Can a lawyer who represents inventors take a royalty interest or a share of profits as a fee, and what conflicts arise if the lawyer also represents the manufacturers the inventors deal with?

Plain-English summary

A lawyer represented persons marketing inventions to manufacturing companies and asked about fee arrangements and conflicts. The committee was of the opinion that if the lawyer also represented the manufacturing companies the clients were dealing with, the lawyer would need to comply with RPC 1.7's disclosure and consent requirements.

On the fee question, the lawyer asked whether the inventors could pay on a contingent basis through a royalty interest in gross receipts or in the sale of the products or patent, or by sharing gross or net profits, or by paying a fixed or percentage fee for finding licensees or distributors. The committee was of the opinion that entering into any form of business relationship with a client requires compliance with RPC 1.8, and pointed to In re McGlothen, 99 Wn.2d 515, 663 P.2d 1330 (1983), and the cases cited there. It added that, depending on the facts, the lawyer's own interests might come into conflict with the client's as a result of the business or fee arrangement, in which case RPC 1.7(b) would apply.

Finally, the committee was of the opinion that if the lawyer also represented the manufacturing company in drafting agreements between the company and the client, the conflict of interest between them might not be waivable under RPC 1.7(a).

Currency note

This opinion was issued in 1994, before the Washington State Bar Association's adoption of the 2006 revisions to the Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Is a royalty or profit-share fee from a client treated as a business transaction with the client?

A: Yes. The committee was of the opinion that entering into any form of business relationship with a client, including these royalty and profit-share fee arrangements, requires compliance with RPC 1.8.

Q: Can the lawyer's own fee arrangement create a conflict with the client?

A: The committee said that, depending on the facts, the lawyer's own interests might come into conflict with the client's as a result of the business or fee arrangement, in which case RPC 1.7(b) would apply.

Q: What if the lawyer also represents the manufacturer the inventor is dealing with?

A: The committee was of the opinion that representing the manufacturing company in drafting agreements between the company and the client might create a conflict that is not waivable under RPC 1.7(a).

Background and rules framework

The opinion applied RPC 1.8 (ABA Model Rule 1.8), which governs a lawyer's business transactions with a client, to the proposed royalty, profit-share, and finder-fee arrangements. It also applied RPC 1.7 (ABA Model Rule 1.7): subsection (b) for the lawyer's own interest in the fee arrangement, and subsection (a) for the directly adverse conflict that could arise from representing both the inventor and a manufacturer the inventor is dealing with, which the committee said might not be waivable.

Citations and references

Rules of Professional Conduct:

• ABA Model Rule 1.7 (conflict of interest; current clients); Washington RPC 1.7, 1.7(a), 1.7(b)
• ABA Model Rule 1.8 (business transactions with a client); Washington RPC 1.8, 1.8(a)

Cases:

• In re McGlothen, 99 Wn.2d 515, 663 P.2d 1330 (1983), cited by the committee on business relationships with clients

See also

• WA Ethics Op. 1191: Fee Paid in Client Stock
• WA Ethics Op. 1198: Contingent Fee From Sale Proceeds
• WA Ethics Op. 1017: Lawyer Who Is Also a Real Estate Broker

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=638

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Advisory Opinion: 1557
Year Issued: 1994
RPC(s): RPC 1.7; 1.8(a)
Subject: Business transaction with client; lawyer representing inventors for royalty interest or share of profits

The Committee reviewed your inquiry concerning representation of persons marketing inventions to manufacturing companies. It was not clear from your inquiry whether you also represent manufacturing companies with whom your clients might be dealing. The Committee was of the opinion that if you do, you would need to comply with the requirements of RPC 1.7 regarding disclosure and consent.

You ask whether investors could pay legal fees on a contingent basis in the form of either a royalty interest in gross receipts or sale of the products or patent. Others have also suggested sharing in the gross or net profits with you and one client has requested that you seek prospective licensees or distributors for a fixed or percentage fee. The Committee was of the opinion that in entering into any form of business relationship with a client you would need to comply with the requirements of RPC 1.8. The Committee also suggested that I refer you to In Re McGlothen, 99 Wn. 2d 515, 663 P.2d 1330 (1983) and the cases cited therein. The Committee also was of the opinion that, depending on the facts, in some instances as a result of the business/fee arrangement with your client, your own interests might come into conflict with your client's. In that case, you would need to comply with RPC 1.7(b).

Finally, the Committee was of the opinion that if you were also representing the manufacturing company in drafting agreements between the company and your client, the conflict of interest between then might not be waiveable pursuant to RPC 1.7(a).