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Nationwide Mutual Insurance Co. may have a valid complaint in its fight with the State Bar of Texas’ Unauthorized Practice of Law Committee on the issue of captive firms, but the issue ultimately should be decided in state court, the 5th U.S. Circuit Court of Appeals ruled Feb. 20. The decision is the result of a 2-year-old suit filed by Columbus, Ohio-based Nationwide Mutual — one of several major insurance companies being investigated by the UPLC over the use of so-called “captive firms” to defend policyholders against Texas suits. Captive firms essentially are law offices staffed by lawyers who are employees of insurance companies but who represent the company’s policyholders. The company filed Nationwide v. UPLC as a pre-emptive strike, hoping to stop the investigative committee by asking the court to declare unconstitutional the State Bar Act, � 81.101 of the Texas Government Code, which regulates the UPLC’s powers. The 5th Circuit declined to consider whether the act is unconstitutional, but the judges did not find anything wrong with Nationwide’s use of captive firms. “Nothing in the act itself expressly forbids insurance companies from employing staff counsel to represent its insureds,” wrote Judge James L. Dennis in an opinion joined by Senior Judge Will Garwood and Judge Harold D. DeMoss Jr. “Moreover, we find no Texas cases that address whether … [the UPLC statute] prohibits an insurance company from employing staff attorneys to defend its insureds,” Dennis wrote. Last year, U.S. District Judge Jerry Buchmeyer of Dallas dismissed Nationwide’s suit with prejudice, advising the company it could take its case to state court where the issue is currently being litigated in two other cases. The 5th Circuit found that Buchmeyer erred by dismissing the case with prejudice. The decision clears the way for Nationwide’s case to be litigated in state court and later in federal court on appeal if necessary. FIGHTING ON James W. Walker, who represents Nationwide, says the opinion is a damaging blow to the UPLC and its argument that captive firms are not allowed to function under state law. UPLC officials believe that captive firms — as employees of insurance companies — can’t ethically represent clients. “The 5th Circuit said that’s not correct at all. The main argument that the committee has argued historically has been completely debunked by the 5th Circuit,” says Walker, managing partner of Dallas’ Walker Sewell. “Nationwide’s concept of the State Bar Act is a reasonable conception of the act which would allow staff counsel.” But James D. Bloom, a partner in Dallas’ Bloom & Stoddard who represents the UPLC in Nationwide, doubts the insurance company will make any headway with the opinion if it chooses to fight on in state court. “The court specifically says they are not deciding the question [Nationwide] wanted them to decide,” Bloom says. “They said, ‘We think it’s a closed question and we’re going to let the state courts decide.’ “ The issue is pending in two Dallas state courts: UPLC v. Allstate is in the 298th District Court, and American Home v. UPLC is in the 68th District Court. Both cases involve several insurance companies that use captive firms. Mark Ticer, former chairman of the Dallas subcommittee of the UPLC who filed UPLC v. Allstate in state court in 1998 over the company’s use of captive firms, says the 5th Circuit decision merely means Nationwide gets to take its fight to state court. “They wanted to end run around Allstate and do things in federal court to gain an advantage,” alleges Ticer, of the Law Office of Mark Ticer in Dallas. “But it didn’t work out that way.” Throughout the litigation, Allstate officials have repeatedly denied they’re violating the State Bar Act. They have said all of their lawyers are bound by case law mandating that an insurance company lawyer’s first duty is to the insured, not the insurance company. Likewise, Nationwide officials say none of their policyholders ever complained about the use of captive firms. Walker says Nationwide has not decided what its next move will be.

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