NY Ban on Equity Investment In Law Firms Is Upheld

Revised to add comments from three sources about the decision.

By Joan C. Rogers

Jacoby & Meyers doesn’t have a viable First Amendment challenge to New York laws and regulations that prevent for-profit law firms from accepting capital investment from nonlawyers, the U.S. Court of Appeals for the Second Circuit held March 24 ( Jacoby & Meyers, LLP v. Presiding Justices , 2017 BL 93470, 2d Cir., No. 15-2608, 3/24/17 ).

New York’s legal barriers to nonlawyer investment in law firms don’t impose an unlawful burden on the law firm’s First Amendment rights, Judge Susan L. Carney said.

The decision is welcome news to lawyers who are staunchly opposed to nonlawyers having a stake in law firms.

But others say the ruling doesn’t prove it’s good policy to retain the categorical ban enshrined in Model Rule 5.4 and nearly all states’ rules.

The decision follows other setbacks in the last few years for those who want to open up law firms to nonlawyer ownership, as has been done in England and Australia.

The ABA Commission on Ethics 20/20 ditched the idea of recommending any changes to the ABA’s existing policy against nonlawyer owners or investors in law firms. 28 Law. Man. Prof. Conduct 250, 4/25/12 The New York State Bar Association subsequently adopted a resolution reaffirming its opposition to nonlawyer ownership of law firms. 28 Law. Man. Prof. Conduct 747, 12/5/12

At present only two U.S. jurisdictions—the District of Columbia and Washington state—allow firms to include nonlawyer owners under limited circumstances. 31 Law. Man. Prof. Conduct 187, 4/8/15

‘Victory for the Client Interest.’

“All who care about the integrity and independence of our profession should be delighted with this decision,” John E. Thies of Webber & Thies P.C. in Urbana, Ill., told Bloomberg BNA via email. “This case is a victory for the client interest,” he said.

Thies was president of the Illinois State Bar Association in 2012 when the nation’s largest voluntary bar reaffirmed its opposition to nonlawyer ownership during the ABA Ethics 20/20 Commission’s consideration of the idea. He is also past president of the National Caucus of State Bar Associations.

“Among other things, this case re-establishes that regulations preventing non-lawyer ownership in law firms are rationally related to legitimate state interests,” Thies said.

“For good reason, the government clearly has an interest in regulating attorney conduct and maintaining the ethical behavior and independence of our profession,” he said. “Without this oversight, and without these bedrocks of our profession, our system of justice suffers.”

‘Potemkin Barrier.’

But the court’s ruling doesn’t stop others from believing it’s bad policy to continue blocking nonlawyer investment in law firms.

“The decision is certainly correct,” longtime New York lawyer and noted ethics guru Philip Schaeffer said in an email to Bloomberg BNA.

However, merely because there’s no claim under the First Amendment or even the Commerce Clause doesn’t mean that outlawing nonlawyer investment in firms is good policy, he said.

During the Ethics 20/20 Commission’s work Schaeffer served as liaison to the commission from the ABA Standing Committee on Ethics and Professional Responsibility. He’s retired from White & Case, New York.

“The growing need for investments in cyber devices including artificial intelligence makes it apparent that outside financing is needed for lawyers who cannot obtain loans to finance their need for such devices,” Schaeffer said.

“Furthermore, the explosive growth of litigation funding also makes clear the need for outside sources of financing litigation,” he said.

Regulatory issues do not seem to be a major problem in England and Wales or Scotland where alternative business structures are now commonplace, Schaeffer said.

“The argument that such ‘ABS’ entities violate the ‘core values of the profession’ is a false, Potemkin barrier,” he said.

Ban Is ‘Unfortunate’ Public Policy

University of Arizona law professor Theodore J. Schneyer, who was on the Ethics 20/20 Commission, told Bloomberg BNA he continues to believe that the categorical ban on nonlawyer ownership of for-profit law firms is unfortunate as a matter of public policy.

“To be sure, some forms of nonlawyer ownership might enable firms to provide marginally greater access to justice but so clearly threaten the independent judgment lawyers are expected to exercise for their clients that they should remain impermissible,” Schneyer said.

