client.

The problem is that the inventors often demand certain things about the patent application that are not in the best interests of the client. Inventors are, by nature, a temperamental and fickle bunch, and they think they know best – about everything.

Many inventors see a patent as their personal reward that the company bestowed on them, but they do not understand that the patent is a business asset that will be used in many different ways over the next 20 years.[2]

Some inventors can get very prickly and demanding, especially when reviewing the patent application. This puts the patent attorney in a bind. The attorney needs to smooth over things with the inventor because the inventor is the gatekeeper to the attorney getting paid. However, the attorney is supposed to do the best thing for the company.

This results in pacifying the inventor at the expense of the ultimate client. Sometimes, the patent attorney will add whatever material the inventor wants, then just change it after filing.

The outside attorney has a business to run.

The attorney runs a business, and like all businesses, needs to make money. The attorney sells hours – either explicitly through the billable hour -or implicitly through fixed fee work, and the attorney needs to sell as many as possible. This is the source of most attorney jokes because it is true.

Clients are always frustrated because they cannot tell if they need to have the attorney do something because it is necessary or because the attorney just wants to get paid.

The classic example is a patent infringement opinion letter by an attorney. These letters investigate whether or not a company’s product infringes someone else’s patent. Many of these letters are an exercise in the attorney avoiding liability, with endless boilerplate about how no analysis is ever complete, that there may be changes in case law, that a judge or jury may view the patent differently, and on and on. The attorney spent most of their time avoiding liability and very little time on the substantive issue: is their infringement, yes or no?

Patent Attorneys Typically Have Little Business Experience

One little wrinkle of patent law is that patent attorneys and patent agents must have an engineering or science degree to sit for the patent bar exam. Very few engineers go to law school as most engineers make big money as regular engineers.

Consequently, there are very, very few patent attorneys compared to the general population of attorneys. The US has 1,200,000 attorneys, but only 31,000 are patent attorneys. Of the 31,000 patent attorneys, probably fewer than a quarter of them write patents.

The net result is that patent attorneys tend to be much more highly paid than regular attorneys, and they wind up doing the one thing that nobody else in the law firm can do: get patents through the USPTO.

The effect is that patent attorneys do not have direct experience in litigation, licensing, patent brokering, or any of the “business” side of things. Yes, there are patent attorneys who “help” with litigation, licensing, and the like, but they often are working under a conventional litigator or transactional attorney.

What does it mean for a client?

It means that if the patent attorney is an expert at writing good patents and getting them through the USPTO, that patent attorney is likely to not be very good at the business end. If they claim to be good at the business end, they are likely not to be expert at patent preparation.

The end result:

The company has the responsibility to make sure that the patents meet its business goals–not the patent attorney.

There are many things working against the company at this point. The patent attorney might know or have inklings that the company is headed down the wrong path, but the attorney’s liability and their livelihood are at stake, so is the patent attorney going to speak up? Even if they do, they will only do so when they are absolutely, unmistakably certain that they are not missing something. Even then, the client is probably not getting the full story.

Note: This is an excerpt from “Investing In Patents” by Russ Krajec. Russ is the founder and CEO of BlueIron IP, and investment company that finances intellectual property for angel and venture backed startup companies.

_______________

[1] A best practice to select a patent attorney is to have another patent attorney review the first patent attorney’s work product. Ask the reviewing attorney questions like “is this patent enforceable?”, “where are the weaknesses in this patent?”, “what would you do differently?”, and similar questions. Selecting a patent attorney should be based on the quality of actual work product and not based on how nice they are.

[2] The patent term is 20 years from the date of filing or 17 years from the date of issue, whichever is longer – subject to a bunch of exceptions.

The Author

Russ Krajec

Russ Krajec is the CEO of BlueIron, a patent finance company, and author of Investing In Patents, which explains the BlueIron investment model. Russ is an angel investor, registered patent attorney, the former COO of a venture-backed startup company, and an inventor with 30+ US patents/applications.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author as of the time of publication and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 2 Comments comments.

  1. itzhak Yogev May 22, 2016 3:32 am

    “Clients often forget that they are merely one of many nameless, faceless inventors in the giant patent factory… For the attorney, the patent is just one of hundreds and has no special value.”

    I have never handled an inventor so badly as the author believes is the general rule. I know them by name, and care for them and their interests. It is true, that one of the chalenges of the business is to treat each and every patent as if it is going to do many millions, if handled properly. But to say that we usually fail (and even never try) is a slander.

  2. itzhak Yogev May 22, 2016 3:50 am

    “but mostly the attorney will point to the examiner or some other factor as to why the patent never issued.” Well, what do you know, there are objective reasons why patents don’t issue. The Examiner may be a jerk, there may be prior art that nobody knew about (and the client might have not wanted to spend much money on the search), the client might have hidden some key information from the attorney (like a step he preferred not to tell about), the Law may have changed, or simply the client was unwilling to invest in filing an appeal or another RCE. It isn’t that the attorney will point to another factor, it is that usually there is another factor, because of which the patent didn’t issue. Attorneys may contribute to the failure, naturally, but the author rights as if the attorneys are to be blamed, but they are wise enough to point to other factors, so they don’t have to pay.

    The author is hostile to patent attorneys in a manner that makes reading the article unpleasant. I certainly not read his book or suggest anyone reading it.