When researchers reported a noninvasive breakthrough in removing skin blemishes several years ago, Chris Marlett saw a chance to invest in the nano-pulse technology and make the treatment commercially available.
The CEO of investment banking firm MDB Capital Holdings convinced three competing inventors to join forces under the umbrella of a new company called Pulse Biosciences, which he eventually took public.
But the yearslong process was “crazy difficult,” Marlett said, and involved working with a slew of outside lawyers and navigating a complex patent process. He anticipates a much smoother path in his next venture—with startup money, patent protection, and legal guidance under the same roof through one of Arizona’s newest law firms: MDB Capital-owned PatentVest.
Such an all-in-one legal and business service profiting nonlawyers is banned by ethics rules in virtually every other state, and the conflict-of-interest pitfalls this type of firm could invite is “the thing that keeps me up at night,” said Husch Blackwell Chair Catherine Hanaway.
But Marlett sees business efficiency in Arizona’s experiment in who can practice law.
“Now,” he says, “we’ll have one unified process to do it.”
Alternative Business Structures
The state’s alternative business structure (ABS) program has approved 40 new businesses to practice law over the last 19 months, after Arizona’s Supreme Court scrapped the rule banning nonlawyers from co-owning law firms. At least 11 of the new firms focus on mass tort and personal injury law. Most have been modest in size and ambition, posing little competitive threat to Big Law.
But PatentVest is in a different category.
Critics have said that allowing investment firms and tech companies to buy law firms or create their own and practice alongside traditional lawyer-owned, billable hour-focused firms could compromise attorneys’ independence and cloud legal judgment.
Nonlawyer-owned law firms, including those owned by investment companies like PatentVest, pose “a lot of risks to legal consumers,” said Micha Star Liberty, a past president of Consumer Attorneys of California. “I don’t think law firms should be basing their actions on profits versus what’s in the best interest of the client. Caveat emptor doesn’t pass the blush test.”
Most states have adopted the American Bar Association’s Model Ethics Rule 5.4, which says that with few exceptions a “lawyer or law firm shall not share legal fees with a nonlawyer.”
They reason that lawyers need to maintain independence, and legal consumers must be protected from nonlawyers who aren’t subject to traditional lawyer discipline, including the threat of being disbarred.
Yet legal industry reformers say the current system has failed to address a well-documented need for cheaper and more accessible legal services. Allowing nonlawyers to own law firms—and granting paralegals and other professionals greater ability to counsel clients in limited settings and provide certain services like drawing up wills, trusts, and contracts—is key to advancing access to justice, they say.
While Arizona has taken the lead, a handful of other states are watching how it goes and considering loosening their legal ownership regulations, including Michigan, Connecticut, and North Carolina. They would follow Arizona and the District of Columbia, as well as Utah, which has been experimenting with new nonlawyer-owned legal service operations through a regulatory “sandbox” program.
California went the other direction last September, when Gov. Gavin Newsom signed a law that essentially barred the state from moving forward with its own sandbox.
‘We Could All Get Zapped’
In September, Arizona’s ABS committee—which is chaired by former chief justice of the Arizona Supreme Court Scott Bales and includes 10 other retired judges, lawyers, and businesspeople—approved PatentVest’s application to practice law.
Previously, PatentVest was a patent database. Now, both the database and the law firm portions of the business are 100% owned by MDB, an intellectual property-focused investment company based in Dallas, which has succeeded in spinning 16 tech businesses into public companies.
MDB’s plan: morph PatentVest into an end-to-end law firm that helps startup clients hone their tech, capture it in strong patents that can withstand litigation, and ultimately take some of the startups public. The Arizona law is “really critical” to offering this range of services to inventors, university researchers, and other innovators, Marlett said in an interview.
After Marlett’s pitch to the ABS committee in September, a few commissioners noted that the company will need to be scrupulous in its ethical responsibilities to clients from whom it hopes to profit by taking them public, according to an audio recording of the meeting obtained by Bloomberg Law. But they voted unanimously to license PatentVest and praised its leaders for exploring new ways to serve the public.
“This is the most electrifying application we’ve had a discussion on,” ABS committee member Mike Widener said at the time, after potential ethics concerns were raised about PatentVest’s business model. “I mean, literally electrifying in the sense that we could all get zapped.”
PatentVest’s application illustrates what the ABS structure is supposed to do, Widener said, by identifying problems in the existing legal culture and devising “ways to get around it.”
Yet Husch Blackwell’s Hanaway, whose firm boasts a Phoenix office, has said she is particularly concerned about how private equity firms seem intent on “rolling up” IP-focused law firms.
“This could get them in front of some very innovative companies with tech that they might later want to invest in,” she said.
Litigation Finance
Using Arizona’s program as a vehicle to shake up intellectual property law norms is attractive to businesses beyond investment banking.
The practice of patent law is multifaceted, ranging from applying for patents and negotiating with the US Patent and Trademark Office to obtain them—an often lengthy process known as patent prosecution—to enforcing the patents and fending off challenges to their validity.
