May in-house counsel for a for-profit company owned by nonlawyers provide legal services to the company's customers if the customers pay only the company's 'actual cost' of employing the lawyer?

Texas Ethics Opinion 707: In-House Counsel Offered to a Nonlawyer-Owned Company's Customers at "Actual Cost"

Short answer: Per the opinion, a Texas lawyer-employee of a for-profit, nonlawyer-owned company may not provide legal services to the company's customers on matters unrelated to the company's own interests, even when the company charges only its "actual cost" of employing the lawyer. The Committee concludes the arrangement violates the prohibition against assisting the unauthorized practice of law in Rule 5.05(a)(2) and, depending on the circumstances, may also violate the fee-sharing prohibition in Rule 5.04(a).

Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the Texas Disciplinary Rules of Professional Conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.

About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. The opinion text is reproduced at the bottom; the official source (linked) controls.

View original opinion

Plain-English summary

The opinion responds to a proposed arrangement in which a for-profit company owned by nonlawyers, currently providing litigation support and management services, would give customers the option of retaining the company's salaried Texas-licensed lawyer-employees. The company would charge no more than the "actual cost" of employing the lawyer-employees, and the lawyer-employees would purport to exercise independent judgment for the customers free of company interference.

The Committee applies the Texas Supreme Court's three-factor test from Unauthorized Practice of Law Comm. v. American Home Assurance Co., 261 S.W.3d 24 (Tex. 2008): (1) whether legal services further an existing interest of the company; (2) whether the company has a direct, substantial financial interest in the matter; and (3) "most important," whether the company's interest is aligned with the customer's. The Committee finds each factor unsatisfied: the company has no existing interest, no financial stake, and no aligned interest in the customers' matters. Because the company would be holding itself out as the source of legal services to unrelated others, the company itself would be engaged in the practice of law; the lawyer-employees who carry that out would violate Rule 5.05(a)(2) by assisting the unauthorized practice. The Committee distinguishes Opinion 512 (June 1995), which approved an in-house lawyer being loaned to a joint venture in which the parent corporation had an existing, aligned, financial interest.

On fee sharing, the opinion treats Rule 5.04(a) as a separate constraint. An "above cost" payment to the company is plainly fee sharing; but the Committee declines to bless every "at cost" payment, because under Opinion 498 (March 1994) and Hexter Title & Abstract Co. v. Grievance Committee, 142 Tex. 506, 179 S.W.2d 946 (1944) the inquiry is whether the company is in fact obtaining indirect compensation, including goodwill, increased sales, or higher prices on other products. Whether the arrangement violates Rule 5.04(a) turns on those facts. The Committee notes other jurisdictions (Arizona, D.C.) take different approaches but limits its own opinion to existing Texas law.

In practice

Under this opinion, conduct involving a Texas lawyer-employee of a for-profit, nonlawyer-owned company providing legal services to that company's customers on matters unconnected to the company's own interests is prohibited as assisting the unauthorized practice of law. Per the opinion, the analysis turns on the three American Home Assurance factors, with alignment of interests the most important. The Committee notes the opinion does not address Texas nonprofit corporations carrying out a charitable mission, nor does it foreclose other in-house-lawyer arrangements where the corporate employer has an existing, aligned, substantial interest in the matter.

Common questions

Q: Why is the company engaged in the practice of law, rather than just the lawyer-employee?

A: Per the opinion, the company would offer customers the option of retaining its lawyer-employees, receive the customers' payments, and enjoy the goodwill and competitive advantage of providing legal services at "actual cost." Under American Home Assurance, those are the markers of a corporation employing attorneys "to represent the unrelated interests of others," which is the practice of law by the corporation.

Q: Does charging only "actual cost" cure the problem?

A: No, not for the UPL question. The Committee notes the Texas definition of the practice of law does not turn on whether the company receives consideration. On the fee-sharing question (Rule 5.04(a)), "actual cost" is a necessary but not sufficient condition; the Committee cites Opinion 498 and Hexter for the proposition that indirect benefits (increased sales, goodwill, higher prices on other products) can still amount to compensation for legal services.

Q: How does this opinion treat ABA Formal Opinion 95-392?

