Can a lawyer joining a Texas firm as 'of counsel' (an independent contractor for tax purposes) agree not to serve the firm's clients for a period after leaving the firm?

Plain-English summary

The opinion considers a lawyer who proposes to join a Texas firm under an agreement where the lawyer will not be a partner or employee for federal tax purposes, will be treated as an independent contractor, and will be held out publicly as "of counsel." The proposed agreement bars the lawyer, for a specified period after the relationship ends, from providing legal services to firm clients the lawyer worked for while of counsel.

The Committee treats this as a Rule 5.06(a) question. Relying on Opinion 577 (March 2007) and the fact that the lawyer is held out as "of counsel," the Committee concludes the arrangement makes the lawyer a member of the firm. Although the lawyer is not an "employee" for federal tax purposes, the relationship is a contract for the lawyer's "employment" as that term is used in Rule 5.06. The proposed post-termination restriction therefore runs contrary to Rule 5.06(a), which prohibits a partnership or employment agreement that restricts a lawyer's right to practice after the relationship ends, except an agreement concerning retirement benefits (citing Opinion 590 (December 2009)). The proposed agreement contains no retirement-benefits provision.

The opinion notes that Rule 5.06's introductory language provides that "[a] lawyer shall not participate in offering or making" a prohibited agreement, so both the firm lawyers who offer or make the agreement and the lawyer who proposes to enter it would violate Rule 5.06(a) if the agreement includes the practice restriction.

In practice

Under this opinion, and under the Texas rule as it stood at the time of the opinion, a firm and an of-counsel lawyer may not enter an agreement that restricts or prohibits the lawyer from providing legal services to firm clients after the lawyer's work with the firm ends. The opinion holds that the of-counsel designation makes the lawyer a firm member for Rule 5.06 purposes, that the independent-contractor tax characterization does not change the analysis, and that the retirement-benefits exception does not apply absent a retirement-benefits provision.

Common questions

Q: Does calling the lawyer "of counsel" instead of partner or associate avoid Rule 5.06?

A: No. Per Opinion 656, an of-counsel lawyer is a member of the firm, and the relationship is a contract for "employment" as that term is used in Rule 5.06, so the rule applies.

Q: Does treating the lawyer as an independent contractor for tax purposes change the result?

A: No. The opinion states that although the lawyer is not an "employee" for federal tax purposes, the relationship is still a contract for the lawyer's "employment" within the meaning of Rule 5.06.

Q: Who violates the rule if such an agreement is made?

A: The opinion concludes that because Rule 5.06 prohibits participating in "offering or making" the agreement, both the firm lawyers who offer or make it and the lawyer who agrees to it violate Rule 5.06(a).

Background and rules framework

The opinion interprets Texas Disciplinary Rule 5.06(a) (restrictions on a lawyer's right to practice), which corresponds to ABA Model Rule 5.6. The rule bars partnership or employment agreements that restrict a lawyer's right to practice after the relationship ends, subject to an exception for agreements concerning retirement benefits.

Citations and references

Rules of Professional Conduct:

• MR 5.6 (restrictions on right to practice)
• Texas Disciplinary Rule 5.06(a)

Other opinions cited:

• Texas Professional Ethics Committee Opinion 577 (March 2007): when a lawyer is a member of a firm
• Texas Professional Ethics Committee Opinion 590 (December 2009): restrictions on the right to practice

See also

• ABA Formal Op. 06-444: Restrictive Covenants and Retirement Benefits
• TX Ethics Op. 699: Lawyer Departure Restrictions and Client Notice
• TX Ethics Op. 700: New Engagement With Clients Who Follow a Departing Lawyer

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-656/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_656.pdf

Original opinion text

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

QUESTION PRESENTED

Under the Texas Disciplinary Rules of Professional Conduct may a lawyer, as a part of becoming a member of a law firm, enter into an agreement with the law firm that provides that the lawyer is restricted or prohibited from providing legal services to clients of the law firm after the lawyer's work with the law firm ends?

STATEMENT OF FACTS

A Texas lawyer proposes to become a member of a Texas law firm by entering into an agreement with the law firm under the terms of which the lawyer will not be a partner or employee, for federal tax law purposes, of the law firm but will regularly work with lawyers in the firm to provide legal services to law firm clients in return for compensation paid by the firm to the lawyer. In all public communications, the law firm will refer to the lawyer as "of counsel" to the law firm, and the law firm will treat the lawyer as an independent contractor in the law firm's accounting and tax reporting with respect to the law firm's relationship with the lawyer. The proposed agreement between the law firm and the lawyer includes a provision that prohibits the lawyer, for a specified period after the termination of the relationship between the lawyer and the law firm, from providing legal services to law firm clients for whom the lawyer worked while he was of counsel to the law firm. The proposed agreement includes no provision concerning retirement benefits for the lawyer.

DISCUSSION

Professional Ethics Committee Opinion 577 (March 2007) addresses the circumstances under which a lawyer is considered to be in a law firm or a member of a law firm and the circumstances in which a lawyer is considered not to be in a law firm or not a member of a law firm. Pursuant to Opinion 577 and the fact that the lawyer in this case will be referred to by the law firm as "of counsel" to the firm, the proposed agreement between the firm and the lawyer is a contract pursuant to which the lawyer will become a member of the firm. Although the lawyer will not be an "employee" of the firm for federal tax law purposes, the relationship is a contract between the firm and the lawyer for the lawyer's "employment" as that term is used in Rule 5.06 of the Texas Disciplinary Rules of Professional Conduct. Accordingly, the proposed agreed limitation on the lawyer's law practice after the relationship terminates is contrary to the provision of Rule 5.06(a), which prohibits "a partnership or employment agreement that restricts the rights of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement ... ." See Opinion 590 (December 2009). Because the introductory language of Rule 5.06 provides that "[a] lawyer shall not participate in offering or making" an agreement prohibited by paragraph (a) of the Rule, both the law firm lawyers involved in offering or making the agreement and the lawyer proposing to enter into the agreement will be in violation of Rule 5.06(a) if the proposed agreement includes a restriction limiting the lawyer's law practice after the termination of the relationship between the lawyer and the law firm.

CONCLUSION

Under the Texas Disciplinary Rules of Professional Conduct a lawyer and a law firm may not enter into an agreement for the lawyer to serve as a member of the law firm if the agreement provides that the lawyer is restricted or prohibited from providing legal services to clients of the law firm after the lawyer's work with the law firm ends.

Tex. Comm. On Professional Ethics, Op. 656 (2016)