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.,

(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

.

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,

(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.,

, 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.,

(5th Cir. 1999); Lipscomb v. Columbus Mun. Separate Sch. Dist.,

(5th Cir. 1998); Munich Amer. Reinsurance Co. v. Crawford,

(5th Cir. 1998); Sierra Club v. City of San Antonio,

(5th Cir. 1997); Clark v. Fitzgibbons,

(1997); Alexander v. Ieyoub,

(5th Cir. 1995); Louisiana Debating & Literary Ass’n v. City of New Orleans,

(5th Cir. 1995); Wilson v. Valley Elec. Membership Corp.,

(5th Cir. 1993). 6

(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

(1984) (quoting Pullman,

); accord City of Houston v. Hill,

(1987) (Scalia, J., concurring); Lipscomb,

; Louisiana Debating & Literary Ass’n,

; see also 17A Charles Alan Wright et al., Federal Practice and Procedure § 4242, at 30 (2d ed. 1988). 8 Midkiff,

. 9 Green v. State Bar of Texas,

(5th Cir. 1994) (noting that “[t]he UPLC is a state agency”); see also

– 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,

.

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.,

(5th Cir. 1995) (citing Harman v. Forssenius,

(1965)); accord Hill,

; Louisiana Debating & Literary Ass’n,

; Word of Faith World Outreach Ctr. Church, Inc. v. Morales,

(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

(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,

, 835- 38, repealed by Act of June 1, 1949, ch. 301, § 1,

. 17 Hexter Title,

; see also J. R. Phillips Inv. Co. v. Road Dist. No. 18,

(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.,

(Tex. 1956); Amarillo Abstract & Title Co. v. Unauthorized Practice of Law Comm.,

(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,

(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

(Tex. Civ. App.–Houston [1st Dist.] 1972, writ ref’d). 22

.

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,

, 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,

, 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

at 88 n.14, 88-89. 29

(Tex. 1965). 30 Moore,

n.14; Barrett v. Atl. Richfield Co.,

(5th Cir. 1971); see also 17A Wright, § 4243, at 66. 31 Delaney,

. 32 Moore,

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,

(1974). 34 See, e.g., Arizonans for Official English v. Arizona,

(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,

(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