California Bans Contingent Fee Sharing With ‘Alternative’ Firms

A California bill that was signed into law is a blow to investors that own stakes in litigation firms.

The measure (A.B. 931), signed by Gov. Gavin Newsom on Friday, bans California attorneys and firms from sharing contingency fees with “out-of-state alternative business structures,” or law firms owned by non-lawyers. Neighboring Arizona has attracted marketing companies, litigation funders, and private equity firms pouring money into law firms since it became one of few jurisdictions to allow non-lawyer ownership in 2021.

The bill initially would have more broadly prohibited lawyers and firms from sharing any fees with ABS operations, including KPMG’s new Arizona law firm. It was narrowed to ban contingent fee arrangements—usually a percentage of any settlement or verdict—which are often utilized by mass tort and personal injury law firms that are heavy users of the ABS program.

The law will make it harder for those kinds of litigation firms in Arizona and other jurisdictions that allow non-lawyers to own firms—Utah, Puerto Rico and DC—to partner with lawyers in California, a large legal market.

“This is a case of a bill that hurts everyone and helps no one,” said Boris Ziser, a partner at McDermott Will & Schulte and co-head of the firm’s finance group, who has helped set up alternative business structures in Arizona. “If you look at the provisions of the bill, it hurts the California lawyers, it hurts the California consumers, it hurts Arizona lawyers, but I can’t figure out who it helps.”

The measure was amended in August to exempt fixed fee arrangements, including those used for back office and other services. It also permits flat fee sharing arrangements for specific dollar amounts.

KPMG, which opened an Arizona law firm earlier this year, plans to partner with attorneys in other states. It is the first Big Four accounting, tax, and consulting company to compete head-on with law firms in the US.

The company declined to comment on whether the California law will impact that plan.

The law imposes minimum $10,000 fines for violations. It will only apply to contracts that begin on or after January 1, 2026.