Does a lawyer employed by a membership organization to help its members have a conflict of interest with the organization that pays him when referrals to outside counsel raise the organization's insurance costs?

Plain-English summary

An attorney was employed as a staff member of a membership organization, primarily to assist members with legal matters and occasionally to counsel the organization (but not its Board of Directors). One of the attorney's options was to refer members to outside counsel paid under a legal-insurance policy funded through member dues. The member's interest was access to the best counsel; the organization's interest was keeping insurance claims down to hold down premiums and dues. The organization did not instruct the attorney to limit referrals or interfere with the attorney's judgment. The questions were whether the attorney had a conflict between the organization and its members, whether Rule 1.12 (organization as client) controlled, and whether the third-party-payment Comment to Rule 1.06 was affected when the third-party payment took the form of a salaried position.

The Committee explained that when a lawyer is not competent to represent a member, the duty to the client requires referral to a competent attorney with the member's consent, even though referral increases the organization's cost (citing Rules 1.01 and 2.01). Because the organization did not instruct the attorney to limit referrals and did not interfere with the attorney's judgment, the Committee concluded that no conflict of interest existed.

The Committee added that if the organization were to interfere, directly or indirectly, with the attorney's judgment or limit member referrals, then Comment 12 to Rule 1.06 would apply: a lawyer may be paid by someone other than the client only if the client is informed and consents and the arrangement does not compromise the lawyer's duty of loyalty (see also Rule 1.08(e)). Finally, because the attorney was specifically hired to render legal services to the members, did not represent the Board, and had an agreement barring the organization's interference, the Committee concluded the attorney was not representing the organization as an entity, so Rule 1.12 (organization as a client) was inapplicable.

Currency note

This opinion was issued in 1991, under the Texas Disciplinary Rules of Professional Conduct that took effect January 1, 1990. Texas did not adopt the ABA's Ethics 2000 revisions; its rules have been amended only piecemeal since, including the comprehensive 2021 revisions adopted by Texas Supreme Court order. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Does a lawyer who works for a membership organization have a conflict with the members he assists?

A: The Committee concluded that no conflict exists where the organization does not instruct the lawyer to limit referrals and does not interfere with the lawyer's judgment in handling member matters.

Q: Is the organization the lawyer's client under the organization-as-client rule?

A: Per the opinion, no. Because the lawyer was hired to serve the members, did not represent the Board, and had an agreement barring interference, the Committee concluded the lawyer was not representing the organization as an entity, so Rule 1.12 was inapplicable.

Q: What happens if the organization pressures the lawyer to limit referrals to control costs?

A: The Committee stated that if the organization interferes with the lawyer's judgment or limits referrals, Comment 12 to Rule 1.06 and Rule 1.08(e) apply: third-party payment is permitted only with the client's informed consent and without compromising the lawyer's loyalty and independent judgment.

Q: Does the lawyer have to refer a member to outside counsel even when it costs the organization more?

A: Per the opinion, yes. When the lawyer is not competent to handle a member's matter, the duty to the client requires referral to a competent attorney with the member's consent despite the increased cost.

Background and rules framework

The opinion interprets Texas Disciplinary Rules 1.01 (competence), 2.01 (independent professional judgment), 1.06 and its Comment 12 (conflicts; third-party payment), 1.08(e) (compensation from one other than the client), and 1.12 (organization as a client). The Texas rules map to ABA Model Rules 1.7 and 1.8(f) on conflicts and third-party payment and Model Rule 1.13 on the organizational client. The analysis turns on who the lawyer actually represents and whether the payer interferes with the lawyer's independent judgment.

