Non-Lawyers Cannot Invest in Law Firms, Says Federal Court

shopping for legal services, legal services act, tesco lawIn England and Wales, banks and supermarkets are selling consumer legal services, but don't expect to see anything similar in the US anytime soon. The ethical ban on non-lawyers investing in US law firms is firmly in place.

The influential Southern District of New York recently dismissed a lawsuit filed by law firm Jacoby & Meyers in which the firm challenged New York Rule of Professional Conduct 5.4.  2012 U.S. Dist. LEXIS 30971. That rule prohibits non-lawyers from investing in law firms. The law firm has similar claims pending in Connecticut and New Jersey against state judges who authorize attorney rules.

The law firm said it needed investments so it could serve the poor, but the bellwether Southern District didn't buy it. The court shot down the law firm's argument that Rule 5.4 was unconstitutional. It added that it might be "a deal with the devil" to allow law firms to sell shares and take outside investments.

There has been widespread hand-wringing in the US ever since the so-called "Tesco Laws" were enacted in the UK in 2007. Alarms went out that big UK law firms and major corporations would start buying up US law firms and change the way law is practiced in the US.  So far, nothing like it has happened.

Lawyers in the United States are still not permitted to obtain equity investments in their practices from non-lawyers, which precludes them from selling stock in their practices to the public. Bar associations have reacted ferociously to any change in the ethics rules, filing amicus briefs against lawsuits that seek to enable non-lawyer ownership of law firms.

For the time being, general practitioners have nothing to fear about Wal-Mart offering legal services. And hostile takeovers of US megafirms are also unlikely. Instead, mergers are the favored approach, as exemplified by Hogan Lovells, from Hogan & Hartson and Lovells, and SNR Denton, from Sonnenschein and Denton Wilde.

 

 

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Comments (2) Read through and enter the discussion with the form at the end
Jerome Kowalski - April 16, 2012 11:23 AM

This lawsuit was ill conceived from the outset, Larry. There are a number of interwoven statutes at play here, not simply the Rules of Profession Responsibility. These include the Uniform Partnership Act, the Business Corporations Law and others. J&M failed to include an attack on these other laws in its lawsuit.

The fact is that there are means, which are ethically compliant by which non-lawyers can effectively own and direct law firms. The market – not the courts, not the ABA and not local bar associations – will sort all of this out. But, in general, private equity non-lawyer ownership of traditional law firms simply are not economically viable. But, they can be a boon for plaintiff’s tort firms. See http://kowalskiandassociatesblog.com/2011/04/27/alternative-business-structures-here%e2%80%99s-a-great-idea-let%e2%80%99s-get-some-private-equity-funds-to-invest-in-large-commercial-law-firms-and-we%e2%80%99ll-all-make-a-ton-of-money/

James R. Denlea - April 20, 2012 10:32 AM

James R. Denlea, Esq.
Meiselman, Denlea, Packman, Carton & Eberz P.C.
Counsel for Jacoby & Meyers

Initially, it would have been appropriate if Mr. Kowalski disclosed how reliant his corporate and economic interests are upon preserving the status quo. To his point about other statutes (which also violate J&M’s constitutional rights) being interwoven and “at play here,” I commend to his reading the case of Aaron v. Cooper (358 U.S.1 1958). In that case, an attorney named Thurgood Marshall had been told by lower courts that he shouldn’t waste his time trying to fight segregation, because there were other, independent statutes designed to protect the practice. The plural of unconstitutional is not legitimacy.

When one reads the substantial body of media coverage on this case, what is striking is that it appears that none of the commentators have read the briefs. Rule 5.4 does not trace its ancestry to some time-honored notion of professional responsibility; it began as a 1909 statute in New York, to prevent corporations from providing prepaid legal services. It was nothing more than economic protectionism. The ethical parsley sprigs were added later, when the Supreme Court ruled that statutes which provide economic protection to one group as compared with another group were per se invalid.

It is noteworthy that in the two Federal Court rulings issued this far, neither has addressed the merits of the real issue at bar. How many readers know that the blanket proscription of non-lawyer ownership which J&M is seeking to challenge has already been eliminated in the District of Columbia. Remarkably, the Republic has survived.

The real infirmity of the statute, is the sweeping prohibition of private funding (which incidentally, was the death knell for statues barring 1st Amendment rights such as attorney advertising, and corporate political speech). Jacoby & Meyers has never contested that appropriate rules and limitations can be implemented, much like they are in place in D.C., the U.K. and Australia, where the system works quite well. It is simply the blanket suppression of such non-lawyer investment that offends the Constitution and which is the well-spring of the litigations.

Ben Gurion once wrote that reading a translation of Plato, is like kissing a lady through a handkerchief. Don’t let the pundits translate a simple legal truism into an apocalyptic nightmare. Think for yourself. Read the briefs. Be informed. When this idea becomes the law of the land, as it one day will, you will remember this case as the one where it all began.

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