California governor signs bill limiting investor influence in law firms
California Governor Gavin Newsom signed legislation prohibiting business entities from interfering or attempting to influence a licensed attorney or litigant regarding substantive litigation decisions, including settlement, case selection and client acceptance. Violators face statutory damages of $10,000 per violation or three times client damages. The law applies to business entities that raise or manage capital and are involved in litigation practice, regardless of structure.
(Adds statement from Consumer Attorneys of California in paragraph 4) By David Thomas Sept 21 (Reuters) — California, one of the largest US legal markets, has joined Colorado and Illinois in enacting legislation to limit investor influence in law firms amid surging interest in deals that allow outside capital to fuel lawyers' business. California Governor Gavin Newsom on Sunday signed legislation prohibiting business entities from interfering or attempting to "influence the professional judgment of a licensed attorney or litigant regarding any substantive litigation decision," including lawyers' settlement decisions and what cases and clients they take.
Violators, including attorney recipients of outside capital, face statutory damages of $10,000 per violation, or three times the damages suffered by a client. California Assembly member Ash Kalra, who authored AB 2305, did not immediately respond to a request for comment. " Investors and other non-lawyers are broadly prohibited in the United States from owning direct stakes in law firms or sharing in attorney fees.
However, a growing number of firms are inking deals to spin off their non-legal, back-office operations like human resources or marketing into a separate organization called a management services organization (MSO), that is owned or partly owned by outside investors. Such deals can provide an influx of capital for a law firm, which pays the MSO from its revenues but does not share fees. Some MSOs serve multiple firms. " Newsom last year signed into law a bill that prohibited attorneys in the state from splitting fees with out-of-state "alternative business structures," unless there is a contract stating that the fees will be shared, as well as other conditions.
(Reporting by David Thomas)