Randall O. Sorrels and Eric K. Gerard 2016-10-24 15:34:17
Do the benefits of a joint venture outweigh the costs? The joint venture straddles a peculiar middle ground in legal practice between independence and partnership. It offers the advantages of both, allowing each venturer to enjoy the most desirable assets of the other while affording the freedom to associate with other potential suitors. It also carries a unique set of risks and complications in such areas as fee division, mandatory disclosures, conflicts of interest, advertising restrictions, malpractice liability, and potential disputes between the associating lawyers. Ultimately, the prospective joint venturer must decide whether the benefits of this close but transient relationship outweigh the costs. Defining a Joint Venture To qualify as a joint venture under Texas law, the association must be based on either an express or implied agreement containing these essential elements: (1) a community of interest in the venture, (2) an agreement to share profits and losses, and (3) a mutual right of control or management of the enterprise.1 While other business associations—notably, the partnership—would qualify under this definition, the continued legal and practical separation of the entities and the association’s finite duration distinguish the joint venture from other business relationships.2 Between law firms, the term describes both single-matter associations and ongoing arrangements involving a category of cases.3 Either way, there is no formal, legal combination. The firms remain distinct entities, retaining their own names and identities. Further, they usually continue working on matters unrelated to the joint venture, without the other’s involvement, and may even create joint ventures with other firms on those cases. Rather than marry, the two are content to date for as long as it serves their mutual interests. Why might firms enter such an unconstrained relationship? Commonly, economies of scale and/or complementary assets drive them together. Working with another firm, or firms, may allow them to come closer to matching the manpower of their adversaries. In other circumstances, one firm may generate case leads but lack the ability to prosecute them alone. Another firm can bring the experience and expertise needed to execute. However, these benefits must be weighed against the added complications of these arrangements. Fee Splitting The Texas Disciplinary Rules of Professional Conduct define the concept of fee division as “a single billing to a client covering the fee of two or more lawyers who are not in the same firm.”4 Rule 1.04 allows lawyers to divide fees either on the basis of the proportion of services they render or if each lawyer assumes joint responsibility for the representation.5 The lawyers must inform the client of the arrangement and he or she must consent in writing to its essential terms “prior to the time of the association or referral proposed.”6 Essential terms include: (1) the identity of all participating lawyers or firms, (2) whether fees will be divided based on a proportionate or joint responsibility basis, and (3) the share of the fee that each lawyer or law firm will receive or the basis on which the division will be made if the division is based on proportion of service performed.7 A failure to disclose these terms, even if the client has approved the association, “does not constitute sufficient client confirmation within the meaning of this rule,”8 and the agreement may be deemed unenforceable as contrary to public policy.9 On its face, fee splitting based on the assumption of “joint responsibility” appears to align with the definition of joint venture in Texas, which requires a mutual right of control.10 The American Bar Association Center for Professional Responsibility Comment on ABA Model Rule 1.5 explains that “[j]oint responsibility for the representation entails financial and ethical responsibility as if the lawyers were associated in a partnership.”11 Comments to the Texas Rules, however, provide only that joint representation “entails ethical and perhaps financial responsibility for the representation,” explaining that duties need not be evenly split.12 The referring lawyer is not required to participate, and his or her involvement may require simply that the referring attorney reasonably investigate the claims, refer the case to a competent lawyer, monitor the matter, and communicate necessary information to the client.13 Conversely, a “proportionate responsibility” arrangement may more closely resemble a traditional joint venture. As Judge David Evans of the 48th District Court, in Tarrant County, has previously written, “[w]hen two lawyers agree to work a case together and to divide their fees proportionally, their relationship becomes one of co-counsel and is not one of referring lawyer and handling lawyer.”14 Fees between firms are divided proportionately to the services each rendered.15 Both firms must participate in handling the case and base their method of division on the amount of services rendered, the level of responsibility assumed, and the value of the services provided.16 Conflicts of Interest Rule 1.06 in the Texas Rules of Disciplinary Conduct precludes representation of adverse parties in the same litigation, as well as of clients with direct and adverse interests in substantially related matters absent an effective waiver.17 Failure to disclose a conflict may be actionable as a breach of fiduciary duty or professional negligence.18 In the context of a joint venture, both joint and proportional responsibility entail genuine client representation. Thus, the joint venture’s proposed representation must be checked against client rosters of both firms to ensure that no conflicts exist. Additionally, a “moonlighting” lawyer who works a case with another firm absent his or her employer’s approval could be subject to breaches of contract or fiduciary duty if he or she fails to first present the opportunity to his or her own firm.19 Malpractice Liability As discussed previously, a “joint responsibility” association under the Texas Rules need not entail equal responsibility. Texas permits far more flexibility than the near-partnership embrace under the ABA Model Rules. And, unlike the Model Rules, the arrangement does not give rise to default joint and several liability like a partnership.20 Proportionate responsibility arrangements, where each lawyer accepts a specific share of duties, may be even less likely to