Can a Texas lawyer bill a client more for a third-party expense than the lawyer actually paid, and can the firm bill clients for services from a vendor owned by one of the firm's lawyers?

Plain-English summary

The opinion considers a lawyer in a firm who owns a company that provides courtroom graphics, and the firm proposes to bill clients more for the company's services than the company charges the firm. Two questions follow: may a lawyer mark up third-party expenses, and may the firm bill clients for a vendor owned by a firm member.

On markups, the Committee reaffirms Opinion 594 (February 2010): absent disclosure to and agreement with the client, charging, collecting, or recouping more for a third-party expense than the lawyer actually paid would violate Rules 1.04(c), 1.03(b), and 8.04(a)(3). So a lawyer may not mark up reimbursable third-party expenses without full disclosure and the client's agreement.

On the firm-owned vendor, the Committee concludes that billing clients for expenses paid to an entity whose ownership is materially similar to the firm's is a "business transaction with a client" within Rule 1.08(a). Under that rule the lawyer must ensure the transaction and its terms are fair and reasonable and fully disclosed (including disclosure that a firm member owns the graphics company), give the client a reasonable opportunity to seek independent counsel, and obtain the client's written consent. The opinion also points to Rule 1.06(b), which bars representation that reasonably appears to be adversely limited by the lawyer's or firm's own interests; for example, exclusive use of the firm-owned company to the clients' detriment would violate Rule 1.06(b) (citing Opinion 555 (December 2004) and Opinion 536 (May 2001)). If such a conflict arises, Rule 1.06(c) lets the lawyers continue only if they reasonably believe the representation will not be materially affected and the clients consent after full disclosure.

In practice

Under this opinion, and under the Texas rules as they stood at the time of the opinion, a lawyer may not mark up a third-party expense above what the lawyer paid without disclosure to and agreement by the client. The opinion holds that billing clients for a vendor whose ownership is materially similar to the firm's is a business transaction with a client governed by Rule 1.08(a), requiring fair and fully disclosed terms (including the ownership tie), an opportunity to consult independent counsel, and written consent, and that the lawyers must separately analyze whether steering clients to the related vendor creates a Rule 1.06(b)(2) conflict that, if present, can be continued only on the Rule 1.06(c) conditions.

Common questions

Q: Can I bill my client more for a court reporter, expert, or vendor than I actually paid?

A: Per Opinion 658, no, not without full disclosure and the client's agreement; the opinion reaffirms Opinion 594 that an undisclosed markup violates Rules 1.04(c), 1.03(b), and 8.04(a)(3).

Q: My firm wants to use a graphics company a partner owns. What do the rules require?

A: The opinion treats billing clients for a vendor whose ownership is materially similar to the firm's as a business transaction with a client under Rule 1.08(a), requiring fair terms, full disclosure of the ownership, a reasonable opportunity to seek independent counsel, and the client's written consent.

Q: Is there a conflict concern beyond Rule 1.08?

A: Yes. The opinion states the lawyers must consider Rule 1.06(b)(2); if their interest in steering business to the related vendor adversely limits the representation, they may continue only if they reasonably conclude the representation will not be materially affected and the client consents after the Rule 1.06(c) disclosures.

Background and rules framework

The opinion interprets Texas Disciplinary Rule 1.08(a) (business transactions with a client; ABA Model Rule 1.8(a)), Rule 1.06(b)(2) and (c) (conflicts from the lawyer's own interests; ABA Model Rule 1.7), Rule 1.04(c) (fees; ABA Model Rule 1.5), Rule 1.03(b) (keeping the client informed; ABA Model Rule 1.4), and Rule 8.04(a)(3) (dishonesty, fraud, deceit, or misrepresentation; ABA Model Rule 8.4(c)).

