Regulatory Board Recognises Validity of Publicly-Listed Patent Attorney Structures

The Trans-Tasman IP Attorneys Board (TTIPAB) – the regulatory body formerly known as the Professional Standards Board for Patent and Trade Marks Attorneys – has released a consultation paper as part of its review of the Code of Conduct for Patent and Trade Marks Attorneys 2013 (‘Code’).  This review was mandated under the arrangement between the Australian and New Zealand governments to merge the registration and disciplinary regimes for attorneys in the two countries, which came into effect on 24 February 2017.  Any amendments to the Code that may be necessary or appropriate in response to the creation of the Trans-Tasman attorney regime must be made within 12 months of its commencement, i.e. by 23 February 2018.

In addition, as I mentioned in an earlier article regarding the consolidation of a number of Australian IP attorney and legal firms into publicly-listed groups, the TTIPAB commissioned Professor Andrew Christie of the University of Melbourne to examine these structural changes in the profession and advise on whether any further regulatory amendments are required in light of these developments.  Professor Christie has delivered his report, and the TTIPAB has consolidated his findings, and its corresponding proposed revisions to the Code, into the present consultation paper.

Broadly speaking, and consistently with my expectations, no actual issues have been identified with the current ‘listed group scenario’ (as the consultation paper calls it).  While these types of arrangements have the potential create conflict-of-interest situations that cannot arise with traditional independent firm structures, the existing listed holding companies, IPH Limited (ASX:IPH), Xenith IP Group Limited (ASX:XIP) and QANTM IP Limited (ASX:QIP), have all recognised the issues, obtained relevant legal advice, and have implemented a range of measures to manage the associated risks.  The TTIPAB appears generally satisfied with these measures.  The consultation paper states, in particular, that:

The Board recognises that the listed group scenario is a valid legal structure when considered from the perspective of corporations law. The Board also recognises that an equivalent scenario in which the holding company is a private company would also be a valid legal structure. The Board is of the view that attorneys should be free to adopt whatever valid legal structure best suits their commercial interests. Accordingly, the Board does not propose to prohibit or restrict the ability of attorneys to deliver their services through the operation of groups of incorporated attorney firms owned by a holding company, whether that holding company be a publicly listed company or a private company.

The Views of Listed Attorneys

As noted above, all three existing publicly-listed groups have taken the advice of senior counsel about their duties and their obligations.  The steps that have been taken in response include:

1. provisions in their Constitutions about the hierarchy of duties that apply;
2. statements on their websites, letterheads, email footers, and in their client Terms of Engagement about the ownership structure of the firms in the group; and
3. implementation of specific management and governance structures for the group holding company and for the firms in the group.

As stated in the consultation paper:

The listed holding companies believe that, by virtue of being listed, they have more onerous obligations about transparency, and are exposed to greater risk in terms of consequences of failing to meet obligations concerning the conflict situation, than do non-listed attorney firms. They believe that these factors ensure that they adopt best practice mechanisms, and that their mechanisms ensure that no breach of a conflict duty does or can arise.

The Views of Independent Attorneys

In the course of its review of consolidation within the attorney profession, the TTIPAB sought written input from a range of stakeholders, including individual/small firm attorneys, medium/large independent attorney firms, listed holding companies, and listed group attorney firms.  A number of these stakeholders were also interviewed by Professor Christie.  As broadly summarised in the consultation paper, the views of independent attorneys were somewhat different from those of the listed firms.

Individual and small practice attorneys are reported as being ‘most critical of the listed group scenario’, with their main concern being the situation in which attorneys from two different firms within a single listed group are acting on opposite sides of a contentious matter (e.g. litigation or opposition proceedings).  In at least some cases, this group of stakeholders has asserted that the claim that the firms are independent, and hence no conflict arises, is ‘largely a fiction’.  This assertion is, frankly, false with regard to the three existing listed groups, each of which has obtained legal advice and taken steps to ensure that the independence of firms within the group is not a ‘fiction’.