generate shared liability due to the clear demarcation of duties and compensation. That said, pitfalls remain. Comments to the Texas Rules provide that “[w]hether [fee division] or any additional activities that a lawyer might agree to undertake, suffice to make one lawyer participating in such an arrangement responsible for the professional misconduct of another lawyer who is participating in it and, if so, to what extent, are intended to be resolved by Texas Civil Practice and Remedies Code, chapter 33, or other applicable law.”21 The absence of Texas caselaw on the issue does little to clarify. What is clear is that both firms are liable for their own negligence in the representation, as each represents the client. Although reported examples in Texas are few, referring lawyers have been held liable for negligently selecting the handling attorney. Finally, joint and several liability may be imposed for the negligence of the other attorney where the association meets the legal standard of a joint venture discussed above, to which partnership law generally applies.22 The more intertwined the association appears, the more likely shared or vicarious liability could be imputed. Advertising Because the firms in a joint venture remain distinct entities, their promotional efforts constitute “cooperative advertising” subject to Texas Rule 7.04(o): A lawyer may not advertise “as part of an advertising cooperative or venture of two or more lawyers not in the same firm” unless the ad, among other things, names each participating lawyer and states that the cooperating lawyers covered its cost.23 Those involved in the joint venture must also avoid the prohibitions concerning misleading firm and “trade names.”24 For example, the firms cannot advertise under the name of one of their firms followed by the word “Group” (e.g., The Smith Law Group), as a State Bar Professional Ethics Committee opinion determined.25 They would nearly certainly also be barred from using a descriptive name referring to the subject or practice area of the joint venture (e.g., The Offshore Injury Firm). These additional restrictions reflect the Professional Ethics Committee’s apparent view of joint ventures as an easy conduit for consumer deception.26 Disputes As stated previously, partnership law typically governs the rights and obligations of those involved in a joint venture. Yet in contrast to partnership law, no fiduciary duty is created by a joint venture agreement.27 Similarly, the joint venture normally does not create a duty of good faith and fair dealing, as Texas law holds that no such duty exists in ordinary commercial transactions.28 Actionable claims are more likely to be based on a breach of the joint venture or referral agreement, reflecting the arm’s-length nature of the arrangement. The joint venture allows for a deepening of one’s practice without taking the more consequential step of full partnership. The bond between firms is temporary, purposeful, and transactional. The joint venture provides a relationship of convenience—one whose future may be both finite and complicated but can prove quite satisfying while the participants’ interests remain aligned. This article previously appeared in The Houston Lawyer, Vol. 53, No. 1. It has been edited and is reprinted with permission. Notes 1) See Coastal Plains Development Corp. v. Micrea, Inc., 572 S.W.2d 285, 287 (Tex. 1978). 2) As a general rule, joint ventures and partnerships are governed by the same rules. Henrich v. Wharton County Livestock, Inc., 557 S.W.2d 830, 833 (Tex.Civ.App.—Corpus Christi, 1977, writ ref'd n.r.e.); See also State v. Houston Lighting & Power Co., 609 S.W.2d 263 (Tex.Civ.App.—Corpus Christi, 1980, writ ref'd n.r.e.). 3) For example, a commercial lawyer retained by a seriously injured client may choose to partner with a firm that regularly brings such matters to trial, as doing so will add credibility to settlement negotiations and ensure the matter is properly prepared should it need to go to a jury. Or, two plaintiff’s firms may join up in representing a number of clients in mass tort litigation concerning a single drug. In this case, the association is ongoing, enduring past resolution of a single matter until the stream of litigation dries up. 4) Tex. Disciplinary Rules Prof’l Conduct R. 1.04, Comment 10. 5) Id. 6) Tex. Disciplinary Rules Prof’l Conduct R. 1.04. 7) Id.; See also Tex. Disciplinary Rules Prof’l Conduct R. 1.04, Comment 15. 8) Id.; See also In re Wright, 138 Fed. Appx. 690, 696 (5th Cir., 2005); Tex. Disciplinary Rules Prof’l Conduct R. 1.04, Comment 16. 9) See, e.g., Lemond v. Jamail, 763 S.W.2d 910, 914 (Tex. App.—Houston [1st Dist.], 1988), writ denied (May 17, 1989). 10) Ben Fitzgerald Realty Co. v. Muller, 846 S.W.2d at 121. 11) ABA Model R. Prof. Conduct 1.05, Comment 7. 12) Tex. Disciplinary Rules Prof’l Conduct R. 1.04, Comment 13. 13) Id.; See also Tex. Disciplinary Rules Prof’l Conduct R. 1.03. 14) Evans, supra note 11. 15) Tex. Disciplinary Rules Prof’l Conduct R. 1.04. 16) Id. 17) Tex. Disciplinary Rules Prof’l Conduct R. 1.06. 18) See Murphy v. Gruber, 241 S.W.3d 689, 695-96 (Tex. App.—Dallas 2007, pet. denied). 19) See Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193, 203 (Tex., 2002). 20) See Tom Crosley and Tim Torres, Referral Fees, San Antonio Lawyer, Sept.-Oct. 2010. 21) Tex. Disciplinary Rules Prof’l Conduct R. 1.04, Comment 14. 22) See text accompanying notes 1 through 3 supra. 23) Tex. Disciplinary Rules Prof’l Conduct R. 7.04. 24) Tex. Disciplinary Rules Prof’l Conduct R. 7.01. 25) Tex. Comm. on Prof’l Ethics, Op. 591 (Jan. 2010). 26) See Tex. Disciplinary Rules Prof’l Conduct R. 7.04, Comment 19 (“[T]he fact that several independent lawyers have joined together in a single advertisement increases the risk of misrepresentation or other forms of inappropriate expression.”). 27) See, e.g., Dardas v. Fleming, Hovenkamp & Grayson, 194 S.W.3d 603, 620 (Tex. App.— Houston [14th Dist.] 2006, pet. denied). 28) Formosa Plastics Corp. USA v. Presidio Eng’rs & Contractors, Inc., 960 S.W.2d 41, 52 (1998); See also Dardas, 194 S.W.3d at 620. RANDALL O. SORRELS is a partner at Abraham, Watkins, Nichols, Sorrels, Agosto & Friend. He is a former president of the Houston Bar Association and the Houston Trial Lawyers Association. ERIC K. GERARD is a former associate attorney with Abraham, Watkins, Nichols, Sorrels, Agosto & Friend. He is currently a federal prosecutor in the Tampa, Florida, area.
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