A: The Committee cites ABA Formal Op. 95-392 (1995) as concluding that a corporation's in-house counsel would violate Model Rule 5.4(a) by remitting to the corporation a fee greater than the corporation's costs in employing the lawyer. The Committee treats that as consistent with its reading of Rule 5.04(a).

Q: Does Opinion 707 say anything about Alternative Business Structures or D.C.-style nonlawyer-owned firms?

A: The Committee acknowledges Arizona Code of Judicial Administration 7-209 and D.C. Rule 5.4(b) allow nonlawyer ownership but declines to follow either, stating that the Committee's responsibility is to apply existing Texas law. Texas law prohibits the arrangement.

Q: How does this opinion square with Opinion 512?

A: Per the opinion, Opinion 512 approved a corporation lending its in-house counsel to a joint venture in which the corporation held an existing, aligned, substantial financial interest. That arrangement satisfied each of the three American Home Assurance factors. The arrangement here fails each factor because the company has no interest in the customers' matters.

Background and rules framework

The opinion applies Texas Disciplinary Rule 5.05(a)(2) (assisting the unauthorized practice of law) and Rule 5.04(a) (sharing fees with nonlawyers). Rule 5.04 corresponds to ABA Model Rule 5.4; Rule 5.05 corresponds to ABA Model Rule 5.5. The Committee anchors its analysis in Unauthorized Practice of Law Comm. v. American Home Assurance Co., 261 S.W.3d 24 (Tex. 2008), which established the three-factor test for when a corporation engages in the practice of law by employing staff attorneys to provide legal services to non-corporate parties.

Citations and references

Rules of Professional Conduct:

• Texas Disciplinary Rule 5.04(a) (sharing legal fees with nonlawyers)
• Texas Disciplinary Rule 5.05(a)(2) (assisting unauthorized practice of law)

Statutes:

• Tex. Gov't Code § 81.101 (definition of the practice of law)

Cases:

• Unauthorized Practice of Law Comm. v. American Home Assurance Co., 261 S.W.3d 24 (Tex. 2008)
• Hexter Title & Abstract Co. v. Grievance Committee, 142 Tex. 506, 179 S.W.2d 946 (1944)

Other opinions cited:

• Texas Op. 467 (Nov. 1990) - percentage-rent lease with nonlawyer landlord as fee sharing
• Texas Op. 498 (Mar. 1994) - in-house counsel preparing estate-planning documents for corporate customers
• Texas Op. 512 (June 1995) - in-house counsel loaned to joint venture owned by employer
• Texas Op. 531 (1999) - parent corporation charging subsidiary at market rates for legal services
• Texas Op. 552 (Aug. 2004) - insurance-defense lawyer paying third-party auditor a percentage of fees
• Texas Op. 642 (May 2014) - law-firm bonus tied to firm revenue or profit
• ABA Formal Op. 95-392 (1995) - sharing legal fees with a for-profit corporate employer

Other authority:

• Arizona Code of Judicial Administration 7-209 (Alternative Business Structures)
• District of Columbia Rule of Professional Conduct 5.4(b) (nonlawyer ownership)

See also

• TX Ethics Op. 706: Nonlawyer-Owned Vendor Revenue Share - companion fee-sharing analysis under Rule 5.04(a)
• TX Ethics Op. 704: Texas Lawyer Joining D.C. Firm With Nonlawyer Partner - extraterritorial reach of Rule 5.04(b)
• TX Ethics Op. 708: Settlement Non-Disparagement and Marketing NDAs - same Texas Rules of Professional Conduct series

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-707/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_707.pdf

Original opinion text

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

QUESTION PRESENTED

May in-house counsel for a for-profit company owned by nonlawyers provide legal services to customers of the company if the company gives the customers the option of retaining the in-house counsel and only charges the "actual cost" incurred by the company?

STATEMENT OF FACTS

A for-profit company owned by nonlawyers (the "Company") provides litigation management services and support to lawyers, law firms, and corporations, including software and technology to help customers lower their costs and potentially improve litigation results. Nonlawyer employees of the Company provide non-legal services such as assisting customers with invoicing and compliance matters, litigation support, and litigation management. At present, employees do not render legal services to customers.

