NY Federal Court Upholds Rule Barring Non-Lawyers from Investing in Law Firms

by Mike Mintz on April 3, 2012 · 2 comments

in Ethics,Large law firm issues,Law Firms,Legal News and Trends,Small law firm/solo practice issues

The Southern District of New York recently dismissed a lawsuit filed by the well-known law firm Jacoby & Meyers (memorable, at the very least, for its ubiquitous t.v. ads) in which the firm challenged New York Rule of Professional Conduct 5.4.  That rule prohibits non-lawyers from investing in law firms.  The firm claimed that the rule violated its First Amendment freedom-of-association rights, among several other constitutional provisions.

Jacoby & Meyers had also argued that the rule prevented firms from administering to poorer clients by having outside investors finance such firms. The firm also argued that the rule prevented smaller firms from competing effectively with bigger law firms.

The New York federal district court struck down the action on the grounds of lack of jurisdiction since the case involves state court issues. The judge also noted that the action was defective because it only challenged one of several New York ethics rules that prohibit non-lawyers from investing in law firms. The court also opined that limited liability companies could not lawfully practice law in New York.  The judge had also previously indicated that it was doubtful whether Jacoby & Meyers had standing to initiate the case.

The federal court did not discuss the merits of Jacoby & Meyer’s case, except to note that allowing outside investors would amount to making “a deal with the devil.”  The court also drew a comparison to private investment banking partnerships going public.

Jacoby & Meyers brought a similar action in New Jersey and, ironically, the New Jersey federal district court refused to dismiss the firm’s law suit.  It indicated that it needs to determine if New Jersey’s rules of professional conduct already allow for outside investors in law firms.  The New Jersey federal court did, contrary to the conclusion reached by the New York district court, conclude that it had jurisdiction over the action’s constitutional questions.

Jacoby & Meyers filed a third suit challenging the non-lawyer investment rule in Connecticut. The Connecticut Superior Court heard oral arguments on March 19. The Connecticut Bar Association vehemently opposed Jacoby & Meyers law suit and filed an amicus brief in which it contended that, contrary to the firm’s claims that abolishing the rule will lead to better legal services to the poor, the firm was only out to enhance its own financial situation.

Jacoby & Meyers, however, has always maintained that it was interested in seeking outside investment to, at least in part, expand its provision of legal services to poorer communities. It also claimed that the extra money would be used to hire more attorneys and support staff and to invest in new technology as well as to improve its offices.  It also pointed out that such outside investment in law firms was allowed in Australia and the United Kingdom.

Jacoby & Meyers already has outside investors lined up to invest in the firm including three directors of the Empire State Bank, a holding company for ES Bancshare.

The firm is not the first to suggest that non-lawyers be allowed to invest in law firms. In fact, several years ago the American Bar Association set up the Commission for Ethics 20/20 to study the subject and consider changes to the model rules on the issue of non-lawyer investments.  Not to be outdone, the New York State Bar Association recently established a task force to study whether non-lawyers should be allowed to own an interest in law firms.

Jacoby & Meyers is reportedly preparing to appeal the New York district court’s ruling.

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NY Federal Court Upholds Rule Barring Non-Lawyers from Investing … | Krispy Hut
April 3, 2012 at 1:41 pm

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Lulaine @ RD Legal Funding wrote onApril 4, 2012 at 1:18 pm

This is an interesting development because of the stature the legal system holds in our society. Legal work is done for private profit in some respects because skilled professionals have the necessary education and experience to provide a service most don’t do. Since some of the legal work is being outsourced to different countries, the rational can be had that legal work can be more exposed to the free market like having different kinds of investors included in the law firms. This may present problems with lawyers first duty is to clients and and a duty to a investor/shareholder to bring the greatest value possible. A big change for the entire legal system and the way it’s practiced.


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