Incorporation of Patent Attorneys FICPI Conference Daniel Marks Partner 26 July 2008

Proposed reforms to Patents Act Background to proposed reforms The Patents Act currently prohibits a company from carrying on business as a patent attorney: section 201(5) of the Patents Act IP Australia has developed a preferred incorporation model which proposes to repeal the current prohibition on a company carrying on business as a patent attorney Consultation Paper (released October 2007) Position Paper (released December 2007) The proposed reforms are based on provisions of the model law for the legal profession

Proposed reforms cont. The proposed model provides for amendments to Patents Act: The repeal of the current prohibition on a company carrying on business as a patent attorney A notification regime (to the Director General, IP Australia) Notice by company proposing or ceasing to act as a patent attorney Companies acting as patent attorneys to be known as incorporated patent attorneys Preservation of personal responsibility of registered patent attorneys for discipline, complaints and compliance with statutory obligations (whether director or employee) Legislated compliance with a Code of Conduct by all registered patent attorneys (including as employees or officers)

Proposed reforms cont. At least one company director to be a registered patent attorney with responsibility for management of company (with emphasis on discipline and professional obligations of a patent attorney practice) The consequences of not having a patent attorney director for more than a prescribed period (e.g. 7 day period under model law for ILPs) Permission for employees to prepare a specification if acting under supervision of a registered patent attorney In certain circumstances, the Patents Act will prevail over any inconsistency with the Corporations Act Compulsory professional indemnity insurance

Proposed reforms cont. Status of proposed reforms Awaiting release of draft Bill from Office of Parliamentary Counsel Timing will depend on priority/agenda set by Federal Government Domestic Policy section of IP Australia currently believes proposed reforms will not take effect until end 2009 Industry stakeholders should consider lobbying Federal Govt to expedite reforms (if stakeholders consider reforms beneficial)

Partnership structure What is a partnership? (assuming simple partnership structure) A group of persons carrying on a business in common with a view to profit Contractual relationship between persons (whether oral, written or implied by conduct) Simple, flexible and low cost form of association Collectively known as a “firm” Aspects of partnership governed by Partnership Acts in each State – some provisions may be varied by agreement between partners

Partnership structure Duty and role of partners Relationship between partners is a fiduciary one Legal duty for each partner to act fairly, honestly and in good faith towards all other partners in the course of the partnership’s activities Partners in patent attorney firms have additional duty to their clients as imposed by regulatory regime

Partnership structure Advantages Reduced formality and reporting obligations (a partnership may be formed without need for registration, constitution and may be dissolved more easily) Cost Withdrawal of capital (where partners agree) Taxation

Partnership structure Disadvantages Unlimited liability: partners are personally, jointly and individually liable for firm debts No perpetual succession: a partnership is not distinct from its members so (in the absence of express agreement between partners) death, termination, retirement or admission of partners may dissolve partnership and require the formation of a new partnership Limit on number of partners: Corporations Act limits partnerships to maximum of 20 (with exceptions for certain professions e.g. patent attorneys (50), solicitors (400), accountants (1000) Raising funds: Unlike a company, funds cannot be raised by public issue.

Corporate structure What is a company? A company is an association incorporated under the Corporations Act Formed upon registration in accordance with the provisions of the Corporations Act A company is a separate legal entity distinct from its shareholders and directors A company has the following attributes: the capacity to sue and be sued; perpetual existence (until deregistered); the power to own and dispose of property; the potential for members’ liability (for debts) to be limited; and all the powers of a natural person, plus corporate powers e.g. power to issue and cancel shares, distribute company property among members, grant floating charges over the company’s property

Duties and role of shareholders Corporate structure Duties and role of shareholders No real duties imposed on shareholders (unless imposed by constitution or shareholders agreement) Role in voting/approval of certain matters as required under the Corporations Act Proposed reforms will impose duties on shareholders who are employees or officers of incorporated patent attorney

Corporate structure Duties and role of directors Duties and role of directors is a key feature of a company Directors duties arise under Corporations Act, Trade Practices Act, Occupational health and safety legislation and common law (fiduciary relationship between company and director) Duties are also likely to be enhanced under the proposed reforms to Patents Act concerning incorporation of patent attorneys. Further, duties of patent attorney directors will be greater than patent attorneys who are mere shareholders or employees. Directors exposed to claims by a multitude of players e.g. the Company itself, shareholders, members of the public, competitors, creditors, employees, govt agencies

Corporate structure Examples of duties under Corporations Act Duty to act in good faith and in the best interests of the company and for a proper purpose This does not mean a duty to act in the interests of any particular shareholder (including majority shareholders) but rather in the interests of existing and future shareholders as a whole Tension may be created between this duty and duty to the court and to clients pursuant to profession’s regulatory regime. May be overcome by provisions contained in the Constitution. Duty of care, skill and diligence (inc. personal liability if the company trades whilst insolvent) Duty to avoid conflict of interest between personal interest and the duty to the company

Corporate structure Advantages Limited Liability Perpetual succession Capital raising (potential for IPO) vs. debt financing Employee incentives through equity holding Issuing equity for strategic reasons Separation of ownership from management

Corporate structure Disadvantages Tax position of partners in converting to corporate structure (to be discussed in separate presentation) Formalities and costs Participation in management Potentially unequal liability for director patent attorneys Possibly addressed by all non-director patent attorneys agreeing to act in good faith and for a proper purpose together with appropriate indemnities in favour of directors (though query effectiveness)

Questions?