Can our corporation's in-house lawyer be loaned to provide legal services to a joint venture we're part of, without a conflict or unauthorized-practice problem?

Plain-English summary

A corporation planned to form joint ventures (corporate and partnership) with other corporations, sometimes owning a majority, sometimes half, sometimes a minority. The ventures often would have no separate employees; instead each venturer would "loan" employees. To operate efficiently, the corporation wanted to make its in-house lawyers available, from time to time, to provide legal services to the ventures, either without charge or with reimbursement based on the proportion of each lawyer's time. The questions were whether this violates Rule 1.06 (conflicts) or Rule 5.05 (unauthorized practice), and the Committee also considered Rule 1.07 (intermediary).

On Rule 1.06, the Committee concluded the loaned lawyer must recognize the joint venture as his client (Rule 1.12) and that the conflict arises not from the corporation's degree of ownership or whether it charges, but from the simultaneous representation of the corporation and the venture under Rule 1.06(b)(2). Such multiple representation is nonetheless permissible under Rule 1.06(c) if the lawyer reasonably believes neither representation will be materially affected and both clients consent after full disclosure. The consent for the venture cannot be given by the employing corporation; it must come from an authorized employee of the venture or from the other venturers, and the disclosure must include that the lawyer may be paid by the corporation rather than the venture (Rule 1.08(e)). If a permissible conflict later becomes impermissible, the lawyer must withdraw, normally from representing the venture.

On Rule 5.05, the Committee concluded that loaning an in-house lawyer to a related joint venture (not to the public) does not automatically assist the unauthorized practice of law, provided the corporation does not direct the legal services (except as a managing venturer acting for the venture) and any reimbursement is calculated in good faith to pay no more than the full cost of the lawyer's time. In that case the lawyer, not the corporation, is providing legal services directly to the venture, whether or not the corporation is reimbursed; the Committee found the reasoning of Opinion 343 still sound. On Rule 1.07, the Committee concluded the intermediary rules do not apply, because the loaned lawyer represents only the venture, not two clients seeking to consummate a transaction or resolve a dispute between themselves; reading Rule 1.07 more broadly would let it swallow Rule 1.06, contrary to the comments. The intermediary rule applies only when a lawyer represents two clients in the same matter who are resolving a transaction or dispute between themselves.

Currency note

This opinion was issued in 1995, 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 March 1, 2005 amendment to the fee rule, Rule 1.04, and the comprehensive 2021 revisions adopted by Texas Supreme Court order). The Texas intermediary rule (Rule 1.07) discussed here was later repealed; 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: Can a corporation's in-house lawyer do legal work for a joint venture the corporation is in?

A: The Committee concluded yes, if the lawyer reasonably believes neither representation will be materially affected and both the corporation and the venture consent after full disclosure under Rule 1.06(c).

Q: Who gives the joint venture's consent?

A: The opinion concluded the employing corporation cannot consent for the venture; consent must come from an authorized employee of the venture (if it has its own employees) or from the other venturers, and the disclosure must include that the lawyer may be paid by the corporation, not the venture (Rule 1.08(e)).

Q: Is loaning the lawyer the unauthorized practice of law?

A: The Committee concluded it is not, provided the corporation does not direct the legal work (except as a managing venturer acting for the venture) and any reimbursement covers no more than the cost of the lawyer's time; the lawyer, not the corporation, is providing services to the venture.

Q: Does the intermediary rule apply?

A: The opinion concluded Rule 1.07 does not apply, because the loaned lawyer represents only the venture in the matter, not two clients resolving a transaction or dispute between themselves; the intermediary rule is confined to representing two clients in the same matter.

Background and rules framework

The opinion interprets Rule 1.06 (conflict of interest: general rule; ABA Model Rule 1.7) and its consent provision in 1.06(c), Rule 1.12 (organization as client; related to Model Rule 1.13) identifying the venture as the client, Rule 1.08(e) (payment by a third party), Rule 5.05 (unauthorized practice of law; Model Rule 5.5), and Rule 1.07 (conflict of interest: intermediary). It relies on Opinion 343 for the unauthorized-practice analysis and reads Rule 1.07 narrowly to avoid displacing Rule 1.06.

