KPMG Law Firm Faces California Blockade With Fee Shares Bill

A California bill aims to throw a wrench into plans by KMPG and law firms backed by outside investors to operate in the state from their perches in Arizona.

The measure (A.B. 931), already passed by the state Assembly, would ban California lawyers and firms from sharing legal fees with “out-of-state alternative business structures.” It was introduced less than two weeks before KPMG won approval to launch a law firm in Arizona under the state’s alternative business structure program, positioning it as the first Big Four accounting, tax, and consulting company to compete head-on with law firms in the US.

KPMG, whose size and reach makes it a competitive threat to Big Law, plans to use staffing agencies and co-counseling relationships with other law firms to serve clients outside of Arizona. The California bill would effectively close off access to the Golden State, an important legal services market.

The company declined to comment on the bill, which is currently before the state senate’s judiciary committee, where it could get a hearing next month.

“We’ve seen an attempt by some of the ABS’s to come in through the back door over the border to California,” said Nancy Drabble, CEO of Consumer Attorneys of California. The professional organization for plaintiff’s attorneys is a key backer of the legislation, which Drabble said was designed to prevent large corporations, private equity companies, and hedge funds participating in the Arizona alternative business structure system from entering California through alliances with lawyers in the state.

Litigation funders, private equity, and marketing agencies have flocked to Arizona, which eliminated a rule preventing non-lawyers from owning law firms and created an alternative business structure licensing program. California and other major legal markets have so far declined to enact similar changes, which would open up law firms to direct outside investment and could allow them to go public.

“There is always a risk that when one state, particularly a big state, passes a law, other states will look at it,” said Boris Ziser, a partner at Schulte Roth & Zabel and co-head of the firm’s finance group, who has helped set up around half-a-dozen alternative business structures in Arizona. “That’s one of the unfortunate byproducts of a bad law.”

KPMG wants to expand some of the legal work it’s already doing outside of the US, including large scale integrations following mergers and acquisitions by its clients. But that would likely require at least some ability to operate in the country’s largest markets, which are outside of Arizona.

Consumer Legal Funding

The main focus of the legislation is on regulating consumer legal funding—deals in which funders purchase the right to receive a portion of settlements or awards from individual consumers’ legal claims in the state.

It would regulate consumer legal funding agreements and ban attorneys from accepting clients from referral services that are not certified lawyers. The measure excludes lenders and special purpose entities that invest in a consumer legal funding company.

The bill’s prohibition on California attorneys sharing legal fees with out-of-state alternative business structures has drawn the bulk of the concern from opponents. “95% of the words are around consumer litigation funding and then this piece is sort of stuck in there almost like an afterthought,” said Ziser.

Groups like the state’s Hispanic, African American, and Asian Pacific chambers of commerce want the legislation amended to remove the block on fee-sharing with alternative business structure organizations. The move would make it harder for small businesses to get affordable legal services, they said in a May 14 letter to state Sen. Tom Umberg, who chairs the judiciary committee.

_{Podcast: KPMG’s Move to Practice Law in Arizona May Signal Paradigm Shift}

“Arizona has more economic ties to California than any other state,” said Don Bivens, who leads a trade group for law firms operating under the alternative business structure. “This is going to affect a large portion of people who use legal services and I think it’ll be a surprise to the backers of the bill.”

Gov. Gavin Newsom in 2022 signed a law that blocked the California Bar from tinkering with the rules banning non-lawyer ownership of law firms. The move halted discussions of a possible regulatory “sandbox,” like that in Utah, to experiment with alternative business structures.

Mass tort plaintiff’s law firms, many of which have alternative business structures or co-counsel with the organizations, have taken particular issue with the new bill. Such firms often use alternative business structures for lead generation and advertising campaigns across states.

Anne Andrews, a California mass tort lawyer, is working to build a coalition to oppose the legislation.

“It is a usurpation of the State Bar’s authority to govern California’s lawyers, and it’s being pushed by a small minority of private attorneys at firms that want to stifle competition from smaller firms that can only compete with innovative and diverse funding structures,” Andrews, of Newport Beach’s Andrews & Thornton, said in an email.

Consumer Attorneys of California spent nearly $350,000 in the first quarter for lobbying on the bill and a number of other measures. The group counts around 4,000 plaintiff’s lawyers as members, which Drabble said amounts to about half of the plaintiff’s bar statewide.

Some members were approached by alternative business structures, according to Drabble, and felt they were flouting California’s legal ethical rules.

“You are having private equity or a hedge fund or a large business entity that is qualified as an ABS and that’s Arizona’s decision,” Drabble said. “They’ve decided to do that, but that doesn’t mean it should come into California.”