It gets particularly pricey and risky when litigation is involved, which underscores why IP holders would want to shore up their portfolios from the get go. Patent owners that assert shaky patents in federal district court can be faced with invalidity counterclaims and potentially see their lawsuit backfire if a judge or jury decides the patent should never have been granted.
They can also find themselves the targets of parallel invalidity probes—called inter partes reviews—at the Patent Trial and Appeal Board that become expensive to defend and often result in the cancellation of at least some of the challenged claims.
These dynamics, along with the potential for winning huge infringement verdicts, have attracted the attention of litigation funding partners from the private equity world, which has shown strong interest in backing portfolios of patent cases.
About 21% of all capital commitments in the $13.5 billion litigation finance industry were dedicated to patent cases last year, according to Westfleet Advisors’ 2022 sector report, released Feb. 16.
Executives with prominent litigation funding companies such as
There are currently no public discipline records regarding PatentVest or any of the 39 other ABS legal services businesses, said Joe Hengemuehler, a spokesman for the State Bar of Arizona.
A recurring concern among legal traditionalists has been possible encroachment from the Big Four accountancies or other large-scale processional services and legal advice companies through the Arizona program. The Big Four in particular—
Yet despite public statements that they’re looking into the program, none of the major professional services firms have decided to participate so far.
‘Control the Process’
Housing private investment under the same law-firm roof as technical expertise and prosecution firepower will benefit clients by keeping all of the legal services, as well as any privileged lawyer-client conversations, in-house, Marlett said, while avoiding outside counsel bills.
“Patent strategies are a business process, whereas patent prosecution is an inherently legal process,” he said. “We had to create a law firm to control the process.”
The model allows a startup and its backers to closely supervise the genesis of its patents, Marlett said, building extra research and quality-control measures into patents’ claims so they can more easily withstand litigation and validity exams.
“Ninety-five percent of patents are worthless,” Marlett said. “This is a solution.”
On a high level, PatentVest’s model could help startups overcome one of their major hurdles: obtaining solid, affordable legal advice on whether and how to build a patent portfolio, said Abby Rives, who was IP counsel at startup advocacy group Engine at the time she spoke to Bloomberg Law.
While many outside firms routinely offer stellar IP advice, she said, startups can also receive information from mentors who aren’t familiar with their industry and business goals. This can steer a company toward applying for patents that aren’t helpful or don’t serve the business model, according to Rives.
Can shaking up the typical professional services structure increase the quality of legal advice that startups receive?
“It’s an experiment, and we’ll have to see if that actually pans out,” she said.
Amy Landers, director of Drexel University’s intellectual property law program, is skeptical.
“Every patent agent and patent lawyer attempts to get patents that are valid—however, as a practical matter, it’s extraordinarily difficult to know the entire universe of invalidating prior art when drafting a patent,” Landers wrote in an email. “So good intentions are just that.”
Ethical Obligations
PatentVest attorneys must ensure that the business model’s profit structure doesn’t influence how they advise clients, said Mika Reiner Mayer, a Cooley partner who specializes in patent prosecution and portfolio management for life sciences startups.
“One of the great joys of my job is being able to strategize with life sciences startups on how best to structure and build their patent portfolios over time,” Mayer wrote in an email. “In doing my job, my interests are 100% aligned with my clients and I’m not bound by an owner whose sole purpose is to maximize our firm profits. I can see interests potentially diverge in a problematic way in that regard.”
Marlett countered that Big Law attorneys are focused on billing regardless of the outcome, while the PatentVest model bets the company on the success of its clients.
“We are a niche business that has the opportunity to create technology leaders,” he wrote in an email. “I doubt we will threaten any traditional law firms.”
There’s an important distinction between a patent-focused law firm owned by a litigation funder and one like PatentVest, which is aimed at streamlining the IP side of startups and helping them obtain and practice patents that can withstand invalidity challenges, said Mayer.
“A law firm owned by a venture capital group that is truly interested in driving innovation and bringing new technologies to the market is better than a firm owned solely by litigation funders, or others whose sole purpose is to litigate,” Mayer said.
Landers pointed out another potential pitfall: anti-competitive concerns around “a private equity firm cherry-picking and combining patents around a specific emerging tech.”
For example, competitors might be discouraged from developing technology around electric vehicles if a private equity firm already owns thousands of patents in the field. “It begins to look like a patent mass that has market power, or at least sufficient power, to slow innovation in this space,” Landers said.
While courts have shied away from ruling that large, concentrated portfolios—sometimes called “patent thickets"—are illegal, the Federal Trade Commission has begun to explore claims of unfair competition which could be triggered by a lower threshold.
Many big law firms with strong IP practices employ nonlawyer experts like scientists and engineers to aid them with patent work—employees who cannot make partner under current rules and who might be tempted to leave their firms because of the better pay and incentives that corporations can offer.
“This may be a help in cases where we’re competing with publicly traded companies for this talent,” noted Hanaway.
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