Citations and references

Rules of Professional Conduct:

• MR 1.7 (conflict of interest: current clients)
• MR 1.13 (organization as client)
• MR 5.5 (unauthorized practice of law)
• Texas Disciplinary Rules 1.06 (incl. 1.06(c), (e)), 1.07, 1.08(e), 1.12, 5.05

Other opinions cited:

• Tex. Ethics Op. 343: corporate employer loaning in-house counsel to related corporations is not assisting the unauthorized practice of law

See also

• TX Ethics Op. 531: Corporation Charging Subsidiaries Market-Based Fees for Legal Services
• TX Ethics Op. 543: In-House Counsel Accepting Patient Referrals From a Health-Care Provider
• TX Ethics Op. 515: Contracting With a Contract-Lawyer Placement Agency

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-512/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_512.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative. The source text encoded the dash in three section headings with an unreadable character; it has been restored as a hyphen.

QUESTION PRESENTED

May the in-house lawyer of a corporation represent a joint venture in which the corporation is a venturer, without violating Texas Disciplinary Rule 1.06, Conflict of Interest, and/or Texas Disciplinary Rule 5.05, Unauthorized Practice of Law?

STATEMENT OF FACTS

A corporation is considering forming joint ventures, in corporate and partnership form, with other corporations. Most of the other joint venturers will have their own legal departments, but some may not. The corporation will sometimes own a majority of the joint venture, sometimes 50%, and other times it will be a minority owner. Often the joint ventures will not have their own separate employees; rather, certain employees of each joint venturer will be "loaned" to the joint ventures, but will not be separately compensated by the joint venture.

In line with this arrangement, and in order to operate efficiently and cost effectively, the corporation would like to make its in-house lawyers available, from time to time, to provide legal services to these joint ventures. Similarly, the other joint venturers may desire to make their in-house lawyers available, from time to time, to provide legal services to the joint venture. It may be that one party makes available to the joint venture one type of legal service (e.g., labor) and the other party makes available another type of legal service (e.g., corporate). These legal services would relate to the on-going business activities of the joint venture. Under one arrangement, no charge would be made by the corporation to the joint venture for the legal services provided by its in-house lawyers, but under an alternative arrangement, the corporation may be reimbursed by the joint venture for the costs of providing the lawyer, based on the proportion of time each in-house counsel spends on joint venture matters.

DISCUSSION

The above situation raises questions governed by Texas Disciplinary Rule 1.06, Conflict of Interest: General Rule; Texas Disciplinary Rule 5.05, Unauthorized Practice of Law; and Texas Disciplinary Rule 1.07, Conflict of Interest: Intermediary. Each Rule will be considered separately and applied to the fact situation presented above.

DR 1.06 - Conflict of Interest (General Rule)
In relevant part, Rule 1.06 reads as follows:
(a) A lawyer shall not represent opposing parties to the same litigation.
(b) In other situations and except to the extent permitted by paragraph (c), a lawyer shall not
represent a person if the representation of that person:(1) involves a substantially related matter in which that person's interests are materially and directly adverse to the interests of another client of the lawyer or the lawyer's firm; or
(2) reasonably appears to be or become adversely limited by the lawyer's or law firm's responsibilities to another client or to a third person or by the lawyer's or law firm's own interests. (c) A lawyer may represent a client in the circumstances described in (b) if:
(1) the lawyer reasonably believes the representation of each client will not be materially affected; and
(2) each affected or potentially affected client consents to such representation after full disclosure of the existence, nature, implications, and possible adverse consequences of the common representation and the advantages involved, if any.

