Nationwide Mutual v. Unauthorized Practic ( 2002 )

Revised March 8, 2002
UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 00-11025
NATIONWIDE MUTUAL INSURANCE COMPANY,
Plaintiff-Appellant,
VERSUS
UNAUTHORIZED PRACTICE OF LAW COMMITTEE,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Texas
February 20, 2002
Before GARWOOD, DeMOSS, and DENNIS, Circuit Judges.
DENNIS, Circuit Judge:
Nationwide Mutual Insurance Company (“Nationwide”) sued
Texas’s Unauthorized Practice of Law Committee (the “UPLC”) in
federal district court. Nationwide sought a declaration that Texas
law does not prohibit it from employing salaried staff attorneys to
represent its insureds in policy-related cases. Nationwide also
sought a declaration that the Texas State Bar Act, as interpreted
1
by the UPLC, violates the federal constitution. Because it found
the State Bar Act’s unauthorized practice of law provisions to be
sufficiently unclear, the district court abstained from exercising
its jurisdiction under the Pullman1 doctrine. Nationwide has
appealed and requests that we certify the state law issue to the
Supreme Court of Texas. We affirm the district court’s abstention
ruling but remand with instructions to dismiss without prejudice.
We also deny Nationwide’s motion to certify a question to the
Supreme Court of Texas.
I. Facts and Procedural History
Nationwide employs staff attorneys to represent its insureds
in policy-related lawsuits. Like traditional outside counsel,
Nationwide’s staff counsel are duly licensed attorneys who conduct
discovery, draft and file court documents, and physically appear in
court. The key difference is that staff counsel are salaried
employees of Nationwide; they are not independent attorneys paid on
a per case basis.
Before filing this lawsuit, Nationwide learned that the UPLC
had sued Allstate Insurance Company in a Texas state court,
alleging that Allstate’s employment of staff attorneys constitutes
the unauthorized practice of law by a corporation.2 Other
1
Railroad Comm’n v. Pullman Co., 312 U.S. 496, 501-02 (1941).
2
See Unauthorized Practice of Law Comm. v. Collins, No. 98-8269
(298th Dist. Ct., Dallas County, Tex.) (the “Allstate Litigation”).
2
insurance companies have intervened in the Allstate litigation.
Nationwide, however, chose not to intervene. Once it learned that
the UPLC was investigating its use of staff attorneys, Nationwide
filed this declaratory judgment action in federal court.
In its complaint, Nationwide seeks a declaration that there is
no disciplinary rule, ethical opinion, or caselaw in Texas
prohibiting an insurance company from using staff attorneys to
defend its insureds. Nationwide also seeks a declaration that the
unauthorized-practice-of-law section of the Texas State Bar Act, as
interpreted by the UPLC, violates the federal Constitution.
Specifically, Nationwide alleges that the section (1) violates due
process because it bears no rational relationship to the objective
of ensuring quality, ethical representation; (2) violates due
process because it is unconstitutionally vague; (3) violates the
First Amendment; (4) impairs Nationwide’s contractual obligations
to its insureds in violation of Article I, § 10 of the
Constitution; and (5) is therefore actionable under 42 U.S.C. §
1983.
The UPLC moved to dismiss Nationwide’s suit under Rules
12(b)(1), (2), and (6) of the Federal Rules of Civil Procedure.
The UPLC offered several reasons for dismissal, including (1) that
there is no constitutional right to practice law, (2) that the suit
should be dismissed under the Younger3 abstention doctrine due to
3
Younger v. Harris, 401 U.S. 37 (1971).
3
the pending Allstate litigation, and (3) that Texas law prohibits
a corporation, other than a “professional corporation,” from
practicing law.
The district court granted the UPLC’s motion to dismiss after
hearing arguments from both sides. Rather than invoking the
Younger doctrine, however, the district court dismissed the suit
under the Pullman doctrine so that the state courts could resolve
whether Texas law actually prohibits an insurer from employing
staff attorneys on behalf of its insureds. The court noted that
the resolution of this state law issue could make it unnecessary to
determine whether the State Bar Act violates the federal
Constitution. Finally, the court reminded Nationwide of its
opportunity to intervene in the Allstate litigation. Nationwide
appeals the district court’s dismissal and moves this court to
certify the state law question to the Supreme Court of Texas.
