A corporation either owns or contemplates acquiring 80 percent or greater interests in various business enterprises (these enterprises are referred to as the "controlled businesses"). In an effort to ensure that the law firm that now represents the corporation is engaged to represent the corporation and the controlled businesses with respect to all future legal matters, the law firm and the corporation propose to enter into a written agreement under which the corporation will encourage the use of the law firm by the controlled businesses. Under the agreement, if the controlled businesses engage the law firm to perform legal services, the client corporation will receive either a discount in billing rates for future legal work or a rebate of fees previously paid by the corporation to the law firm.
Is the proposed agreement between the corporation and the law firm permissible under the Texas Disciplinary Rules of Professional Conduct?
The proposed agreement provides for a transfer of value from the law firm to the client corporation (in the form of reduced fees or rebates of fees) as compensation to the corporation for causing the controlled businesses to use the law firm's services. Such an agreement is contrary to Rule 7.01(i) of the Texas Disciplinary Rules of Professional Conduct, which provides that "[a] lawyer shall not give or promise to give anything of value to a lay person for referring clients or potential clients to any lawyer or law firm...." The exceptions stated in Rule 7.01(i), for payments of fees for advertising and public relations services and for certain payments to referring organizations that do not profit from the performance of legal services, have no application in this case.
A corporation's controlling equity ownership in controlled businesses does not justify an arrangement in which a law firm agrees to pay the corporation for causing other entities to use the law firm's services. For example, it is permissible for a law firm and a group of commonly controlled businesses to agree on reduced legal fees for legal services to members of the group. It is likewise permissible for a parent corporation of a group of controlled businesses to control and pay for legal services for all members of the group and to obtain reimbursement from group members for their shares of legal service costs. These permissible arrangements do not involve payment by a law firm to one entity for causing another entity to employ the law firm.
An arrangement between a law firm and a corporation under the terms of which the corporation would receive reduced legal fees or rebates of fees in exchange for causing controlled businesses to use the law firm's services would constitute an impermissible promise to pay for the referral of clients to the law firm in violation of Rule 7.01(i) of the Texas Disciplinary Rules of Professional Conduct.