The Company proposes to give customers the option of retaining lawyers who are salaried, full-time employees of the Company ("In-House Counsel"). The Company claims that if a customer retains the In-House Counsel, the Company will charge the customer no more than the "actual cost" the Company incurs for allowing the In-House Counsel to provide legal services.

The Company asks the Committee to assume that (1) all In-House Counsel providing legal services to customers are licensed or permitted to practice in Texas, (2) In-House Counsel will not represent both the Company and its customers in the same or substantially related matters, (3) when providing legal services to customers, In-House Counsel will exercise independent professional judgment solely for the benefit of customers, free from any compromising influences and loyalties, and (4) the Company and its nonlawyer representatives will not be involved in the lawyer-client relationship and will not control or interfere with the In-House Counsel's representation of customers.

DISCUSSION

The Committee concludes the proposed representation of customers by the Company's In-House Counsel is prohibited because the arrangement violates the prohibition against assisting in the unauthorized practice of law. Further, and depending on the circumstances, the arrangement may also violate the prohibition against fee sharing with nonlawyers.

The proposed arrangement violates the prohibition against assisting in the unauthorized practice of law.

Rule 5.05(a)(2) of the Texas Disciplinary Rules of Professional Conduct provides that a lawyer shall not "assist a person who is not a member of the bar in the performance of activity that constitutes the unauthorized practice of law."

Rule 5.05 does not define the "unauthorized practice of law" but leaves the definition to judicial development. Id., comment 2; see also Tex. Gov't Code § 81.101 (defining the practice of law as including "the giving of advice or the rendering of any service requiring the use of legal skill or knowledge, such as preparing a will, contract, or other instrument, the legal effect of which under the facts and conclusions involved must be carefully determined," but allowing for other definitions by the courts).

A corporation (other than a professional corporation) may not engage in the practice of law in Texas. See Unauthorized Practice of Law Comm. v. Am. Home Assur. Co., 261 S.W.3d 24, 33 (Tex. 2008) ("American Home Assurance"). The question here is whether a corporation engages in the practice of law if it offers its customers the opportunity to retain the corporation's lawyer-employees.

The Texas Supreme Court addressed this issue in American Home Assurance. The Court considered whether an insurance company engages in the unauthorized practice of law by assigning staff attorneys employed by the insurance company to defend claims against insureds. The Court recognized that a corporation does not practice law by employing salaried attorneys to represent itself, together with the common interests of other employees and affiliates. Id. at 33-35. Specifically, the Court said that the unauthorized practice of law statute "does not mean that a corporation engages in the practice of law when its attorney-employees provide legal advice regarding the corporation's own affairs or represent others with identical interests in court." Id. at 36. But the Court observed that a corporation engages in the practice of law when it "employs attorneys to represent the unrelated interests of others." Id. The Court also cited its decision in Hexter Title & Abstract Co. v. Grievance Committee, 142 Tex. 506, 179 S.W.2d 946 (1944), noting that "[w]e emphasized that Hexter was permitted to employ salaried attorneys to advise it on the state of title for its own uses; it was prohibited only from providing the same service to customers and prospective customers for their use." 261 S.W.3d at 38.

The American Home Assurance Court concluded that "a liability insurer does not engage in the practice of law by providing staff attorneys to defend claims against insureds, provided that the insurer's interests and the insured's interests in the defense in the particular case at bar are congruent." Id. at 39. The Court articulated "three factors to be considered in determining whether a corporation engages in the practice of law by employing staff attorneys to provide legal services to someone other than the corporation." Id. at 38.

The first factor is whether rendition of legal services furthers an existing interest of the company, as opposed to a prospective interest. A liability insurer has an existing interest in satisfying its contractual obligation to provide a defense to its insureds. Id. In contrast, the Company here has no interest in the representation of its customers, existing or prospective. The Company does not currently have any duty to provide the proposed legal services to others and does not need those legal services for itself.

The second factor is whether the company has a direct, substantial financial interest in the matter for which it provides legal services. A liability insurer's interest in defending a claim against the insured is direct and substantial. Id. In contrast, the Company here has no financial interest in the matters for which its In-House Counsel will be providing legal services.

