VIP Titles and Incentive Bonuses Not Allowed for Top Nonlawyer Executives at Texas Firms

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May 21 — In an opinion at odds with how some large law firms operate, the Texas bar's ethics committee has nixed the idea of conferring titles such as “chief executive officer” or “chief technology officer” on nonlawyer managers of law firms, and ruled out the idea of paying bonuses to such employees that depend on hitting revenue or profit targets.  

The May opinion addresses an unnamed Texas firm's plan for titling and compensating nonlawyer executives. The panel concluded that calling nonlawyers “officers” or “principals” or promising them incentive bonuses would offend the ethics rule requiring professional independence.

CEOs and CMOs With MBAs at Some Firms

Texas Op. 642 doesn't acknowledge that some firms—including at least two with offices in the state—are already bringing in nonlawyers who have a top-level business background and giving them titles that reflect their roles.

Examples include Scott Green, “chief executive officer” of Pepper Hamilton LLP in New York; Elizabeth Hughes Eginton, who June 2 became “chief marketing officer” at Latham & Watkins in New York; and Gregory Fleischmann, “director of global marketing” at Baker McKenzie in Chicago.

Latham has an office in Houston, and Baker McKenzie has offices in both Houston and Dallas.

In much different factual circumstances, a Georgia lawyer was recently disbarred in part for setting up a law practice with nonlawyer clients who provided funds for the new firm, handled its business operations and expected to share in the profits. In re Nesbitt,2014 BL 19963, 754 S.E.2d 363, 30 Law. Man. Prof. Conduct 104 (Ga. 2014).

What's in a Name?

The opinion states that if a firm's nonlawyer employees are really “officers” or “principals” in the firm, that arrangement would violate Texas Disciplinary Rule of Professional Conduct 5.04, which generally does not permit Texas lawyers to allow nonlawyers to have controlling or ownership interests in their law firms. The opinion invokes several parts of that rule, stating that lawyers must not:

  •  practice in a for-profit professional corporation or association if “a nonlawyer is a corporate director or officer thereof” (Rule 5.04(d)(2));
  •  practice in a for-profit professional corporation or association if “a nonlawyer has the right to direct or control the professional judgment of a lawyer” (Rule 5.04(d)(3)); or
  •  form a partnership with a nonlawyer if any of the firm's activities consist of the practice of law (Rule 5.04(b).
  • On the other hand, if nonlawyers are identified as “officers” or “principals” when they actually don't control the law firm's operations or own an interest in it, use of those titles would be a misleading communication about the firm in violation of Rule 7.02(a) and would be dishonest in violation of Rule 8.04(a)(3), the committee said.

    $$$ for Hitting Targets

    The committee also took a dim view of the firm's proposal to pay specified bonuses to nonlawyer employees contingent on the firm's achieving a certain amount of revenue or profit. That plan, it said, would be improper under Rule 5.04(a), which generally prohibits lawyers and law firms from sharing or promising to share fees with a nonlawyer.

    According to Comment [1], the purpose of Rule 5.04(a) is to deter lawyers from providing an incentive for nonlawyers to practice law or to solicit clients for the lawyers, the panel said.

    The firm's proposal for paying bonuses is the very type of plan that Rule 5.04(a) forbids—one that is tied to achieving a specified level of revenue or profit, the committee said. It would provide an incentive for the firm's nonlawyer employees to increase revenues, which could involve unethical solicitation of clients, or to reduce expenses, which could encourage the nonlawyers to interfere with the lawyers' independent judgment in practicing law, it said.

    The committee stated that Rule 5.04(a) does not preclude a law firm from taking considerations such as revenue, expenses and profit into account in determining whether to pay bonuses and, if so, how much to pay.

    “Rule 5.04(a) does, however, prohibit a law firm from agreeing to pay a non-lawyer employee a specified bonus that is tied to specified revenues or profits, such as: `We will pay you a bonus of $10,000 if the firm's revenue (or profit) for the year is at or above $1 million,'” the opinion states.

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