II. Discussion
A. Standard of Review
The parties disagree on the proper standard of review for this
case. Nationwide argues that we review abstention decisions de
novo, while the UPLC insists that we review abstention decisions
only for abuse of discretion. There is some truth to each of these
propositions. Despite the confusion that once existed in this
4
Circuit,4 it is now clear that we apply a two-tiered standard of
review in abstention cases. Although we review a district court’s
abstention ruling for abuse of discretion, we review de novo
whether the requirements of a particular abstention doctrine are
satisfied.5 We recently articulated this two-tiered standard of
review in Webb v. B.C. Rogers Poultry, Inc.:
We review an abstention for abuse of discretion. The
exercise of discretion must fit within the narrow and
specific limits prescribed by the particular abstention
doctrine involved. A court necessarily abuses its
discretion when it abstains outside of the doctrine’s
strictures.6
Thus, we review the district court’s decision to abstain for abuse
of discretion, provided that the elements of Pullman abstention are
present.
B. Pullman Abstention
The Supreme Court explained in Hawaii Housing Authority v.
Midkiff that under the Pullman doctrine, a federal court should
4
See Brooks v. Walker County Hosp. Dist., 688 F.2d 334, 336 n.4
(5th Cir. 1982) (discussing an apparent inconsistency in the
standard of review in Fifth Circuit abstention cases).
5
See, e.g., Webb v. B.C. Rogers Poultry, Inc., 174 F.3d 697, 701
(5th Cir. 1999); Lipscomb v. Columbus Mun. Separate Sch. Dist., 145
F.3d 238, 242 (5th Cir. 1998); Munich Amer. Reinsurance Co. v.
Crawford, 141 F.3d 585, 589 (5th Cir. 1998); Sierra Club v. City of
San Antonio, 112 F.3d 789, 793 (5th Cir. 1997); Clark v.
Fitzgibbons, 105 F.3d 1049, 1051 (1997); Alexander v. Ieyoub, 52
F.3d 554, 557 (5th Cir. 1995); Louisiana Debating & Literary Ass’n
v. City of New Orleans, 42 F.3d 1483, 1489 (5th Cir. 1995); Wilson
v. Valley Elec. Membership Corp., 8 F.3d 311, 313 (5th Cir. 1993).
6
174 F.3d 697, 701 (5th Cir. 1999) (internal citations and
quotation omitted).
5
abstain from exercising its jurisdiction “when difficult and
unsettled questions of state law must be resolved before a
substantial federal constitutional question can be decided.”7 “By
abstaining in such cases, federal courts will avoid both
unnecessary adjudication of federal questions and ‘needless
friction with state policies . . . .’”8 In other words, for
Pullman abstention to be appropriate in this case, it must involve
(1) a federal constitutional challenge to state action and (2) an
unclear issue of state law that, if resolved, would make it
unnecessary for us to rule on the federal constitutional question.
The first prong is clearly satisfied. The UPLC is a state
agency,9 and any attempt by it to prohibit Nationwide from
employing staff attorneys would be state action.10 Nationwide has
raised several arguments under which the UPLC’s reading of the
State Bar Act would violate Nationwide’s constitutional rights.
Although we express no opinion on whether Nationwide’s
7
467 U.S. 229, 236 (1984) (quoting Pullman, 312 U.S. at 500);
accord City of Houston v. Hill, 482 U.S. 451, 476 (1987) (Scalia,
J., concurring); Lipscomb, 145 F.3d at 242; Louisiana Debating &
Literary Ass’n, 42 F.3d at 1491; see also 17A Charles Alan Wright
et al., Federal Practice and Procedure § 4242, at 30 (2d ed. 1988).
8
Midkiff, 467 U.S. at 236.
9
Green v. State Bar of Texas, 27 F.3d 1083, 1087-88 (5th Cir.
1994) (noting that “[t]he UPLC is a state agency”); see also Tex.
Gov't Code Ann. §§ 81.103 – 81.104 (Vernon 1998) (empowering the
Supreme Court of Texas to appoint the nine committee members of the
UPLC to police against the unauthorized practice of law in Texas).
10
See Green, 27 F.3d at 1087-88.
6
constitutional arguments will ultimately prevail, they appear to at
least deserve consideration. The UPLC has not demonstrated that
all of Nationwide’s claims clearly mandate dismissal.