The third factor, which the American Home Assurance Court deemed "most important," is whether the company's interest is aligned with that of the person to whom the company is providing legal services. Id. "[I]n the vast majority of cases, a liability insurer and an insured have the same interest in defeating a liability claim." Id. In contrast, there is no reason to believe the Company's interest is aligned with, or even related to, the interests of its customers in the proposed representations.

Under American Home Assurance, therefore, the Company engages in the practice of law if it gives its customers the option of retaining its lawyer-employees regarding legal matters unconnected to the Company's own interests. And it is the Company, not merely the In-House Counsel, that will be engaged in the practice of law. It is the Company that intends to offer its customers the option of retaining its In-House Counsel to handle matters unrelated to the Company. It is the Company that will enjoy the goodwill and competitive advantage generated by offering customers legal services at "actual cost." It is the Company that will receive the customers' payments for legal services. According to American Home Assurance, this is the practice of law by the Company. 261 S.W.3d at 36 (a corporation engages in the practice of law when it "employs attorneys to represent the unrelated interests of others"). Because the Company may not practice law, an In-House Counsel who assists the Company in providing such services violates Rule 5.05(a)(2).

Professional Ethics Opinion 512 (June 1995) is consistent with this analysis. In Opinion 512 the Committee discussed whether a corporation could loan its in-house counsel to a joint venture owned in part by the corporation. The opinion examined whether the arrangement would violate the rules governing conflicts of interest and the unauthorized practice of law. The Committee concluded that the arrangement was permissible provided that (1) the joint venture did not reimburse the corporation for more than the full costs of the legal services, (2) the corporation did not direct the lawyer in the performance of legal services for the joint venture, (3) the corporation and the joint venture consented after full disclosure to conflicts of interest presented by the multiple representation, and (4) the lawyer believed the lawyer's representation of the corporation and the joint venture would not be materially affected by the conflicts of interest.

Unlike the present scenario, the assumed facts in Opinion 512 satisfy each of the three factors announced in American Home Assurance: (1) the corporation/employer had an existing interest in the subject matter of the representation, (2) the corporation/employer had a direct and substantial financial interest in the subject of the representation, and (3) the corporation/employer's interest in the matter was aligned with the interest of the joint venture client. Unlike the arrangement proposed by the Company, the corporation in Opinion 512 did not assign its lawyer/employee "to represent the unrelated interests of others." American Home Assurance, 261 S.W.3d at 36.

The fact that the Company intends to charge customers no more than its "actual cost" in employing the In-House Counsel does not mean the Company will not be engaging in the practice of law. Although the amount of compensation may affect the separate issue of fee sharing with nonlawyers, see infra, the Texas definition of the practice of law does not turn on whether a company receives consideration for providing legal services. See Tex. Gov't Code § 81.101.

This opinion is limited to the scenario described in the assumed facts, whereby the Company proposes to offer its own customers the option of retaining the Company's lawyer-employees regarding legal matters unconnected to the Company's interests. The Committee does not intend to suggest that an in-house lawyer may never represent a client other than the lawyer's employer, or that a lawyer's employer necessarily engages in the practice of law if an in-house lawyer represents a client other than the employer. Subject to the rules relating to conflicts of interest and fee sharing, a lawyer-employee's ability to represent third parties is generally a matter of contract between the lawyer and the employer.

Further, the Committee does not intend to suggest that Texas nonprofit corporations may not provide legal services to third parties in accordance with their charitable missions. The Court in American Home Assurance recognized that a corporation does not engage in the unauthorized practice of law "when its attorney-employees provide legal advice regarding the corporation's own affairs or represent others with identical interests in court." 261 S.W.3d at 36. For that reason and perhaps others, a nonprofit corporation does not engage in the unauthorized practice of law by allowing its attorney-employees to provide legal services to third parties when doing so serves the mission of the nonprofit.

Depending on the circumstances, the proposed arrangement may violate the prohibition against fee sharing with nonlawyers.

Rule 5.04(a) provides that a "lawyer or law firm shall not share or promise to share legal fees with a non-lawyer," with exceptions not relevant here.

