In the past, we have reported on nonlawyer investment in law firms and there are two recent developments to report under the professional conduct rules.

First, the New York State Bar Association (“NYSBA”) reaffirmed its opposition to allowing nonlawyers to own an interest in law firms. At the same time, the NYSBA endorsed the concept of allowing fee sharing among lawyers in different firms even when one of the firms is located in a jurisdiction that permits nonlawyer ownership. NYSBA, Report of the Task Force on Nonlawyer Ownership (2012). In December 2011, the ABA Ethics 20/20 Commission published for comment a tentative proposal for a modest change in the ABA Model Rules of Professional Conduct to allow nonlawyers to have a partial stake in law firms. The Commission also presented initial proposals to permit “intrafirm” fee-sharing among offices of a law firm, as well as “interfirm” fee-sharing among different firms, when jurisdictions have conflicting rules on nonlawyer ownership. After those proposals came out, the NYSBA launched a task force to reexamine the issue of nonlawyer ownership under New York’s ethics rules. The core of the NYSBA’s resolution states that the NYSBA “reaffirms its opposition at this time to any form of nonlawyer ownership of law firms in the absence of a sufficient demonstration that change is in the best interest of clients and society, and does not undermine or dilute the integrity of the legal profession.” The NYSBA task force also recommended recognition of interfirm sharing of fees so long as the new provision (rule or comment) makes explicit that fee sharing is prohibited where a lawyer knows that a nonlawyer owner is directing or controlling the other lawyer’s professional judgment.

Second, in November 2012, the Second Circuit gave the Jacoby & Meyers law firm a second chance to challenge the constitutionality of New York’s rules of professional conduct that prohibit private equity investment in law firms, vacating a district court decision that dismissed the lawsuit on procedural grounds. Jacoby & Meyers, LLP v. Presiding Justices, 488 F. App’x 526 (2d Cir. 2012) (No. 12-1377). The Second Circuit held that Jacoby & Meyers may amend its complaint to challenge all New York laws – not just the ethics rule – that stop law firms from accepting nonlawyer equity investors. Jacoby & Meyers had alleged that New York Rule of Professional Conduct 5.4(d)(1), which forbids lawyers to practice in a for-profit law firm if a nonlawyer owns any interest in the firm, cannot survive constitutional scrutiny because it (i) exceeds the judiciary’s rule-making power, (ii) violates state separation of powers, (iii) is void for vagueness, and (iv) violates the federal Constitution’s dormant commerce clause, due process clause, equal protection clause, takings clause, and guarantees of freedom of speech and association. The district court dismissed the complaint because other, unchallenged provisions of New York law would prevent private equity investment even if Rule 5.4 were struck down. The Second Circuit decided that Jacoby & Meyers may expand its complaint to challenge those laws too and the district court may address the merits of the constitutional challenge. Jacoby & Meyers also filed nearly identical complaints in federal district court in New Jersey and Connecticut, challenging those states’ rules against nonlawyer owners.