To satisfy the second prong, there must be an uncertain issue
of state law that is “fairly susceptible” to an interpretation that
would render it unnecessary for us to decide the federal
constitutional questions in a case.11 Thus, for abstention to be
proper in this case, the State Bar Act must be fairly susceptible
to an interpretation that would permit Nationwide to employ
salaried attorneys to represent its insureds in coverage-related
cases. We believe that it is.
Subchapter G of the State Bar Act, published in the Texas
Government Code §§ 81.101 – 81.106 (Vernon 1998), regulates the
practice of law in Texas. Nothing in the Act itself expressly
forbids insurance companies from employing staff counsel to
represent its insureds. Section 81.101(a) provides a nonexhaustive
list of activities constituting the “practice of law,” including
drafting and filing court documents, appearing before a judge, and
giving legal advice out of court. But the Act does not define the
“unauthorized practice of law”; § 81.102(a) merely states that “a
person may not practice law in this state unless the person is a
11
Baran v. Port of Beaumont Navigation Dist., 57 F.3d 436, 442
(5th Cir. 1995) (citing Harman v. Forssenius, 380 U.S. 528, 534-35
(1965)); accord Hill, 482 U.S. at 468; Louisiana Debating &
Literary Ass’n, 42 F.3d at 1492; Word of Faith World Outreach Ctr.
Church, Inc. v. Morales, 986 F.2d 962, 967 (5th Cir. 1993).
7
member of the state bar.”12 Nationwide’s staff attorneys are duly
licensed members of the state bar, just like attorneys in private
practice. Furthermore, the word “person,” as used in § 81.102(a),
presumptively includes corporations. The Texas Code of
Construction Act, which applies to the State Bar Act,13 instructs
courts to read the word “person” as including corporations,
partnerships, and other legal entities.14
Moreover, we find no Texas cases that address whether §
81.102(a) prohibits an insurance company from employing staff
attorneys to defend its insureds. The UPLC argues that the Supreme
Court of Texas definitively held in Hexter Title & Abstract Co. v.
Grievance Committee15 that corporations may never employ attorneys
12
Chapter 83 of the Texas Government Code provides an additional
nonexhaustive list of activities qualifying as the unauthorized
practice of law. See Tex. Gov’t Code Ann. §§ 83.001–83.006 (Vernon
1998) (prohibiting the drafting of conveyances, deeds, notes, and
mortgages by persons who are not licensed attorneys or real estate
brokers). None of those activities, however, is relevant to this
case. Section 38.123 of the Texas Penal Code criminalizes certain
unauthorized practices of law, but it does not clarify the question
of whether an insurance company may employ staff attorneys to
represent its insureds.
13
Tex. Gov’t Code Ann. § 1.002 (Vernon 1988) (“The Code
Construction Act (Chapter 311 of this code) applies to the
construction of each provision in this code, except as otherwise
expressly provided by this code.”).
14
Id. § 311.005(2) (stating that unless the statute in which the
word is used requires a different meaning, “‘Person’ includes
corporation, organization, government or governmental subdivision
or agency, business trust, estate, trust, partnership, association,
and any other legal entity”).
15
179 S.W.2d 946 (Tex. 1944).
8
to represent third parties; we disagree. First, the court based
its ruling in Hexter Title on a now repealed Texas penal statute16
that expressly forbade corporations from practicing law on behalf
of third persons; the court did not examine or apply § 81.102(a).17
Second, Hexter Title is factually distinguishable from the present
case. Hexter Title involved a title company, “incorporated for the
purpose of making abstracts of title to land and liens thereon,”
that employed lawyers to draft conveyances and other legal
documents for its clients.18 The court held that the “preparation
of the conveyances and other instruments covered by the injunction
in nowise relates to [the business of making titles].”19 Since
Hexter Title had no present interest in the legal documents that it
was drafting, it could not perform that service. On the contrary,
Nationwide, as an insurer, has a direct financial interest in
policy-related cases involving its insureds. Thus, under the
court’s reasoning in Hexter Title, there might be reason to treat
insurance companies differently from title companies with respect
16
Unauthorized Practice Act, 43d Leg., R.S., ch. 238, 1933 Tex.
Gen. Laws 835, 835- 38, repealed by Act of June 1, 1949, ch. 301,
§ 1, 1949 Tex. Gen. Laws 548.
17
Hexter Title, 179 S.W.2d at 951; see also J. R. Phillips Inv.
Co. v. Road Dist. No. 18, 172 S.W.2d 707, 712 (Tex. Civ. App.–Waco
1943, writ ref’d) (citing the same penal statute for the
proposition that it is unlawful for corporations to practice law).
