NY Court Upholds Ban on Non-Lawyer Investment in Law Firms

03/09/12

New York State ethic rules hold that if investment is not from legal circles, then it is illegal, as far as law firms are concerned. A federal judge in Manhattan upheld the law this week and held the plaintiffs who challenged the law lacked locus standi in as much as their cause of action lacked merit. The case is Jacoby & Meyers v. Presiding Justice, U.S. District Court, Southern District of New York, No. 11-CV-3387.


The constitutionality of the New York state ethics rule was recently challenged by Jacoby & Meyers and the case was closely followed by the legal community. Lifting of the ban on non-lawyers from investing in law firms hold the potential of changing the way the law firm sector functions.

Non-lawyer investment in law firms has become a bone of contention in U.S. legal circles after both UK and Australia changed their rules and allowed non-lawyer ownership of law firms. The moves in UK and Australia have found appreciation and small and start-up law firms have found much-needed investment as well as expertise.

This remains a bone of contention since many law firms lack the kind of marketing and infrastructural investment and expertise needed to free lawyers and partners from functions they are not specialized to handle and focus on their core competencies. The only way out for a law firm to have expertise related to modern technologies like computerization and internet and hardcore managerial supervision is to hire professionals or consultants at a high cost. But that raises the bottom-line of startups and keeps deserving law firms from becoming more efficient. While in the normal industry sectors mergers and agreements without up-front investment ensure acquisition of efficiency by compelling the service provider to have stake in the output, for law firms such practices remain prohibited.

In the U.S., except in the District of Columbia, non-lawyers cannot invest in law firms.

The apparent justification for the ban is that profit motive will affect duty to the client (as if the ban prevents duty to clients being affected by profit motive).

U.S. District Judge Lewis Kaplan found on Thursday that Jacoby & Meyers, the plaintiffs had failed to prove that they were harmed by the ethics rule. He wrote, “The ruling they seek would be a purely advisory declaration of the sort that is forbidden to federal courts.”

Jacoby & Meyers has also filed similar cases in other parts of the country including New Jersey and Connecticut. The defendants are the state judges who oversee and pass attorney rules.

In their court papers, Jacoby & Meyers has stated that there are several investors who are interested in investing significant sums of money in the firm. Directors of ES Bancshares Inc, a holding company for Empire State Bank are involved.

At present, following the changes of status in UK and Australia, non-lawyer ownership of law firms is a hotly discussed topic in the American Bar Association and the New York Bar State Bar Association. The NYSBA President Vincent Doyle announced earlier this month that a task force was in the process of being formed by the association to find out whether non-lawyers should be permitted to own equity in law firms.