“But the same cannot be said of every form, as illustrated by the concededly modest, but trouble-free form that has existed in D.C. for years,” he said.

“On balance, the best approach would be to permit some experimentation so that a sound regulatory scheme can be developed on the basis of experience,” Schneyer said.

Schneyer said that notwithstanding his policy judgments, he can’t fault the Second Circuit for rejecting Jacoby & Meyers’s First Amendment arguments for striking down New York’s categorical ban. Those arguments aren’t well grounded in constitutional law, he said.

“In my opinion, the only legal avenue that might come closer to justifying the courts in striking down the ban is the antitrust route, as fortified two years ago by the Supreme Court’s Dental Examiners decision,” Schneyer said, referring to N.C. State Bd. of Dental Exam’rs v. FTC, 2015 BL 48206, 31 Law. Man. Prof. Conduct 108 (U.S. 2015).

“Don’t expect that to happen anytime soon,” he said.

First Amendment Only Challenge on Appeal

Jacoby & Meyers, which calls itself “America’s leading full service consumer law firm,” brought this putative class action challenging the constitutionality of New York Rule of Professional Conduct 5.4, which forbids lawyers to practice in a for-profit law firm if a nonlawyer owns any interest in the firm, along with other provisions of New York law that prevent lawyers from obtaining equity investments in their practices from nonlawyers.

The district court threw out the suit, saying the firm’s constitutional challenges were “entirely without merit.” 31 Law. Man. Prof. Conduct 414, 7/29/15 .

On appeal, Jacoby & Meyers pinned its challenge on the First Amendment, alleging that if it were allowed to accept outside investment, it could become more efficient and serve more clients at lower cost.

By impeding that goal, New York’s rules and laws against nonlawyer ownership of law firms unconstitutionally cramp the right to associate with clients and to access the courts, in violation of the First Amendment, Jacoby & Meyers contended.

Firm Doesn’t Have Claimed Rights

The Second Circuit held that Jacoby & Meyers doesn’t have a First Amendment right to association or petition as the representative of its clients’ interests.

Supreme Court decisions foreclose recognizing a First Amendment right of association or court access in a for-profit law firm that is not itself engaged in its own political advocacy or expression, the court said.

In the context of for-profit law firms that serve their clients’ interests as a business, the right to petition a court for redress of grievances belongs to the client, not the attorney, the court said.

No Unlawful Burden on Rights

The court also held that, even if Jacoby & Meyers does have some First Amendment right to associate with clients or to petition the government through the courts on behalf of its clients, the rules and laws that block nonlawyer ownership in law firms don’t impermissibly infringe any such rights.

The firm’s only plausible argument is that it would associate with and serve more needy clients if the barriers to nonlawyer investment were removed, the court said.

But regulations don’t infringe a lawyer’s First Amendment right of association or access to the courts just because they hypothetically and marginally raise the cost of legal services, it said.

The court pointed out that many of the rules governing lawyers, such as educational requirements, directly or indirectly affect the cost of legal services. There’s no basis for subjecting legislative judgments that balance increased cost against consumer protection to strict judicial scrutiny simply because the business being regulated is the practice of law, it said.

Rational Basis

The court said the regulations in issue here plainly survive rational basis review because they serve New York state’s well-established interest in regulating attorney conduct and in maintaining ethical behavior and independence among members of the legal profession.

“For example, by proscribing the involvement of unrelated third parties in the attorney-client relationship, the regulations preclude the creation of incentives for attorneys to violate ethical norms, such as those requiring attorneys to put their clients’ interests foremost,” the court said.

Judge Gerard E. Lynch and U.S. District Judge Alvin K. Hellerstein, sitting by designation, were on the panel.

Finkelstein, Blankinship, Frei-Pearson & Garber LLP represented Jacoby & Meyers LLP and Jacoby & Meyers USA II PLLC. The Office of the New York Attorney General represented the defendants.

To contact the reporter on this story: Joan C. Rogers in Washington at jrogers@bna.com

To contact the editor responsible for this story: S. Ethan Bowers at sbowers@bna.com

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