18
Id. at 952.
19
Id.
9
to the employment of duly licensed staff counsel.20
In Scruggs v. Houston Legal Foundation,21 a Texas appellate
court applied a more liberal approach toward allowing corporations
to employ licensed attorneys to represent third parties. Scruggs
held that a charitable, nonprofit corporation could employ
attorneys to represent indigents accused of committing crimes.22
The court focused on the fact that the Legal Foundation did not
attempt to control or exploit the manner in which the attorneys in
its employ represent their indigent clients. Because the
Foundation’s practices were not demeaning to the profession, there
was not proof that it was engaged in the unauthorized practice of
20
Id. There is abundant caselaw in Texas regulating title
companies’ attempts to draft legal documents for third parties. At
least three other Texas appellate court decisions have
characterized this practice as the unauthorized practice of law.
See San Antonio Bar Ass’n v. Guardian Abstract & Title Co., 291
S.W.2d 697, 701 (Tex. 1956); Amarillo Abstract & Title Co. v.
Unauthorized Practice of Law Comm., 332 S.W.2d 349, 350-51 (Tex.
Civ. App.–Amarillo 1960, writ ref’d n.r.e.) (holding that there was
a fact question regarding whether the title company was engaged in
the practice of law);Stewart Abstract Co. v. Judicial Comm’n, 131
S.W.2d 686, 690 (Tex. Civ. App.–Beaumont 1939, no writ). There now
exists a statute which specifically prohibits title companies from
drafting legal documents for third parties. See Tex. Gov’t Code
Ann. § 83.001. The Texas judiciary and legislature have not,
however, addressed the issue of insurance companies employing staff
attorneys to represent their insureds. Because of differences
between a title company’s interest in drafting a conveyance for a
third party and an insurer’s interest in a case involving one of
its insureds’ policies, we do not believe that those cases
necessarily control the present issue.
21
475 S.W.2d 604 (Tex. Civ. App.–Houston [1st Dist.] 1972, writ
ref’d).
22
Id. at 607.
10
law simply because it employed lawyers to represent third parties.23
Although the Texas legislature has since enacted legislation
prohibiting non-profit legal service corporations from employing
staff counsel to represent third parties,24 the Scruggs opinion
demonstrates a willingness by Texas courts to allow certain
corporate staff counsel arrangements, rather than a predisposition
to outlaw the practice entirely.
Finally, it is unclear what effect Texas’s ultra vires statute
has on an insurer’s right to employ staff attorneys. Article 2.01
of the Texas Business Corporation Act provides that corporations
may not organize for the purpose of transacting business that
“cannot lawfully be engaged in without first obtaining a license .
. . to engage in such activity” if “a license cannot lawfully be
granted to a corporation.”25 While the statute may suggest that
Nationwide’s staff attorneys cannot practice law unless Nationwide
itself can obtain a bar license, no Texas court has interpreted
this statute to prohibit insurance companies from employing staff
counsel. And as stated above, it is unclear whether § 81.02(a) of
the State Bar Act prohibits insurance companies from “practicing
law” by employing duly licenced attorneys, because the word
“person” as used in the statute includes corporations.
23
Id. at 606-07.
24
See Tex. Ins. Code Ann. art. 23.12 (Vernon 1981).
25
Tex. Bus. Corp. Act Ann. art. 2.01, § B(2) (Vernon 1980).
11
In light of these conflicting authorities and in the absence
of caselaw interpreting § 81.102(a) in this context, we believe
that the law is fairly susceptible to a reading that would permit
Nationwide to employ staff counsel on behalf of its insureds.
While the Texas courts certainly may decide that Nationwide’s staff
attorneys are engaged in the unauthorized practice of law, we
believe that the law is uncertain enough on this issue that we
should abstain from ruling on its federal constitutionality. Thus,
given that the strictures of the Pullman doctrine were satisfied
and in light of Texas’s interest in policing its state bar, the
district court did not abuse its discretion in applying Pullman
abstention to this case.
