The IP Factor

Judge Steven Adler, President of the Israel Labor Court of Appeals has ruled on a dispute between a patent attorney and a firm employing the patent attorney on the basis of a percentage of billing. Whilst not rejecting the system out of hand, Adler was highly critical of it. 

Background

In Israel, a number of IP firms pay their patent attorneys a salary which is based on a percentage of the billing for their work.

Briefly, the approach ensures that the salary is linked to the work performed by the patent attorney and arguably protects the interest of both the employer and the employee. Indeed, where the attorney has as much work as he/she wants and the sums billed to clients are collected, the system works very well and saves on the periodic, time-consuming negotiations regarding salary. It aligns the interests of the worker and the employer.

Where the system breaks down is where the worker does not get as much work as he/she would like. Unlike regular employment conditions based on fixed salary, where the employer has to find enough work for his/ her staff, or to fire them and pay redundancy compensation, the system enables unscrupulous employers wishing to rid themselves of an employee, to simply reduce the amount of work until the employee resigns of his/her own volition. More commonly, since the employer need only provide enough work to the employee to prevent them from getting up and leaving, firms employing the system tend to be over-staffed and where there is simply not enough work to go around, the employee is under-employed and under-paid. This enables the employer to meet deadlines and provide a high level of service, that a firm that minimizes highly paid professional staff may be unable to compete with.

Arguably, in practice, since the employers and employees have a fairly good idea what system each firm uses, patent attorneys gravitate to the type of firm that best suits them.

By its nature, under the percentage system described above, the employer / employee relationship often ends acrimoniously. Under this percentage system, former employees sometimes allege that the employer forced them out by systematically and deliberately reducing the supply of work. Additionally, since by its nature, the percentage based remuneration varies from months to month and may be corrected where clients fail to pay or where bills are discounted, with many firms requiring that the patent attorney share the risk, the resulting variable salary requires both sides to calculate and track billings.

Nevertheless, to compensate for the inherent risk, percentage based systems are generally more generous to the employee than fixed salary systems in terms of opportunity to increase income.

Decision

In Appeal to the National Labor Court ‘A. ‘A. 246/08, a patent attorney and former employee of a patent firm appealed the decision of the Regional Labor Court (Court of First Instance) in which it was ruled that the former employee was indeed entitled to some statutory benefits and also to some unpaid holidays, but rejected arguments that the amount of work had been deliberately reduced or that the patent attorney did not understand the terms and conditions of employment.

The employee challenged the legality of the system of employment as being against Israel Labor Law and/or as being the result of a standard contract that was not properly negotiated.

Judge Steven Adler, the President of the Labor Court ruled, ex ante, that the percentage method of calculating salaries was legal as:

1. the terms and conditions were understood by both parties
2. the employee earned rather more than the legal minimum wage
3. social benefits were deducted directly from the employer and not from the employee’s wage packet, despite the fact that the “benefits” component of the of the compensation package grew at the expense of the salary component of the pay packet which was not the intention of social benefit law, which rewards long service.

Judge Adler was, however, critical of the method of calculation referring to it as being non-conventional, but remained unconvinced that the system was unfairly binding on the worker, was illegal or indicative of unreasonable behavior of the employer. Having established that, he went on to indicate that:

1. the method of salary calculation was not “the way of kings” (a Biblical metaphor relating to the best way);
2. was not optimally compatible with the intention of the laws designed to protect the worker, as opposed to the percentage system which can be viewed as a system designed to protect the employer from salary expense fluctuations;
3. one should not deduce from the ruling in the specific case in question that there is nothing illegitimate in this method of calculating employee compensation, and
4. one should not take this ruling (where the former employee’s claims were rejected, as carte blanche that compensation on a percentage basis would be acceptable in other cases

Adler went on to stress that in the specific instance, it appeared that the worker had accepted the conditions over a number of years and fully understood the ramifications. He also pointed out that the system could be viewed as the employer insuring himself against market fluctuations at the employee’s expense, and the effect of seniority in the workplace was nullified by the depreciation of the basic salary to offset seniority benefits.

Nevertheless, in summing up, Judge Adler whilst repeating his reservations with regard to this system of calculating salary, concluded that it is neither illegitimate nor illegal, per se; was accepted by the employee over a long period of time and so cannot be challenged in retrospect. Fairly minor costs of 5000 NIS ($1500) were awarded against the appellant (former employee).

My Comments

Reflecting the extraordinarily small community of licensed Israel Patent Attorneys, readers will not be surprised to learn I have met both parties professionally, so I am not mentioning names, nor am I commenting on the specific facts of the case. Indeed, I have met Judge Adler in the past (at a seminar organized by Adv. David Gilat in memory of Reinhold Cohen) and discussed the issue of percentage salaries with him theoretically and academically, so there is little in this decision that surprises me, in that it reflects his general philosophy of worker’s rights and the cognitive nature of Employment Law.

In a previous posting, I critiqued a scathing dismissal of the percentage salary system published by Dr. Kfir Luzzatto and gave him a right to reply of which he availed himself.

Adler points out that, in his opinion, the percentage system is one which is open to abuse both by employers and employees, and while it is legal, can be problematic.

From some of his comments, I think that if another case comes before him, without the case specific mitigating circumstances present in this instance, he might well find in favor of the employee and could rule that the system is not merely problematic but some implementations of it are illegal.

I note however, that the system is not unique to patent firms and similar systems are in place in many law firms, where, a ‘trainee lawyer’ (stajer, or articled clerk) will generally earn a minimum wage, an ‘associate lawyer’ will generally earn a fixed salary, and a ‘junior partner’ will earn a percentage of his/her billing, as opposed to a full partner or senior partner, who earns a percentage of the profits or turnover of the firm.

Some firms cream off from the top for time put into training. In other words, the client is billed X; the supervisor spends Y hours in tidying up the application and training and gets his percentage of Y, and the trainee is left with his percentage of what remains – with the firm collecting from the trainer or trainee. Sometimes, at least for the first few cases, in practice, firms using such a system do not pay the apprentice patent attorney anything, rationalizing it as free training. This was not a consideration in the case in hand, where the former employee was a licensed and experienced patent attorney, but if a case where this happened were to come before judicial review, I would anticipate the justices in the labor courts taking a very dim view indeed.

In this regard, I think Adler’s remark noting that in the specific case the appellant (former employee) earned rather more than the legal minimum salary is important, as I believe that this system is inappropriate for trainees, who are not guaranteed even the minimum wage, despite having college edcation and increasingly, higher degrees as well.

Throwing Down the Gauntlet

I think Judge Adler has thrown a challenge to the profession. Whilst not ruling that the percentage system is illegal, he is extremely critical of it. I would like to see the Israel Branch of the AIPPI and/or the Association of Patent Attorneys in Israel (the AIPA) – which is supposed to be a self-regulating umbrella organization for practitioners – hold an open and frank review of current practices, to decide on and encode reasonable behavior. If there is a consensus amongst practitioners, both employers and employees, as to what constitutes acceptable, ethical behavior, it is unlikely that the labor courts will get involved.

This entry was posted on Monday, August 24th, 2009 at 8:04 pm and is filed under Israel, Israel Court Ruling, Israel IP, News, Opinion. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.