Private Equity Control in Law Firms Bill Advances in California

A California bill that prohibits private equity firms, hedge funds, and other corporate investors from directing or influencing the practice of law advanced to the state senate on Monday.

The bill (AB 2305), introduced by assembly member Ash Kalra, is aimed directly at regulating non-lawyer owned law firms and is meant to ensure that decisions about legal cases remain solely in the hands of licensed attorneys and their clients. Kalra’s office said in a Monday press release that the bill addresses loopholes used by investors who restructure their involvement with law firms including classifying the investment as a loan.

“By prohibiting corporate investors from controlling or influencing litigation decisions, AB 2305 will close emerging loopholes, protect the independence of the legal profession, and ultimately, preserve the integrity of our justice system,” said Assembly member Kalra in a statement on Monday. “California will continue to lead the nation in safeguarding the legal industry from the influence of private equity investors and give consumers the peace of mind that their attorney is prioritizing their best interest.”

The bill targets alternative business structures and management service organizations, two vehicles that allow non-lawyer investment in the legal space. Detractors fear that this type of direct involvement will lead to investors controlling the litigation.

A similar measure in Illinois that bans sharing fees with the structures advanced out of committee in March. Only Arizona, Utah and DC allow some form of non-lawyer ownership of firms. Management Service Organizations involve moving the back office function of a law firm into a separate vehicle to allow non-lawyer investment and are not subject to specific state regulations.

Kalra, a Democrat, has taken particular interest in regulating the structures. In October, another one of his measures was signed by Gov. Gavin Newsom and went into effect earlier this year. It bans California attorneys and firms from sharing contingency fees with out-of-state alternative business structures.

Both pieces of legislation were backed by the Consumer Attorneys of California, a professional organization for plaintiffs’ attorneys.

“Today the Assembly sent a clear message: accountability in the legal profession is not optional,” said Doug Saeltzer, the organization’s president, in a Monday statement. “AB 2305 passing off the Assembly floor is a significant step forward in our ongoing effort to give Californians stronger protections and real enforcement tools against bad actors. CAOC sponsored this bill because we believe the same standards we demand of corporations and powerful institutions must apply to us. We’re grateful to Assemblymember Kalra for his leadership, and we’ll keep fighting until these reforms are signed into law.”