C. Dismissal
Although the district court did not err in applying Pullman
abstention, it did err in dismissing Nationwide’s claims with
prejudice.26 Ordinarily, a district court ordering Pullman
abstention should “retain jurisdiction but . . . stay the federal
suit pending determination of the state-law questions in state
court.”27 The Supreme Court, however, has recognized a limited
26
The district judge technically did not specify whether he was
dismissing the case with or without prejudice, however, “a
dismissal is presumed to be with prejudice unless the order
explicitly states otherwise.” Fernandez-Montes v. Allied Pilots
Ass’n, 987 F.2d 278, 284 n.8 (5th Cir. 1993). Furthermore, the
UPLC’s motion, which the district court granted, requested that
Nationwide’s claims be dismissed with prejudice.
27
Harris County Comm’rs Court v. Moore, 420 U.S. 77, 88 n.14
(1975).
12
exception to this rule for cases from Texas, whereby the district
court dismisses the case without prejudice rather than retaining
jurisdiction.28 Federal courts created this exception because the
Texas Supreme Court held in United Services Life Insurance Co. v.
Delaney29 that it cannot grant declaratory relief if a federal court
retains jurisdiction over the case.30 According to the Supreme
Court of Texas, such a ruling would be an advisory opinion.31 But
as the Supreme Court noted in Harris County Commissioners Court v.
Moore, our practice of dismissing Pullman abstention cases from
Texas is not designed to foreclose recovery permanently:
We have adopted the unusual course of dismissing in this
case solely in order to avoid the possibility that some
state-law remedies might otherwise be foreclosed to
appellees on their return to state court. Obviously, the
dismissal must not be used as a means to defeat the
appellees’ federal claims if and when they return to
federal court.32
The district court therefore erred in dismissing Nationwide’s
claims with prejudice. On remand, the district court should
dismiss this case without prejudice so as to preserve Nationwide’s
state and federal claims.
D. Certification to the Supreme Court of Texas
28
Id. at 88 n.14, 88-89.
29
396 S.W.2d 855 (Tex. 1965).
30
Moore, 420 U.S. at 88 n.14; Barrett v. Atl. Richfield Co., 444
F.2d 38, 46 (5th Cir. 1971); see also 17A Wright, § 4243, at 66.
31
Delaney, 396 S.W.2d at 863-64.
32
Moore, 420 U.S. at 88 n.14 (emphasis added).
13
In addition to appealing the district court’s abstention
ruling, Nationwide has filed a motion with this court to certify
the following question to the Supreme Court of Texas: “Whether,
under Texas state law, the State Bar Act prohibits an insurance
company from employing duly licensed staff legal counsel to
represent the interests of its insureds when the insurance company
has a contractual duty to defend and indemnify the insured?” Under
Rule 58 of the Texas Rules of Appellate Procedure, “[t]he Supreme
Court of Texas may answer questions of law certified to it by any
federal appellate court if the certifying court is presented with
determinative questions of Texas law having no controlling Supreme
Court precedent.”
The decision to certify a question of state law lies within
the sound discretion of this court.33 While we acknowledge the
efficiencies generated by certification,34 we decline the invitation
to certify the question in this instance. The UPLC and several
insurance companies are currently litigating this state law
question in two Texas district courts. We believe that the Supreme
Court of Texas would be better suited to answer this question with
33
Lehman Bros. v. Schein, 416 U.S. 386, 391 (1974).
34
See, e.g., Arizonans for Official English v. Arizona, 520 U.S.
43, 76 (1997) (“Certification procedure . . . allows a federal
court faced with a novel state-law question to put the question
directly to the State’s highest court, reducing the delay, cutting
the cost, and increasing the assurance of gaining an authoritative
response.”); Schein, 416 U.S. at 391 (stating that certification
“does, of course, in the long run save time, energy, and resources
and helps build a cooperative judicial federalism”).
14
the benefit of records generated in state court by several
insurance companies than it would be by receiving a certified
question from one insurer with a relatively limited record on
appeal. We therefore deny Nationwide’s motion to certify its
question to the Supreme Court of Texas.
III. Conclusion
The district court did not abuse its discretion in applying
Pullman abstention in this case. We believe that the Texas State
Bar Act is fairly susceptible to a reading that would make it
unnecessary for us to rule on the federal constitutionality of its
unauthorized practice of law provisions. The district court erred,
however, when it dismissed Nationwide’s claims with prejudice. We
therefore AFFIRM the district court’s application of the Pullman
doctrine, but REVERSE its decision to dismiss Nationwide’s claims
with prejudice. The district court’s order of dismissal is
VACATED, and the case is REMANDED with instructions to dismiss
Nationwide’s claims without prejudice. Finally, Nationwide’s
certification motion is DENIED.
15