Rules Prohibit Nonlawyer Control or Ownership of Firms
Under Rule 5.04 of the Texas Disciplinary Rules of Professional Conduct, Texas lawyers may not allow nonlawyers to have controlling or ownership interest in their law firms, and lawyers are prohibited from practicing law with for-profit entities if a nonlawyer is a director or officer thereof or if a nonlawyer has the right to direct or control the professional judgment of a lawyer. Similar prohibitions apply to law firms that are organized as partnerships. The opinion notes that the title “officer” indicates that the person holding the title has the power to control the entire firm (in the case of chief executive officer) or significant areas of the firm’s operations (in the case of chief technology officer), thus running afoul of Rule 5.04(a). Moreover, the use of the term “principal” implies an interest in the firm involving control, ownership, or both. Designating nonlawyers “principals” when they do not, in fact, have a controlling or ownership interest in the firm would be misleading and would violate Rule 7.02(a), which prohibits false or misleading statements about the qualifications or services of any lawyer or firm.
Bonuses Based on Revenue Also Prohibited
The opinion also held that the Texas disciplinary rules prohibit a law firm from paying bonuses to nonlawyer employees that are contingent upon the firm’s achieving a specified level of revenue or profit, as that would constitute sharing of legal fees with a nonlawyer, something that is expressly prohibited by the rules. The law firm may consider its revenues and profits in determining whether to award bonuses, and if so, how much. But, bonuses cannot be directly tied to meeting specific revenue goals. Tha— according to the Professional Ethics Committee—would provide an incentive for the nonlawyer employees to do things in an effort to increase revenues that might interfere with the lawyer’s independent judgment.
Law Firms and Legal Services Groups Seek Reconsideration
The Professional Ethics Committee has received numerous requests for reconsideration of its opinion. In particular, a June 16, 2014 request for reconsideration was signed by the managing partners of 53 Texas law firms that believe the committee “misapplied the relevant ethical rules” and “reached an overly broad conclusion that is not supported by the rules and does not protect the public.” The reconsideration request argues that the conclusions reached by the committee would “cause enormous problems for the day-to-day operations of law firms throughout Texas.”
“The letter seeking reconsideration addresses the question of nonlawyers having the title ‘officer’ even if it is Chief Technology Officer, Chief Information Officer, or Chief Talent Officer,” observes Irwin H. Warren, New York, NY, cochair of the ABA Section of Litigation’s Ethics and Professionalism Committee. “The fact that employees have such titles does not mean or should not mean that the firm runs afoul of the ethics rule. The ethics rule was intended to prevent nonlawyers from owning law firms or exercising professional control over lawyers.” As Warren sees it, having a nonlawyer employee with the title “officer” in no way means that such a nonlawyer owns the firm, has an ownership interest in the firm, or exercises professional control over the lawyers’ practice of law. “If anything, those nonlawyers operate or do their jobs under the ownership and control of the lawyers, rather than vice versa,” he explains.
The request for reconsideration points out that some law firms in Texas have more than 700 attorneys, with significantly more nonlawyer employees, and annual revenues in excess of $600 million. Firms of that size and complexity require professional management to ensure that finances are handled appropriately, technology works reliably and is secure, and so forth. “Clients will be ill-served if lawyers also have to act as their firms’ Chief Technology Officers,” the letter states.
A similar request for reconsideration was filed by Association of Legal Administrators, the American Association of Law Libraries, the International Legal Technology Association, the International Practice Management Association, and the Legal Marketing Association, which note that “the rule focuses on ownership, not titles. As long as the professional independence of the lawyer is not being interfered with, title should not matter, regardless of whether it is officer, director or principal.”
Criticism of Hiring Nonlawyer Managers
“This whole thing is crazy!” says Lawrence J. Fox, Philadelphia, PA, past chair of the ABA Standing Committee on Ethics and Professional Responsibility. Fox agrees with the Texas Ethics Committee’s opinion and is surprised by the outcry against it. “I don’t understand it. It undermines everything we believe in. It is so fundamental I wouldn’t have thought it was debatable.”
As Fox sees it, “Law firms have to be run by lawyers. Lawyers can only report to lawyers. If you end up with a CEO who is not a lawyer, you’ve destroyed that. If you have a nonlawyer CEO running the place, that person isn’t entitled to privilege. What are they CEO of? All law firms do is deliver legal services.” He admits that when a large Philadelphia law firm named a nonlawyer CEO a few years back, he “went berserk.” “You can have a CFO who is a nonlawyer. Or a CIO. As long as their pay is not based on the revenue of the firm. But no law firm CEO should be a nonlawyer!”
The ability of a nonlawyer to exert pressure due to his or her position is a concern for Fox: “I don’t want a nonlawyer in a position of power interfering with how we—the lawyers—do business. He or she might say, ‘You shouldn’t do pro bono, it’s not good for bottom line. You shouldn’t be active in the bar. It’s not good for the bottom line.’ But, not everything is bottom line oriented.” As Fox explains, “We are a profession. We have obligations with respect to training, bar involvement, pro bono, and so forth. As soon as you put people in positions where they benefit from the firm’s revenues, there is risk they will compromise those traditional values because the push will be about making more money, not doing what is truly the right thing.”
According to a June 20, 2014 letter from the State Bar of Texas to the law firms who requested reconsideration, the request for reconsideration of the opinion will be taken up by the Professional Ethics Committee at its fall meeting.
Katerina E. Milenkovski is an associate editor for Litigation News.