04 September 2017

Proposed Code of Conduct for Trans-Tasman Attorneys Risks Unintended Adverse Consequences for Firms and Clients

Red TapeFollowing publication of a consultation paper in April 2017, the Trans-Tasman IP Attorneys Board (TTIPAB) – the regulatory body formerly known as the Professional Standards Board for Patent and Trade Marks Attorneys – has now released a Draft Code of Conduct 2018 (‘draft Code’), Draft Guidelines to the Code of Conduct 2018, and Explanatory Notes for public consultation.  The draft Code and other documents, including the original consultation paper, and non-confidential submission received in response, can be found on the TTIPAB web site.

In many respects, the draft Code is an update and improvement on the existing Code of Conduct for Patent and Trade Marks Attorneys 2013, that codifies what most in the IP professions would regard as good ethical and business practice, and plain ‘common sense’.  For example, the draft Code confirms, in a new section 19(1), that ‘a registered attorney is a fiduciary in respect of the registered attorney’s dealings with a current client, and owes a duty of loyalty to a current client’, which is the basis upon which most attorneys have conventionally operated anyway.  Additionally, it draws on comparable international regulations, and in particular the UK Rules of Conduct for Patent Attorneys, Trade Mark Attorneys and Other Regulated Persons, to ensure that the standards applicable to patent and trade marks attorneys in Australia and New Zealand are on-par with the expectations of corresponding professionals in other jurisdictions.

Unsurprisingly, given recent developments in the Australian profession, the main area in which the draft Code includes provisions that are specific to local circumstances is that of firm ownership.  In particular, the draft Code seeks to specifically regulate the way in which Trans-Tasman (i.e. Australian/NZ) attorneys communicate their legal and ownership structures to clients.  In the specific case that an attorney firm is a member of what the draft Code calls an ‘ownership group’ – i.e. two or more firms, often operating independently at least in relation to the provision of attorney services, and having a common owner – the draft Code proposes further obligations to obtain written consent of clients when separate firms within the group act on opposing sides in certain contentious matter.

While the draft Code represents an improvement upon the current Code in many respects, the provisions relating to business structures and ownership groups are unprecedented, and very much influenced by the recent developments in the IP professions in Australia.  As such, I am concerned that they are unduly prescriptive, and have the potential to create unintended (although certainly not unforeseeable) consequences.  In particular, draft provisions relating to client communications are likely to place unduly onerous obligations not only upon Australian and NZ attorneys, but also upon the foreign attorneys with whom they work, and those attorneys’ clients, around the world. 

Furthermore, draft provisions relating to independence of firms within an ownership group may actually have the unintended effect of encouraging firms to form alternative structures.  This could involve mergers of firms, leading to an actual reduction in competition and choice in the marketplace for IP services, or it could involve the development of new structures that have perhaps yet to be imagined.

It is my opinion that a Code of Conduct for attorneys should focus on the fundamentals.  If appropriate ethical obligations are in place, that apply to individual registered attorneys, attorneys who are partners/directors of firms, and incorporated attorneys, then desirable behaviours can be expected – and undesirable behaviours can be addressed through disciplinary proceedings – regardless of legal and ownership structures.  It is not the role of the Code of Conduct to regulate how attorneys go about the day-to-day operations of their businesses, so long as the interests of clients are adequately protected.

As I will explain in this article, I therefore consider that the draft Code is, in some respects, unduly prescriptive.  I anticipate that firms operating within ownership groups will share this view.  However, even independent attorneys should be concerned that the draft Code, if brought into force, would oblige them to communicate information regarding their legal and ownership structure to all clients – domestic and foreign – for whom they act.

Written submissions in response to the draft Code are due by 28 September 2017, and should be sent via email to MDB-TTIPABCodeofConduct@ipaustralia.gov.au.

Informing Clients of Legal and Ownership Structures

Proposed new paragraphs 16(1)(d), (e) and (f) of the draft Code require registered attorneys to inform new or prospective clients of the following matters:
  1. the legal personality of the registered attorney and the legal structure under which the registered attorney practices; and
  2. where the registered attorney is an incorporated company – whether the company is public or private; and
  3. where the registered attorney is the member of an ownership group – that fact and the identity of the other members of that group.
However, in contrast with other information that must be provided to clients under subsection 16(1), the obligation to inform clients of the above matters is not waived under subsection 16(2) in the event that the registered attorney is instructed by another attorney, including foreign-registered attorneys.  Accordingly, under the proposed provisions a Trans-Tasman registered attorney would be required to provide this information to all ‘end clients’ (i.e. the ultimate parties on whose behalf work is conducted), and not merely to the person or entity (such as a foreign associate attorney) from whom instructions are received.

Furthermore, while these provisions predominantly affect attorneys within publicly-listed and group structures, who would be required to provide the information set out in paragraphs 16(1)(e) and 16(1)(f), all registered attorneys would be obliged to provide all end clients with the information specified in paragraph 16(1)(d), while all incorporated attorneys (of which there are many among the independent firms, as well as within ownership groups) would additionally be required to provide the information specified in paragraph 16(1)(e).