In the fact situation presented, the "loaned" in-house counsel must recognize that the joint venture is his client (Rule 1.12) and that loyalty is an essential element in the lawyer's relationship with that client (Rule 1.06, Comment 1). The potential conflict does not arise by virtue of the extent of control or ownership that the corporation has in the joint venture, or because the corporation charges or does not charge an amount for providing the in-house lawyer. It is the simultaneous representation of the joint venture and the corporation that presents the potential for conflict under Rule 1.06(b)(2). The rule prohibits a lawyer from representing a person if the representation "reasonably appears to be or become adversely limited by the lawyer's responsibilities to another client to or a third person . . . . " (Rule 1.06(b)(2)). However, even though a conflict, or a potential conflict, may exist in simultaneous representation of the corporation and the joint venture, such multiple representation is permissible if there is compliance with Rule 1.06(c). That is, the lawyer must reasonably believe that the representation of each client will not be materially affected and the corporation and the joint venture must consent to such representation after full disclosure. In these circumstances, the required consent could not be given on behalf of the joint venture by the corporation employing the lawyer; instead, consent must be obtained from an authorized employee of the joint venture, if the joint venture has its own employees, or from the other joint venturers (See Comment 5 to Rule 1.12). The disclosure to the joint venture and the joint venture's consent should also include the fact that the lawyer may be paid by the corporation and not the joint venture. Under Rule 1.08(e), a lawyer may be paid from a source other than the client if (1) the client is informed of that fact and consents, (2) the arrangement does not compromise the lawyer's duty of loyalty to the client, and (3) confidential information is treated properly under Rule 1.05.

It is only when a potential or actual conflict develops into an impermissible conflict that the lawyer should withdraw. If such a situation should develop after properly accepting multiple representation under Rule 1.06, the lawyer must promptly withdraw from one or more representations to the extent necessary for any representation not to be in violation of the Rules (Rule 1.06(e)). In the situation presented, the lawyer would normally withdraw from representation of the joint venture.

DR 5.05 - Unauthorized Practice of Law
Rule 5.05 provides as follows:
"A lawyer shall not:
(a) practice law in a jurisdiction where doing so violates the regulation of the legal profession in that jurisdiction; or

(b) assist a person who is not a member of the bar in the performance of activity that constitutes the unauthorized practice of law." The intent of Rule 5.05 is to protect individuals and the public from the mistakes of the untrained and from schemes of the unscrupulous, who are not subject to the judicially imposed disciplinary standards of competence, responsibility, and accountability (Rule 5.05, Comment 1). In the fact situation presented herein, the corporation proposes to "loan" its in-house lawyer to a related joint venture and not to the public in general. As such, the intent of Rule 5.05 would not be automatically violated by any of the described arrangements.

In the factual situations presented, the Committee believes that the lawyer involved would not be assisting his employer corporation in the unauthorized practice of law. This conclusion is based on the assumption that, when the lawyer is providing legal services to the joint venture as a client, (1) the lawyer is not directed by the corporation in the provision of these services (other than by the corporation explicitly acting on behalf of the joint venture as a managing venturer of the joint venture) and (2) any reimbursement by the joint venture or the other venturers for the compensation paid by the corporation to the lawyer is calculated in good faith to pay no more than the full costs to the corporation of the portion of the lawyer's time that is devoted to services for the joint venture.

In such circumstances, regardless of whether or not the corporate employer is reimbursed by the joint venture for the cost of the lawyer's services, the lawyer is properly viewed as providing legal services directly to the joint venture, which is the lawyer's client. If the joint venture reimburses the corporation for the salary and benefits paid to the lawyer, such reimbursement does not constitute payment by the joint venture to the corporation for the corporation's provision of legal services since only the lawyer and not the corporation is providing services as a lawyer to the joint venture. This conclusion applies equally if the employer/corporation is not reimbursed for the cost of employing the lawyer who is loaned to the joint venture; in that case, the corporation is contributing legal services to the joint venture, but the lawyer's client is the joint venture and the lawyer, not the corporation, is providing legal services to the joint venture. Texas Professional Ethics Committee Opinion 343 dealt with a situation similar to the question presented herein. Although the opinion was published before enactment of the present Texas Disciplinary Rules of Professional Conduct, its logic and reasoning are still sound. In holding that the possibility that the in-house lawyer was assisting his corporate employer in the unauthorized practice of law was "more imaginary than real," the opinion stated: "While it is not the function of this Committee to decide what constitutes unauthorized practice of law, we are satisfied that under the facts presented in this inquiry the general corporate employer is not undertaking to furnish legal services to the other corporations; it is not holding itself out as a furnisher of legal services, and it is not exploiting the services of the lawyer. It is merely providing a convenient means whereby the lawyer's services can be made available to the related corporations as they have need for such services, and in these arrangements we see no real likelihood that the lawyer would be aiding his general corporate employer in the practice of law."