Citations and references

Rules of Professional Conduct:

• MR 1.8 (business transactions with clients)
• MR 1.7 (conflicts; lawyer's own interests)
• MR 1.5 (fees)
• MR 1.4 (communication)
• MR 8.4(c) (dishonesty, fraud, deceit, or misrepresentation)
• Texas Disciplinary Rules 1.08(a), 1.06(b)(2), 1.06(c), 1.04(c), 1.03(b), 8.04(a)(3)

Other opinions cited:

• Texas Professional Ethics Committee Opinion 594 (February 2010): marking up third-party expenses
• Texas Professional Ethics Committee Opinion 555 (December 2004): lawyer's ownership interest in a chiropractor's practice
• Texas Professional Ethics Committee Opinion 536 (May 2001): referrals to an investment advisor for referral fees

See also

• TX Ethics Op. 641: Client Referrals From a Financial-Planning Company
• TX Ethics Op. 643: Referrals to a Lawyer-Owned Debt-Management Company
• TX Ethics Op. 706: Nonlawyer Vendor Revenue Share and Equity

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-658/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_658.pdf

Original opinion text

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

QUESTION PRESENTED

May a Texas lawyer bill clients for expenses paid to a third party in an amount that is greater than the amount that the third party charged the lawyer? May Texas lawyers charge for the expenses paid to a third-party vendor that is owned by a member of their law firm?

STATEMENT OF FACTS

A Texas lawyer in a law firm owns a company that employs non-lawyer professionals to provide courtroom graphics to lawyers. The lawyers in the law firm propose to bill their clients in amounts that are greater than the amounts that the company charges to their law firm.

DISCUSSION

In Professional Ethics Opinion 594 (Feb. 2010), this Committee concluded: "In the absence of disclosure to and agreement with a client to the contrary, charging, collecting or recouping from a client more for a third-party expense than the amount of the expense actually paid by a lawyer would violate the requirements of Rules 1.04(c), 1.03(b) and 8.04(a)(3) of the Texas Disciplinary Rules of Professional Conduct." The Committee reaffirms that conclusion. Thus, absent full disclosure to and agreement by the client, a lawyer may not "mark up" expenses paid to a third party for which the lawyer seeks reimbursement from the client.

The additional question considered here is whether lawyers may pass along to their clients the expenses paid to a third-party vendor that is owned by a member of their law firm. The Committee concludes that lawyers that bill clients for expenses paid to an entity whose ownership is materially similar to their law firm's is "a business transaction with a client" within the meaning of Rule 1.08(a). Under Rule 1.08(a), a lawyer may not enter into such a transaction unless:

"(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed in a manner which can be reasonably understood by the client;
(2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and
(3) the client consents in writing thereto."

To comply with Rule 1.08(a)(1)'s requirement of full disclosure, the lawyers here must disclose that a member of their law firm owns the graphics company.

The lawyers must also consider Rule 1.06(b), which prohibits a lawyer from representing "a person if the representation of that person: . . . (2) reasonably appears to be or become adversely limited . . . by the lawyer's or law firm's own interests." For example, if the availability of a law firm-owned graphics company results in the law firm's use of that company exclusively and to the detriment of its clients, then such use of that company would violate Rule 1.06(b). See Opinion 555 (Dec. 2004) (discussing a lawyer's ownership interest in a chiropractor's practice, to whom the lawyer refers his clients); and Opinion 536 (May 2001) (discussing a lawyer who refers clients to an investment advisor in exchange for referral fees). If such conflicts arise between the lawyers' interests and their clients' interests, Rule 1.06(c) provides that the lawyers may continue representing their clients only if the lawyers reasonably believe that the representations will not be materially affected and the clients, after full disclosure, consent.

CONCLUSION

Under the Texas Disciplinary Rules of Professional Conduct, absent an agreement to the contrary, Texas lawyers may not bill clients for expenses paid to a third party in an amount that is greater than the amount that the third party charged their law firm. If Texas lawyers pass along to clients the expenses paid to a third-party vendor whose ownership is materially similar to their law firm's, they must comply with Rule 1.08's requirements for entering into a business transaction with a client. The transaction must be on terms that are fair to and fully disclosed to the clients (including disclosure of the ownership of the third-party vendor that is materially similar to their law firm's); the clients must have a reasonable opportunity to seek the advice of independent counsel; and the clients must consent in writing.

The lawyers must also consider whether their or their law firm's own interests in directing their clients' business to the related third-party vendor results in a conflict of interest under Rule 1.06(b)(2). If it does, then the lawyers may continue representing the clients only if they reasonably conclude that the representation will not be materially affected, they make the disclosures required under Rule 1.06(c)(2), and the client, after disclosure, consents.

Tex. Comm. On Professional Ethics, Op. 658 (2016)