Ethics Opinion

Opinion No. 76-16

December 1976

Summary: It is not improper for a lawyer to accept shares of stock in a corporation as compensation for organizing a corporation to market a new invention-process, preparing legal documents in connection with marketing, selling or leasing the invention-process or its finished products, and general legal advice to the corporation.

Facts: A former client of a law firm has a patent on an invention-process and seeks to form a corporation to market, sell or lease the invention-process, the finished product, or both. He has proposed to assign the patent to the corporation when formed, to take 70 percent of the stock himself, to give 20 percent of the stock to a promoter, and to give the law firm 10 percent of the stock for organizing the corporation, preparation of legal documents and general legal advice to the corporation. The law firm asks whether there is ethical impropriety in receiving compensation in this manner.

Discussion: DR 5-103(A) provides: "A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation he is conducting for a client," except for acquisition of a lien granted by law to secure his fee or expenses, or for a reasonable contingent fee in a civil case.
In American Bar Association Committee on Professional Ethics Formal Opinion 279, June 18, 1949, it was held that former Canon 10 (which is to the same eftect as DR 5-103(A) above) prohibited a lawyer from accepting stock in a corporation as payment of his fee for filing a competing or counter-application to the Federal Communications Commission for transfer of control or assignment of license of an existing radio station to the corporation, rather than to a competing corporation which had already filed such an application. Nor could the lawyer purchase stock in the corporation as an investment, the committee ruled. It concluded that such acceptance or purchase was, on the facts, acquisition of "an interest in the subject matter of the litigation which he is conducting" for his corporate client. The opinion concluded, however, that the committee "limit our ruling to the facts presented and do not say that under no circumstances is it proper for a lawyer to accept as an attorney's fee a stock interest in a corporate client."
Since none of the legal services to be performed by the firm which initiated the inquiry to us involve "litigation" to be conducted by the law firm for the inventor or for the corporation, we conclude that acceptance of stock in the client corporation in return for other types of legal services, and/or purchase of the stock by the firm as an investment, is ethically proper.
We believe our decision here to be consistent with ABA Opinion 279, since in that case the only asset of the corporation was its competing or counter-application to the Federal Communications Commission, in a contested case which involved some at least of the elements of a "litigation." But we would note that the question involved in ABA Opinion 279 is not now before us, and we express no opinion as to its correctness where the "subject matter" of the lawyer's representation of the client (or client corporation) involves an application to an administrative agency, rather than enforcement of a more traditional type of cause of action being litigated between two adverse parties.

Permission to publish granted by the Board of Delegates, 1976. As stated in the Rules of the Committee on Professional Ethics, this advice is that of a committee without official governmental status.