The following analysis discusses the conflicts of interest rules in the Code of Professional Conduct (the “Code”) and a licensee potentially wearing different hats within a company or organization.
A licensee was acting as patent agent for a corporation but was also acting as interim CEO, a Board member and a shareholder and wanted to know whether they were running afoul of the conflict of interest rules in the Code.
The principle of Part 3 of the Code, which sets out the conflict of interest rules, states that “in each matter, an agent’s judgment and loyalty to the client’s interest must be free from compromising influences.”
Rule 3-1 states that “an agent must not act for a person if there is a substantial risk that the agent’s loyalty to or representation of that person would be materially and adversely affected by the agent’s own interest”. The Commentary to that Rule goes on to state that “a conflict of interest exists if there is a substantial risk that an agent’s loyalty to or representation of a client would be materially and adversely affected by the agent’s own interest”.
The Commentary to Rule 3-1 goes on to state that “an agent…having a personal financial interest in a client’s affairs or in a matter in which the agent is requested to act for a client such as a partnership interest in a joint business venture with a client” is an example of a conflict of interest, though it notes that
an agent who owns a small number of shares of a publicly traded corporation would not necessarily have a conflict of interest in acting for the corporation because the ownership of those shares may have no adverse influence on the agent’s judgment or loyalty to the client.
The Commentary to Rule 3-1 also states that “an agent…acting for a public or private corporation and serving as the director of the corporation” is an example of a conflict of interest. The Commentary explains that holding those two roles may result in a conflict of interest
because they may affect the agent’s independent judgment and fiduciary obligations or obligations of loyalty and good faith in either role or both roles, obscure whether advice is given in one role or the other and disqualify the agent…from acting for the corporation.
The Code also provides at Rule 3-2 that there is an exception to the application of the conflict of interest rules. The exception provides that
an agent must not represent a client in a matter if there is a conflict of interest unless there is express or implied consent from all affected clients and the agent reasonably believes that they are able to represent each client without having a material adverse effect upon the representation of or loyalty to the other client.
The Code states at Rule 3-8(1) that
an agent must not enter into a business transaction with a client or knowingly give to a client or acquire from a client, directly or indirectly, ownership of, or a security or other monetary interest in an intellectual property right that is the subject of the agent’s professional advice.
A licensee who also holds the position of interim CEO, shareholder, and sits on the Board is likely acting in a conflict of interest. This is set out in the Commentary to Rule 3-1 above. In the scenario described, there is no one to give consent to a possible conflict of interest pursuant to Rule 3-2 because the licensee is in a situation where they are effectively both the agent and the client.
Additionally, Rule 3-8(4) states that a licensee must not acquire from a client a monetary interest in an intellectual property on which they have given professional advice. In the scenario described, the licensee would have both given advice on an intellectual property right and, in acting as CEO and shareholder, the licensee is very likely to have acquired a monetary interest in the intellectual property right as well. This means that the agent cannot readily recommend that the client seek independent legal advice, where they themselves are effectively the client, as set out in Rule 3-8(4).
Licensees should be attuned to the possible conflicts of interest that may arise from various business arrangements with clients and should be particularly careful when stepping into a role that may compromise their objectivity in advising a client.
A licensee in the scenario described has various options, and may end up stepping out of one or more roles in order to ensure that they are not acting in a conflict of interest.
Ultimately each licensee has to decide what the correct course of action is in order to adhere to their professional obligations. It is up to the licensee to exercise their own professional judgement in any given circumstance. Through the Ethics Inquiry process, we are happy to help interpret the Code as part of the process of risk-assessment and ethical analysis.
We look forward to receiving more inquiries and providing more guidance to licensees. It helps us identify areas where further information or analysis might be instructive and it will help to inform our consultation on the Code, which will be rolling out in early 2023.