May a California lawyer accept as a fee for preparing and prosecuting a patent application a percentage of any future profits the patent generates, without complying with the adverse-interest rule for ownership transactions?

Plain-English summary

The committee considers a new client who proposes to pay the lawyer 5% of "net profits" from any licensing of a patent in lieu of an hourly or flat fee. The lawyer's interest is unsecured, the patent's issuance is uncertain, and any profits are unknown when the engagement begins. The question is whether the arrangement triggers former Rule 3-300's adverse-interest procedure, Rule 4-200's unconscionability bar, and Bus. & Prof. Code section 6147's contingent-fee statute.

The committee, following Ramirez v. Sturdevant (1994) and Setzer v. Robinson (Cal. 1962), treats the negotiation of a fee at the outset of the relationship as an arm's-length transaction distinct from a mid-representation fee change.

On Rule 3-300, the committee reads Hawk v. State Bar (Cal. 1988) and the State Bar Court's decision in In re Silverton (2001) as identifying "adversity" with the lawyer's ability "to summarily extinguish the client's interest in property" without judicial intervention. The committee characterizes the proposed agreement as conveying only a contractual right to a future contingent payment, not an ownership interest in the patent itself. If the client refused to pay, the lawyer would have to bring a fees action; the client could oppose the existence, amount, and enforceability of the fee in that action. The committee draws this analysis from its own Opinion 496 (1998), which addressed a priority lien on civil-rights recoveries. The committee distinguishes Silverton (lawyer who contracted for the proceeds of compromises of his client's medical claims), in which the lawyer's contracted-for right could summarily extinguish the client's interest in the negotiated funds.

The committee notes a tension between the lawyer's interest and the client's that is intrinsic to patent contingent-fee arrangements. The lawyer who prosecutes the application controls the breadth of claims; narrower claims are easier to obtain but more limited in scope, while broader claims are riskier but yield greater rights. A lawyer fee tied to commercialization may shape that drafting decision. The committee concludes that this divergence is not "adversity" within Rule 3-300 or Hawk, but it engages the lawyer's other duties of competence, full disclosure, and respecting the client's authority over substantive decisions.

On Rule 4-200, the committee reiterates that an unconscionable fee is one "so exorbitant and wholly disproportionate to the services performed as to shock the conscience" (Bushman v. State Bar (Cal. 1974); Tarver v. State Bar (Cal. 1984)), and that conscionability is generally assessed at the time the agreement is made (Rule 4-200(B); Brobeck, Phleger & Harrison v. Telex Corp. (9th Cir. 1979); Cetenko v. United Calif. Bank (Cal. 1982)) unless the parties contemplate later-event adjustment.

On section 6147, the committee concludes that because the lawyer's fee depends on both patent issuance and commercial exploitation, the agreement is contingent and must satisfy section 6147(a)'s requirements. Non-compliance does not constitute discipline grounds but renders the agreement voidable at the client's option under section 6147(b), with the lawyer entitled to recover only a reasonable fee.

In practice

The opinion holds that, under former California Rule 3-300 as it stood in 2001, a percentage-of-future-patent-profits fee is a contingent fee, not an adverse pecuniary interest requiring the Rule 3-300 procedure (independent counsel advice and informed written consent). The committee directs the lawyer to memorialize the agreement in writing under Bus. & Prof. Code section 6147 and to evaluate the fee against Rule 4-200's unconscionability standard at the time of agreement.

California's professional-conduct rules were revised effective November 1, 2018; former Rule 3-300 corresponds substantially to current Rule 1.8.1 (business transactions and acquisition of adverse interests), and former Rule 4-200 corresponds to current Rule 1.5. The committee's analysis predates the 2018 revisions.

Common questions

Q: Does a percentage-of-patent-profits fee trigger California's adverse-interest rule for acquiring an interest in a client's property?

A: Per the opinion, no. The committee characterizes the lawyer's right as a contractual right to a contingent payment, not an ownership interest the lawyer can summarily extinguish. Former Rule 3-300's separate procedural requirements do not apply.

Q: Must the engagement still be in writing?

A: Per the opinion, yes. Because the fee is contingent on the patent's issuance and commercial exploitation, Bus. & Prof. Code section 6147(a)'s written-agreement requirements apply. Non-compliance lets the client void the agreement; the lawyer's recovery is limited to a reasonable fee.

Q: When is the fee evaluated for unconscionability?

A: Per the opinion, at the time the agreement is made, unless the parties contemplate later-event adjustment. The committee cites Rule 4-200(B); Brobeck; and Cetenko.

Q: Does the lawyer have any special duty given the conflict between broader and narrower claims?

A: Per the opinion, the committee identifies a "potential divergence of interests" not amounting to Rule 3-300 adversity. The lawyer's competence duty, the duty of full disclosure, and the duty to let the client make substantive decisions all apply.

Q: Could the lawyer take an actual ownership interest in the patent instead of a contingent fee on profits?

A: The opinion does not approve that arrangement and analyzes only the proposed percentage-of-profits structure. The committee specifically notes that the agreement here does "not assign[] the lawyer an ownership interest in the patent or its profits."

Background and rules framework

The opinion interprets former California Rules of Professional Conduct 3-300 (avoiding adverse pecuniary interests), 3-310 (avoidance of conflicts), and 4-200 (unconscionable fees), and Bus. & Prof. Code section 6147 (contingency fee contracts). It anchors the adversity analysis in Hawk v. State Bar (Cal. 1988) and the State Bar Court's In re Silverton (2001), and the unconscionability analysis in Bushman v. State Bar (Cal. 1974) and Tarver v. State Bar (Cal. 1984).

Citations and references

Rules of Professional Conduct:

• Former California Rule 3-300 (adverse pecuniary interest)
• Former California Rule 3-310 (conflicts of interest)
• Former California Rule 4-200 (unconscionable fees)

Statutes:

• Bus. & Prof. Code section 6147 (contingency fee contracts)

Cases:

• Brobeck, Phleger & Harrison v. Telex Corp., 602 F.2d 866 (9th Cir. 1979), unconscionability at time of agreement
• Hawk v. State Bar of California, 45 Cal.3d 589 (Cal. 1988), summary extinguishment as adversity
• Tarver v. State Bar of California, 37 Cal.3d 122 (Cal. 1984), unconscionability standard
• Cetenko v. United Calif. Bank, 30 Cal.3d 528 (Cal. 1982)
• Bushman v. State Bar of California, 11 Cal.3d 558 (Cal. 1974), unconscionable fee definition
• Setzer v. Robinson, 57 Cal.2d 213 (Cal. 1962), fee negotiation at outset as arm's length
• Passante v. McWilliam, 53 Cal.App.4th 1240 (1997)
• Ramirez v. Sturdevant, 21 Cal.App.4th 904 (1994), arm's-length fee negotiation
• Alderman v. Hamilton, 205 Cal.App.3d 1033 (1988), fee statutes' purpose
• In re Silverton, 2001 Cal. Op. LEXIS 4 (Cal. State Bar Ct. 2001), settlement-proceeds contract may violate Rule 3-300

Other opinions cited:

• Cal. State Bar Formal Opinion 1989-116
• LACBA Formal Opinion 496 (1998): priority lien on civil-rights recovery not adverse interest

See also

• LACBA Opinion 489: Retainer Agreement Language Limiting Client
• LACBA Opinion 526: First-Proceeds Contingency Fee
• LACBA Opinion 535: Charges in Representation Subject to Fee Statutes

Source

• Landing page: https://lacba.org/?pg=ethics-opinions
• Original PDF: https://lacba.org/docDownload/2010599