An Onerous Obligation!

In order to assess just how onerous this obligation will be, I used the 2017 IPGOD data set to to determine the number of foreign (i.e. non-Australian and NZ) applicants for which the top eight firms within ownership groups, as identified in this earlier article, act in relation to patent prosecution matters.  These firms are Spruson & Ferguson, Davies Collison Cave, Griffith Hack, Pizzeys, Shelston IP, FPA, FAK Callinans, and Watermark IP.  In particular, I counted the number of distinct applicants having ‘live’ patents or applications within the data set (i.e. as at the end of 2016) for which each of these eight firms is listed as the address for service.  The results are shown in the chart below.
Counts of End Clients
The numbers in this chart vary from 2,476 foreign applicants served by Watermark IP up to 6,491 served by Davies Collison Cave.  The sum of individual firm totals is 34,103, however the number of distinct applicants across all eight firms is only 27,279.  This means that there is a significant number of foreign applicants having multiple Australian patents and/or applications that are handled by two or more of these eight firms.  This happens most commonly because an end client’s attorneys in their home country decide, for whatever reason (e.g. technology, reciprocity, relationship-building) to send their Australian/NZ work to more than one local firm.

Bear in mind, also, that the numbers above are for Australian patent filings only.  They do not include trade marks, registered designs, or other IP matters, and they do not include NZ rights of any kind.

In addition to the sheer numbers involved, it is also important to understand the nature of the relationships between an Australian/NZ firm, the foreign associate firm providing filing, prosecution and other instructions, and the end client/applicant.  Generally, the applicant has a direct business relationship with their ‘home’ attorney, who has primary responsibility for the care and conduct of the applicant’s IP matters.  In the vast majority of cases, it is the applicant’s attorney who selects and instructs the firms that will handle applications in other jurisdictions, from their own network of associates.  Thus a direct business relationship exists between the applicant’s home attorney, and the Australian/NZ firm that they choose to instruct for filing and prosecution of any Australian and/or NZ patent applications.

Accordingly, although the Australian/NZ attorney has a duty to act in the interests of the applicant in this situation, just as they do for any other client, there is typically no direct communication or business relationship involved.  The local attorney will have a business address for the applicant, since this is required for filing on an Australian application.  However, this business address is not necessarily a correspondence address.  Furthermore, in most cases the local attorney has no other contact details for the applicant, i.e. no specific contact names, telephone or fax numbers, or email addresses.  As a practical matter, the only way for the Australian/NZ attorney to communicate with the applicant is through the applicant’s home attorney.

The proposed Code thus implicitly envisages that the Australian and NZ attorneys and firms that are bound by its provisions will send out tens of thousands of communications to foreign associate firms around the world, requesting that they be passed on to the end clients.  Many associate firms will receive these communications from multiple Australian/NZ firms including, in some instances, multiple communications from different firms intended for a single end client.  The vast majority of these end clients will have played no part in the selection of the Australian/NZ firms acting on their behalf.  They will have no idea who these communications are from, why they are receiving them, or what they mean.  Having entrusted their IP matters to their chosen home attorneys, they have confidently left decisions in relation to foreign filings in their attorneys’ hands.  It is also worth keeping in mind that for many of these clients, English is not their native language, and they will therefore require the communications to be translated and interpreted for them.

In my opinion, imposing this substantial burden on Australian/NZ attorneys, the hundreds of foreign associate firms with which they work, and the tens of thousands of end clients around the world, makes absolutely no sense at all, and serves no useful purpose.  The foreign associates should be provided with the information they need to make decisions in selecting Australian and NZ attorneys on behalf of their clients, as should those foreign applicants who instruct Australian and NZ attorneys directly.  Beyond that, however, the proposed obligations are excessively onerous.  I can see no reason to exclude the provisions of paragraphs 16(1)(d), (e) and (f) from the exception set out in subsection 16(2), although it would be appropriate to require that foreign-registered attorneys be informed of these matters.

Independence of Attorneys in Ownership Groups

Proposed section 21 of the draft Code addresses the independence of registered attorneys within ownership groups.  In particular, draft subsection 21(1) provides that:

For the purposes of sections 19 and 20 [which deal with loyalty and conflicts], a registered attorney that is a member of an ownership group will not be regarded as independent of the other members of the group unless the registered attorney operates independently of the other members in the provision to clients of attorney professional services.

There are two points I would note about this.  First, it appears to create a rebuttable presumption that firms within an ownership group are not independent.  This seems to be the opposite of the approach foreshadowed in the Consultation Paper, in which the Board proposed to amend the Code to provide that ‘incorporated attorney practices that are commonly owned practices are not to be treated (a) as other than separate practices, and (b) as business associates of each other for the purposes of the conflict of interest provisions, so long as they are operated independently’ (emphasis in original), which I read as a rebuttable presumption that the firms are independent.