Citations and references

Rules of Professional Conduct:

• MR 1.7 (conflicts of interest); MR 1.8(f) (third-party payment); MR 1.13 (organization as client)
• Texas Disciplinary Rules 1.01, 2.01, 1.06 (and Comment 12), 1.08(e), 1.12

See also

• TX Ethics Op. 487: Joint Representation of Employer and Employee Under an Advance Agreement
• TX Ethics Op. 490: Bank Fee for an In-House Lawyer Preparing Loan Documents
• ABA Formal Op. 514: Advising an Organization About Conduct That May Create Legal Risk for Its Constituents

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-476/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_476.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

QUESTION PRESENTED

Does the attorney have a conflict of interest between the organization's interest and the interest of the individual members?
Does Rule 1.12 (organization as a client) supersede any arrangement the attorney may have had with the organization as to whose interest the attorney represents?
Is Comment 12 to Rule 1.06 affected when the payment by a third party consists of a salaried position with the third party?

STATEMENT OF FACTS

An attorney is employed by a membership organization as a member of the organization's staff. The attorney is employed primarily to assist members of the organization in legal matters, but also is called on from time to time to provide counseling for the organization. The attorney does not provide counseling for the Board of Directors.

One of the options the attorney has in assisting organization members is to refer them to outside counsel, who are paid under a legal insurance policy that each member is insured under as a part of their dues payment. While the member's interest is to be provided access to the best legal counsel available, whenever necessary, the interest of the organization is to keep insurance claims down in order to ensure low premiums and thus low dues payment for its members. The organization does not instruct the attorney to limit the referrals nor does it interfere in any way with the judgment of the attorney in handling of member problems.

DISCUSSION

Rule 1.01(a) provides: "A lawyer shall not accept or continue employment in a legal matter which the lawyer knows or should know is beyond the lawyer's competence, unless: (1) another lawyer who is competent to handle the matter is, with the prior informed consent of the client, associated in the matter; or (2) the advice or assistance of the lawyer is reasonably required in an emergency and the lawyer limits the advice and assistance to that which is reasonably necessary in the circumstances."

Moreover, Rule 1.01(b) provides that: "In representing a client, a lawyer shall not: (1) neglect a legal matter entrusted to the lawyer; or (2) frequently fail to carry out completely the obligations that the lawyer owes to a client or clients."

Moreover, Rule 2.01 provides that: "In advising or otherwise representing a client, a lawyer shall exercise independent professional judgment and render candid advice."

When a lawyer is not competent to represent a member of the organization, the lawyer's duty to the client requires referral to a competent attorney (with the member's consent) in spite of the increased cost to the organization occasioned by such referral.

Since the organization does not instruct the organization attorney to limit referrals and does not interfere with the attorney's judgment in handling member problems, no conflict of interest exists. However, should the organization directly or indirectly interfere with the attorney's judgment in handling member problems or in limiting member referrals to other attorneys, then Comment 12 under Rule 1.06 is applicable: "A lawyer may be paid from a source other than the client, if the client is informed of that fact and consents and the arrangement does not compromise the lawyer's duty of loyalty to the client." See Rule 1.08(e). For example, when an insurer and its insured have conflicting interests in a matter arising from a liability insurance agreement, and the insurer is required to provide special counsel for the insured, the arrangement should assure the special counsel's professional independence. So also, when a corporation and its directors or employees are involved in a controversy in which they have conflicting interests, the corporation may provide funds for separate legal representation of the directors or employees, if the clients consent after consultation and the arrangement insures the lawyer's professional independence."

Rule 1.08(e), provides that: "A lawyer shall not accept compensation for representing a client from one other than the client unless (1) the client consents; (2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and (3) information relating to representation of a client is protected as required by Rule 1.05."

Since the attorney is specifically hired to render legal services to the members of the organization, and does not represent the Board of Directors of the organization, and has an agreement with the organization prohibiting the organization's interference, in this fact situation the attorney is not representing the organization as an entity so that Rule 1.12 (organization as a client) is inapplicable.

CONCLUSION

Since the attorney is specifically hired to render legal services to the members of the organization, and does not represent the Board of Directors of the organization, and has an agreement with the organization prohibiting the organization's interference, in this fact situation the attorney is not representing the organization as an entity so that Rule 1.12 (organization as a client) is inapplicable.

Tex. Comm. On Professional Ethics, Op. 476 (1991)