The larger non-listed attorney firms expressed similar views in relation to the handling of contentious matters, however their concerns extended further to the fact that listed group firms within the same group can and do prosecute applications for clients whose interests are contrary to one another.  These firms apparently share the concerns of small practitioners that claims of independence are somewhat fictional, with the consultation paper noting that:

The non-listed firms see the listed group scenario as an artifice, the intention of which is to avoid the need for the group to lose any clients when a new firm is included within the group. That is to say, using the holding company to own and operate the listed group firms under separate banners avoids the loss of clients that would inevitably have occurred had the listed group firms instead merged. It also avoids the loss of clients that might otherwise have occurred from taking on a new client whose commercial interests are in conflict with those of an existing client, because the new client can be referred to another firm within the group.

According to the paper, the non-listed firms would like to see the Code amended to ensure that listed firms are required to be sufficiently transparent with new and existing clients about their ownership structures.  Non-listed firms also believe that clients should be required to give fully informed consent for separate firms within a single listed group to act on opposing sides in contentious matters.  However, this is based on the false proposition that firm independence in the listed group scenario, as currently structured, is a fiction. 

Recognising Reality

The TTIPAB plainly realises that the horse has already bolted, and that there is little point (or practicality) in now seeking to shut the gate:

The Board recognises that the listed group scenario is a reality, and indeed a significant commercial reality given the concentration of attorney work in Australia currently undertaken by listed group firms. While the Board is not aware of any attorney firms currently operating in a non-listed group, it recognises that such a scenario may occur at some future time. ... Accordingly, the Board proposes to amend the Code to introduce recognition of the possibility of a company, whether publicly listed or private, owning and operating a plurality of incorporated attorney practices.

The TTIPAB also recognises that there is a challenge in educating clients and the public more widely about the nuances of the listed group scenario:

The Board is concerned that the degree of awareness and understanding of the listed group scenario among some clients, and the stake-holding public more generally, is limited. The Board recognises that achieving complete awareness and understanding by all stakeholders of the listed group scenario is unlikely to be possible in practice. ... Accordingly, the Board proposes to amend the Code to impose on commonly owned firms minimum obligations concerning disclosure of their ownership status to prospective and existing clients.

Proposed Amendments to the Code

With regard to the listed group scenario, and considering the input from listed and independent attorneys, the TTIPAB is proposing to amend the Code so as to explicitly recognise the existing structures and arrangements, and to ensure that they – along with any similar entities that may be formed in the future – are obliged to continue to operate along current lines.  The proposed amendments would:

1. provide express recognition of the possibility of a legal person – whether a publicly listed or privately owned company, an individual or some other legal person – owning and operating multiple incorporated attorney practices;
2. provide that such commonly-owned practices are not to be treated as other than separate practices, and are not to be treated as business associates of each other for the purposes of conflict of interest provisions, so long as they are operated independently;
3. provide guidance on the governance and management structures and procedures required within or by the holding entity, and within the commonly-owned practices, to ensure that the practices are being operated independently; and
4. provide that commonly-owned attorney practices must disclose to prospective and existing clients specified information about their ownership status.

Conclusion – No Surprises Here

There is nothing in the TTIPAB’s consultation paper, insofar as it relates to listed groups of attorney firms, that should come as any surprise to regular readers of this blog.  The legitimacy of these structures has always been about corporate governance and transparency.  Client education has been, and will continue to be, an issue.  And there is nothing remotely unexpected about independent attorneys and firms expressing concerns about conflicts of interest and the potential impact of this form of consolidation on competition.  As I wrote back in February, when Professor Christie’s review was announced:

The remaining highly technical legal question is whether the ownership and management arrangements within the three publicly-held groups create unforeseen conflict-of-interest issues.  My understanding is that all three have obtained high-level legal advice that they do not, which doubtless they will present to Professor Christie when he comes knocking on behalf of the Professional Standards Board.  Attorneys within independent privately-held firms may have a different view – although even this is not without a strong element of commercial interest.  Ultimately, client perception may be a more significant factor than the risk of any actual legal conflict arising.

We now have an answer to that question – nothing unforeseen or of any new concern has arisen.  The listed forms did indeed rely (as they rightly should) upon the advice they each obtained from senior counsel.  Independent attorneys, whether in small practices or larger firms, in fact hold a different view, although it is a view that is at odds with the legal and commercial reality.  And, yes, client perception and education is important.

The TTIPAB is calling for feedback on the consultation paper, and proposed amendments to the Code of Conduct.  Submissions are requested in writing by 3 June 2017.  Instructions on how to make a submission are included within the consultation paper, available from the TTIPAB website.

Tags: Australia, Patent attorney profession