Second Circuit Upholds Ban on Private Investment in Law Firms

“Any law firm, of course, might like to attract more clients, and any client would like to pay less for his lawyer's services,” Judge Susan Carney wrote for the unanimous panel. “But these observations do not mean that regulations that hypothetically and marginally raise the cost of legal services infringe any lawyer's First Amendment right of association or access to the courts: the connection is simply too attenuated.”

Carney was joined in the decision by Judge Gerard Lynch and Southern District Judge Andrew Hellerstein, who sat on the panel by designation.

Jacoby & Meyers, famous for broadcasting the first law firm TV ad in the U.S. after the Supreme Court lifted the ban on attorney advertising, was challenging parts of New York State's code of professional conduct for lawyers and associated state regulations. The rule barring fee splitting was established by the American Bar Association and has been adopted by state bars across the country. In the United Kingdom, by contrast, it's acceptable for law firms to receive external investments, either through private placements or public offerings.

New York officials countered in the litigation that the state's regulatory regime ensures that lawyers will serve their clients without influence by outside investors, and noted that the prohibition on outside investing has long been the status quo nationwide.

“There is no basis for J&M's claim that every state in the nation has, for many years, been violating the First Amendment rights of every lawyer in the country by prohibiting them from funding their practices with non-lawyer equity,” the New York Attorney General's office argued.

Carney acknowledged that First Amendment protections for commercial speech are “evolving rapidly,” but said that the New York's regulations do not inhibit an attorney's “constitutionally-shielded” ability to associate.

Peter Jarvis, a partner at Holland & Knight who has advised law firms on ethics issues, said that restrictions on the legal industry's access to capital is one of the driving forces behind the rise in third-party litigation funding. In that industry, too, litigation funders have had to tread carefully in navigating around the fee-splitting rule. See “Ethics Rule Has Lit Funders Treading Carefully in Class Actions,” The Recorder (http://bit.ly/2oRSNGy).

Jacoby & Meyers' suit was first launched in 2011 against New York's four appellate division departments, the New York Attorney General, general counsels for the state's grievance committees and other officials. Southern District Judge Lewis Kaplan dismissed the case in 2015.

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Andrew Denney covers litigation in New York for this newsletter's ALM siblings the New York Law Journal and Law.com. He can be reached at [email protected]. On Twitter: @messagetime. Ben Hancock can be contacted at [email protected].

A federal appeals court rejected an attempt to loosen restrictions on private investment in the legal industry, dismissing arguments that ethics rules on so-called “fee splitting” impinge on lawyers' First Amendment rights. Jacoby & Meyers v. The Presiding Justices, No. 15-2608 (2d Cir March 24, 2017) (http://bit.ly/2oRS2Nk).

The decision, which affirms a 2015 district court ruling, is a blow to Los Angeles-based personal injury firm Jacoby & Meyers, which has fought a nearly six-year legal battle against the prohibition on non-lawyers investing in law firms and sharing in legal fees.

The firm had argued it needed infusions of capital to expand its operations, hire new attorneys and staff, improve infrastructure and buy new technology. The improvements would allow the firm to lower its fees and expand its ability to represent needy clients, the firm said.

“Any law firm, of course, might like to attract more clients, and any client would like to pay less for his lawyer's services,” Judge Susan Carney wrote for the unanimous panel. “But these observations do not mean that regulations that hypothetically and marginally raise the cost of legal services infringe any lawyer's First Amendment right of association or access to the courts: the connection is simply too attenuated.”

Carney was joined in the decision by Judge Gerard Lynch and Southern District Judge Andrew Hellerstein, who sat on the panel by designation.

Jacoby & Meyers, famous for broadcasting the first law firm TV ad in the U.S. after the Supreme Court lifted the ban on attorney advertising, was challenging parts of New York State's code of professional conduct for lawyers and associated state regulations. The rule barring fee splitting was established by the American Bar Association and has been adopted by state bars across the country. In the United Kingdom, by contrast, it's acceptable for law firms to receive external investments, either through private placements or public offerings.

New York officials countered in the litigation that the state's regulatory regime ensures that lawyers will serve their clients without influence by outside investors, and noted that the prohibition on outside investing has long been the status quo nationwide.

“There is no basis for J&M's claim that every state in the nation has, for many years, been violating the First Amendment rights of every lawyer in the country by prohibiting them from funding their practices with non-lawyer equity,” the New York Attorney General's office argued.

Carney acknowledged that First Amendment protections for commercial speech are “evolving rapidly,” but said that the New York's regulations do not inhibit an attorney's “constitutionally-shielded” ability to associate.

Peter Jarvis, a partner at Holland & Knight who has advised law firms on ethics issues, said that restrictions on the legal industry's access to capital is one of the driving forces behind the rise in third-party litigation funding. In that industry, too, litigation funders have had to tread carefully in navigating around the fee-splitting rule. See “Ethics Rule Has Lit Funders Treading Carefully in Class Actions,” The Recorder (http://bit.ly/2oRSNGy).

Jacoby & Meyers' suit was first launched in 2011 against New York's four appellate division departments, the New York Attorney General, general counsels for the state's grievance committees and other officials. Southern District Judge Lewis Kaplan dismissed the case in 2015.

*****
Andrew Denney covers litigation in New York for this newsletter's ALM siblings the New York Law Journal and Law.com. He can be reached at [email protected]. On Twitter: @messagetime. Ben Hancock can be contacted at [email protected].