Second, the proposed wording is explicit that it is the ‘provision to clients of attorney professional services’ that must be independent.  This allows for ownership groups to, for example, share back-end services, and to include entities providing non-attorney services (such as business advisory, IP strategy, IP valuation, search and analytics) to clients of firms within the group, as well as clients outside the group.

Draft subsection 21(2) is likely to be more contentious:

Notwithstanding subsection (1), a registered attorney that is a member of an ownership group must not act for a client in a matter relating to proceedings before a court, a tribunal or a like adjudicative body where the registered attorney knows that a client of another member of the group is involved in the matter and that the clients’ interests are adverse unless the registered attorney’s client in writing has given reasonably informed consent to the registered attorney acting in the matter.

In other words, even if firms within in ownership group are independent, two distinct firms within the group cannot act for clients on opposite sides in adversarial matters, including oppositions, without obtaining the informed consent, in writing, of each client.

This is something for which some of the submissions from independent attorneys argued.  Personally, I do not understand why this situation, in particular, should be treated differently.  Either the firms within an ownership group are independent – in which case they should be treated as such for all purposes – or they are not.  It sends a mixed message to require informed consent in some circumstances, but not others.  Clients might (quite understandably) wonder whether ‘independence’ means anything if there are particular situations in which they are required to provide consent, but others in which they are not.

A further concern that I have about this proposed provision is that, if brought into force, it may encourage mergers of firms within ownership groups.  After all, what would be the point of maintaining independent operations of attorney firms if, in fact, that independence is called into question in contentious matters, and it becomes necessary to obtain informed client consent?  Clients may decline to provide such consent, if only because they do not fully appreciate the circumstances, and this simply seems to be the safest course of action.  If neither client in an adversarial matter provides consent, then both firms within the group lose their business.  While this outcome would no doubt delight independent attorneys, I cannot see how it is necessarily in the best interests of the clients involved, which would then need to seek alternative representation.  And with this prospect hanging over them, some ownership groups may decide that it is not worth the cost of maintaining independent firms, considering the reduction in the benefit to the separate firms of continuing to act for clients whose interests may be adverse to those of clients of other firms in the group.

Conclusion – Risk of Unintended Consequences?

The more prescriptive the Code of Conduct becomes, the more likely it is to have unintended consequences.  It is not, in my view, the proper role of the Code to determine – whether directly or indirectly – the viable or optimal ownership arrangements, legal structures, and business models, for the operation of attorney firms. 

There is a potential for side effects to arise out of imposing particular prescriptive requirements that are applicable to some structures, but not others.  This is not to say that there should be no such requirements – it does not seem unreasonable that clients should be informed of the legal and ownership structures of their attorney firms upon initial engagement and when any change occurs.  However, I would argue that the prescriptive requirements should cover no more than is necessary to ensure that clients are reasonably informed of relevant matters. 

Beyond this, the duties of each registered attorney (as individuals and employees, as well as the registered corporate attorney firms themselves, and their attorney directors), as set out in other provisions of the Code, should be sufficient to protect the interests of clients.  For example, a registered attorney employed by a firm within an ownership group, who acts against the interests of a client of a different firm within the group despite knowing (hypothetically) that the two firms are not truly independent, would be in breach of the Code of Conduct, as would the attorney directors of the firm, and the firm (i.e. ‘incorporated attorney’) itself.  It is therefore not apparent to me why specific prescriptions should apply to this situation, but only in the event that the matter involves ‘proceedings before a court, a tribunal or a like adjudicative body’.

More concretely, it is clear that requiring attorneys to disclose their legal status and ownership structure to all end clients is absurdly onerous, and imposes a burden not only upon the registered attorneys covered by the code, but also hundreds of their foreign associates, and tens of thousands of those attorneys’ clients who will be required to receive and comprehend the information that is provided.  I simply cannot believe that this is what the Board intends.

And yet, if this outcome of provisions of the proposed Code that apply to all registered attorneys has not been foreseen by the Board, then what might be the unintended consequences of the provisions specifically targeted at firms within ownership groups?  It is difficult to know what the future holds for the IP professions in Australia.  Market conditions look to remain challenging, and innovative firms and individuals will continue to evolve new business models and structures in an effort to meet those challenges.  Not all such structures will necessarily be as transparent as the public ownership model, which is subject to substantial additional regulatory controls.  A code of conduct that focusses, in particular, on the current trend of organising firms into ‘ownership groups’ may fail to be adaptable to future structures that are yet to be imagined.

In my opinion, the Code should focus on the fundamentals, and venture into specifics only insofar as is strictly necessary to protect the interests of clients.  Generic provisions requiring attorneys to disclose their legal and ownership structures – whatever those may be – are perfectly fine, subject to avoiding excessively onerous and pointless communications.  However, provisions that target specific structures have the potential to create unintended consequences, for example by making some structures more attractive than others, encouraging shifts in the professional landscape (e.g. through mergers of firms within ownership groups), or restricting the freedom of attorneys to offer their services through a range of business models, including consultancy and casual employment arrangements, that might otherwise be open to them.


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