Ethics of Non-Attorney Officers or Principals and Non-Attorney Bonuses Based on Revenue or Profit

Ellen Lockwood, ACP, RP

Ellen Lockwood, ACP, RP

The Professional Ethics Committee of the State Bar of Texas recently issued Opinion No. 642 which addresses two issues that are relevant to paralegals. The opinion was issued in May 2014 and published in the July 2014 edition of the Texas Bar Journal.

The first issue addressed by the opinion is whether non-attorneys may hold titles such as “officer” or “principal” in a firm. The Committee noted that under the Texas Disciplinary Rules of Professional Conduct, Texas attorneys are not permitted to grant ownership or controlling interest in law firms to non-attorneys and that the assignment of titles such as “chief executive officer” and “chief technology officer” would make it appear that those people have significant control over the firm and its operations.

The Committee cited the following rules as being significant:

•   Rule 5.04(a)—attorneys may not share or promise to share fees with a non-attorney

•   Rule 5.04(d)(2)—attorneys may not practice law if a non-attorney is a corporate director or officer of the law firm

•   Rule 5.04(d)(3)—attorneys may not practice law if a non-attorney “has the right to direct or control the professional judgment of a lawyer”

•   Rule 5.04(b)—attorneys may not form a partnership with a non-attorney if the attorney will be practicing law as part of the activities of the partnership

The Committee pointed out that even if non-attorneys would not own an interest in the firm or control the firm’s operations, it would still be misleading to give non-attorneys titles such as those given to officers and principals. Further, the committee notes that identifying someone as an officer or principal who doesn’t have any ownership of the organization, nor control over its activities, would violate the rule which bars attorneys from any activities which involve “dishonesty, fraud, deceit, or misrepresentation.”

The second issue addressed by the opinion is whether a firm may pay bonuses to non-attorneys based on a firm’s profit or revenue. The Committee notes that Rule 5.04(a) prohibits sharing or promising to share fees with a non-attorney. The purpose of this rule is to prevent attorneys from encouraging non-attorneys to practice law or solicit clients.

The Committee notes that any plan or promise to pay bonuses to non-attorneys based on the firm’s profitability may motivate non-attorneys to try to increase the firm’s revenue. If non-attorneys bonuses are directly tied to the firm’s revenue or profits, non-attorneys may be more likely to commit UPL or solicit clients for the attorneys. Non-attorneys may also try to reduce expenses, which could be considered interfering with an attorney’s independent judgment in his law practice (see Rule 5.04 (d)(3).

The opinion also notes that naturally, the award of bonuses depends upon whether the firm has a lucrative year and therefore must review its balance sheet to determine whether to pay bonuses and that there is no ethical prohibition for doing so. The issue would arise only if the firm promised to pay a non-attorney a specific bonus based on a particular level of profitability of the firm.

Although the legal field continues to evolve, non-attorneys are still prohibited from owning or controlling organizations that provide services which include the practice of law, and from being compensated by those organizations based on the organization’s specified profitability benchmarks.

Ellen Lockwood, ACP, RP, is the Chair of the Professional Ethics Committee of the Paralegal Division and a past president of the Division. She is a frequent speaker on paralegal ethics and intellectual property and the lead author of the Division’s Paralegal Ethics Handbook published by Thomson Reuters.