Opinion 498 (March 1994) addressed the following question: "May an attorney, who is employed on a straight salary basis by a corporation that is not owned solely by licensed attorneys, prepare estate planning documents for customers of the corporation?" The Committee wrote:

In situations where a lawyer is employed by a corporation that is not a professional corporation and provides legal services to customers of the corporation, . . . the corporation must not receive payment for the lawyer's services. . . . In the circumstances here presented, [Rule 5.04(a)] would be violated if the corporation required a customer to pay a fee for services that included the lawyer's services or if the economic arrangements between the corporation and the customer were such that the corporation received income in the form of a mark-up or commission on products sold that was in effect compensation to the corporation for the provision of legal services by the employee/lawyer.

Opinion 498 did not address whether the lawyer-employee would be assisting the corporation in the unauthorized practice of law, or whether payment limited to the "actual cost" of employing the lawyer-employee would violate Rule 5.04(a).

Whether payment to a corporation for the cost of a loaned or outsourced lawyer-employee is fee sharing in violation of Rule 5.04(a) depends on the facts and circumstances. Clearly, an "above cost" payment is prohibited. See Opinion 512 (joint venture partially owned by corporation could not reimburse more than the cost of loaning the corporation's in-house counsel to the joint venture); see also Opinion 531 (1999) (parent corporation may not charge a subsidiary corporation "market rates" for legal services rendered by the parent corporation's legal staff); see generally ABA Formal Opinion 95-392 (1995) (Sharing Legal Fees with a For Profit Corporate Employer) (concluding that a corporation's in-house counsel would violate ABA Model Rule 5.4(a) by remitting to the corporation a fee greater than the corporation's costs in employing the lawyer).

But it does not follow that every "at cost" payment arrangement complies with Rule 5.04(a). For example, Opinion 498, quoted above, recognized that Rule 5.04(a) requires consideration of potential benefits to the corporation beyond payments designated as reimbursement for the costs of employment. And in Hexter Title & Abstract Co. v. Grievance Committee, the Texas Supreme Court observed that a corporation may benefit even if it offers legal services to customers at no additional charge:

No separate charge is made for the services above referred to. The defendant apparently advertises and holds itself out as furnishing this legal service without charge. However, it is not true in fact that such services are furnished free of cost to the customer. This legal service is advertised as a leader to induce prospective customers to come in and transact other business in which there is greater profit. It is offered as an inducement to contract for an abstract of title, for which a direct charge is made, or to allow the defendant's principal to insure the title to the property involved, for which the defendant receives a commission. The furnishing of such legal services constitutes a part of the cost of obtaining the business transacted by the defendant. Evidently it pays, or the practice would be discontinued. It constitutes a part of the total service for which the customers pay.

179 S.W.2d at 952.

Likewise, the Company described in this opinion might obtain an advantage over its competitors if it provides its customers the option of hiring the Company's In-House Counsel at "actual cost." The Company might profit by increased sales or by the ability to charge higher prices on its products and services. These benefits should be considered in determining whether the Company would receive more that its "actual cost" for offering its customers the option of employing the Company's In-House Counsel.

The Committee acknowledges that other jurisdictions have taken different paths regarding fee sharing with nonlawyers, the unauthorized practice of law, and nonlawyer ownership and control of law firms. See, e.g., Arizona Code of Judicial Administration 7-209 (authorizing lawyers to practice law in "Alternative Business Structures" in which nonlawyers have an economic interest or decision-making authority); District of Columbia Rule of Professional Conduct 5.4(b) (allowing D.C. lawyers to practice law in organizations owned in part by nonlawyers, subject to certain restrictions). But this Committee's primary responsibility is to offer guidance as to the existing laws governing the professional conduct of Texas lawyers. Under existing Texas law, the arrangement described in the assumed facts violates the prohibition against assisting in the unauthorized practice of law and, depending on the circumstances, may also violate the prohibition against fee sharing with nonlawyers.

CONCLUSION

A for-profit company owned in part by nonlawyers engages in the unauthorized practice of law if it provides its customers the option of retaining the company's full-time lawyer-employees at "actual cost" on matters unrelated to the company's interests. A lawyer-employee who assists the company in the unauthorized practice of law violates Rule 5.05(a)(2).

A lawyer-employee of a for-profit company violates the prohibition against sharing fees with nonlawyers if the corporate employer receives fees or other economic benefit more than the actual cost of offering customers the option of retaining the lawyer-employee.

Tex. Comm. On Professional Ethics, Op. 707 (2025)