DR 1.07 - Conflict of Interest (Intermediary)
The Committee has also considered whether Rule 1.07, Conflict of Interest: Intermediary, should be deemed to apply to the situations presented. On the facts stated, the lawyer loaned to the joint venture is not being loaned to act as an intermediary between the corporation and the joint venture in any usual sense of the term "intermediary." Instead, the lawyer is being loaned to the joint venture to provide legal services to the joint venture as a separate entity for its on-going business. The loaned lawyer does not provide legal services jointly to the corporation and the joint venture in the same matter.

Paragraph (d) of Rule 1.07 does not require a contrary conclusion. That paragraph provides that "[w]ithin the meaning of this Rule, a lawyer acts as intermediary if the lawyer represents two or more parties with potentially conflicting interests." This provision cannot mean that in any case where a lawyer represents in different matters two clients with potentially conflicting interests, the terms of Rule 1.07 apply. If Rule 1.07 applied in such cases, it would apply to every situation involving potential conflict of interest between clients of a lawyer; in every case where a lawyer represents two clients in substantially related matters in which the clients' interests are adverse, the clients would have potentially conflicting interests.

A result in which Rule 1.07 would, in effect, "swallow up" Rule 1.06 as to client conflicts of interest is directly contrary to the intent of Rule 1.06 as expressed in the Comments to that rule.For example, Comment 3 to Rule 1.06 states that Rule 1.06(b) (and by implication not Rule 1.07) governs representation of co-plaintiffs or co-defendants in the same litigation matter. Comment 3 concludes as follows:
On the other hand, common representation of persons having similar interests is proper if the risk of adverse effect is minimal and the requirements of paragraph (b) are met. Compare Rule 1.07 involving intermediation between clients.
To avoid an interpretation under which Rule 1.07 would supplant Rule 1.06 in all conflict situations, Rule 1.07 must be interpreted to mean that a lawyer is acting as an intermediary only when the lawyer is representing in the same matter two clients with potentially conflicting interests who seek to consummate a transaction or resolve a dispute between or among themselves. [FN1] In that circumstance, the lawyer will usually be acting as an intermediary between the two clients with respect to the single matter. Even in such circumstances, however, the lawyer would not be acting as intermediary between the clients with respect to other matters dealing with third parties, as to which the lawyer represents only one of the two clients. [FN2]

CONCLUSION

Rule 1.06 (Conflict of Interest: General Rule): Under the facts presented, even though a conflict or potential conflict of interest exists in the lawyer's representation of the employing corporation and the joint venture to which the lawyer is loaned, such multiple representation is permissible if (1) the corporation and joint venture consent after full disclosure and (2) the lawyer reasonably believes that the lawyer's representations of the corporation and of the joint venture will not be materially affected.

Rule 5.05 (Unauthorized Practice of Law): Provided that the corporation/employer does not direct the lawyer in the performance of legal services for the joint venture (other than explicitly as a managing venturer of the joint venture) and provided that the joint venture or other venturers do not reimburse the corporation for more than the estimated full costs to the corporation/employer of the lawyer's time devoted to services for the joint venture, a lawyer/employee who is loaned to a joint venture to perform legal services for the joint venture is not deemed to be assisting the employing corporation in the unauthorized practice of law.

Rule 1.07 (Conflict of Interest: Intermediary): Provided that the loaned lawyer is representing only the joint venture entity in the matter or matters for which the lawyer has been loaned to the joint venture, rather than two clients who seek to consummate a transaction or resolve a dispute between themselves, the requirements applicable to intermediaries set forth in Rule 1.07 do not apply.

FN1. The interpretation that Rule 1.07 is to be confined to cases of a lawyer's representation of two clients in the same matter finds additional support in the reference in Rule 1.07(c) to "the matter that was the subject of the intermediation."

FN2. In most situations involving co-plaintiffs or co-defendants in a litigation matter in which the clients are adverse to a third party, the lawyer would not be acting as an intermediary between the clients. However, if the representation at any point involves resolving a dispute between the two clients, the lawyer would become an intermediary as to the matter in dispute between the clients and the requirements of Rule 1.07 would apply.

Tex. Comm. On Professional Ethics, Op. 512 (1995)