Opinion 706

Statement of Facts Discussion Conclusion

A company owned by nonlawyers (“the Company”) provides a platform of case management, back-office, and legal support services and technology for lawyers and law firms. The Company is not a law firm and does not provide legal services. The Company markets and sells the platform only to lawyers and law firms. Lawyers and law firms who subscribe to the Company’s services direct and oversee the use of the Company’s platform.

The Company intends to charge periodic fees that will be based on a lawyer or law firm’s revenues. The Company maintains that all revenue information provided to the Company will be pooled and anonymized so that that the Company will not receive any confidential client information. The Company will not be given a client list and will not be able to associate any revenue with any particular client.

Lawyer A is impressed by the Company’s technology and services. Lawyer A proposes to make an equity investment in the Company, either directly or through Lawyer A’s law firm.

1. A lawyer may not agree to pay a nonlawyer-owned vendor based on a percentage of the revenues of the lawyer or the lawyer’s firm.

Rule 5.04(a) of the Texas Disciplinary Rules of Professional Conduct provides, in relevant part, “[a] lawyer or law firm shall not share or promise to share legal fees with a non-lawyer . . ..” The rule includes three exceptions, none of which apply to charges for third-party support services for law firms. See Rule 5.04(a)(1-3). “The principal reasons for the limitations [on fee sharing in Rule 5.04] are to prevent solicitation by lay persons of clients for lawyers and to avoid encouraging or assisting nonlawyers in the practice of law.” Comment 1 to Rule 5.04.

In Professional Ethics Opinion 467 (November 1990), the Committee considered an office space lease arrangement with a nonlawyer landlord in which a lawyer agreed to pay rent based on a percentage of the lawyer’s gross receipts. The Committee concluded that the lease was an agreement to share legal fees with a nonlawyer in violation of Rule 5.04. The opinion acknowledged that percentage lease agreements are common in leases of commercial property. But the opinion concluded such an arrangement is impermissible for lawyers because it would “create an incentive for the landlord to refer legal business to the law firm” to increase gross revenues and, hence, the rent.

Opinion 552 (August 2004) involved an insurance defense lawyer who was required by an insurance company to submit invoices to a third-party legal fee auditor and pay for the audit based on a percentage of the invoiced fees. The opinion concluded the payment would violate Rule 5.04(a), noting that:

The insurance company has not required the lawyer to pay part or all of the actual expense of the third-party audit, it has required that the lawyer split his or her fee with the third-party auditor on a percentage basis. The payment of a percentage of the lawyer’s fee to the third-party auditor constitutes a violation of Rule 5.04(a).

Similarly, Opinion 642 (May 2014) determined that a law firm may not agree to pay specified bonuses to nonlawyer employees contingent on the firm achieving a certain revenue or profit. The opinion concluded that such an arrangement would violate Rule 5.04(a):

[A] non-lawyer compensation plan that provides for a specified additional payment if the firm meets a predetermined revenue or profit goal is a type of fee-sharing arrangement that is prohibited by this Rule because the arrangement directly connects the amount of fees received by the law firm to the amount of compensation to be paid to non-lawyer employees.

Consistent with Opinions 467, 552, and 642, a lawyer who agrees to the fee arrangement proposed by the Company violates Rule 5.04(a). The Company’s proposed fee is not based on the amount of services provided or the actual cost of those services, but in practical effect is a split of the fees earned by the law firm. Such an arrangement violates Rule 5.04(a)’s prohibition on sharing legal fees with a nonlawyer.

2. A lawyer may own an equity interest in a company owned in part by nonlawyers so long as the company does not engage in the practice of law.

Rule 5.04(b) prohibits a Texas lawyer from forming a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law. Similarly, Rule 5.04(d) prohibits a Texas lawyer from practicing law with or in a professional corporation or association if “a nonlawyer owns any interest therein,” “a nonlawyer is a corporate director or officer,” or “a nonlawyer has the right to direct or control the professional judgment of a lawyer.” But the Rules do not prohibit a Texas lawyer from investing in a nonlawyer-owned business that does not engage in the practice of law.

Although a Texas lawyer is generally free to invest in a nonlawyer-owned business that does not engage in the practice of law, a lawyer may not violate the Rules “through the acts of” the business. See Rule 8.04(a)(1) (a lawyer shall not “violate these rules, knowingly assist or induce another to do so, or do so through the acts of another, whether or not such violation occurred in the course of a client-lawyer relationship”).

3. A lawyer who owns or invests in a law-related business must guard against conflicts of interest and may need to comply with Rule 1.08.

The Committee cautions that additional ethical issues may arise if a lawyer owns or invests in a business that provides law-related goods or services to the lawyer’s clients, i.e., goods or services related to the practice of law that are not prohibited as the unauthorized practice of law when provided by a nonlawyer. Examples of law-related services include title insurance, financial planning, and eDiscovery services. Under certain circumstances, a lawyer’s interest in a law-related services provider may create conflicts of interest. See Rule 1.06 (Conflict of Interest: General Rule); Opinion 658 (July 2016) (discussing issues arising from lawyer’s ownership of courtroom graphics company); Opinion 643 (May 2014) (discussing conflicts arising in connection with lawyer’s ownership of debt management services company); Opinion 569 (April 2006) (discussing whether a lawyer may represent a client in a matter against a customer of a law-related business owned by the lawyer); Opinion 555 (December 2004) (discussing conflicts arising in connection with lawyer’s investment in chiropractor’s practice).

Further, a lawyer engaged in the sale of goods or services related to the practice of law must comply with Rule 1.08(a) if the business provides the law-related goods or services to the lawyer’s client. See Comment 1 to Rule 1.08 (“This Rule applies to lawyers engaged in the sale of goods or services related to the practice of law, for example, the sale of title insurance or investment services to existing clients of the lawyer’s legal practice.”). Rule 1.08(a) provides:

(a) A lawyer shall not enter into a business transaction with a client, or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client, unless:

(1) the terms of the transaction or acquisition are fair and reasonable to the client and are fully disclosed and transmitted to the client in a manner which writing that can be reasonably understood by the client;

(2) the client either is represented in the transaction or acquisition by an independent lawyer of the client’s choice or the client is advised in writing to seek the advice of an independent lawyer of the client’s choice and is given a reasonable opportunity to seek that advice; and

(3) the client thereafter provides informed consent in writing to the terms of the transaction or acquisition, and to the lawyer’s role in it, including whether the lawyer is representing the client in the transaction.

Under the facts assumed in this opinion, it is unclear whether Lawyer A’s law firm will use the Company’s services in the representation of the law firm’s clients (as distinguished from general law firm operations or management). If the law firm intends to retain or recommend the use of the Company’s services in the representation of a client, Lawyer A’s investment in the Company may create a conflict of interest and may require written disclosure and informed consent under Rules 1.06 and 1.08.

Under the Texas Disciplinary Rules of Professional Conduct, a lawyer that engages a nonlawyer-owned company to provide a platform of support services may not pay or promise to pay fees to the company based on a percentage of the revenues of the lawyer or the lawyer’s firm.

A lawyer may own an equity interest in a company owned in part by nonlawyers so long as the company does not engage in the practice of law. A lawyer who owns or invests in a law-related services company should consider ethical issues, including conflicts of interest, that may arise from the investment.