Investors at the Gates

Even at its creation in 1972, Jacoby & Meyers had attitude. When Leonard D. Jacoby and Stephen Z. Meyers opened their first legal clinic in Van Nuys, they distributed a prospectus and sent out press invitations to an open house--both apparent violations of existing restrictions on lawyer advertising.

After the State Bar began disciplinary proceedings, the two attorneys held a news conference and handed out media kits about their clinic, which offered, among other services, basic uncontested marital dissolutions for $100 to $250. According to Justice Frank K. Richardson's bitter dissent to the subsequent landmark decision permitting legal advertising, Jacoby & Meyers had publicly charged "that the Bar felt economically threatened by such a successful attempt at delivering high quality, low-cost legal services." (Jacoby v. State Bar of California, 19 Cal. 3d 359, 383 (1977).) A month later the U.S. Supreme Court ruled that another state bar's advertising ban violated the First Amendment, finding it had "originated as a rule of etiquette and not as a rule of ethics." (Bates v. State Bar of Arizona, 433 U.S. 350, 371 (1977).)

Since the 1970s Jacoby & Meyers has had its ups and down--but it still has attitude. Most recently, however, it has chosen to litigate rather than provoke.

On May 18 of this year the nationwide firm filed three nearly identical class actions--in New York, New Jersey, and Connecticut federal courts--challenging the constitutionality of state judicial bans on nonlawyer ownership of law practices, based on ABA Model Rule 5.4. The nearly identical lawsuits make claims based on alleged violations of the Commerce Clause, the 14th Amendment, and, most interesting, the First Amendment rights of free speech and association. (Jacoby & Meyers Law Offices LLP v. Presiding Justices, No. 11-CV-3387 (S.D.N.Y.); No. 33-AV-001 (D. N.J.); No. 11-CV-817 (D. Conn.).)

"Our client's ability to raise the capital it requires to grow is encumbered by the ban on nonlawyer ownership. That gives it standing to sue," says Jeffrey I. Carton, a partner in the New York firm of Meiselman, Denlea, Packman, Carton & Eberz who represents Jacoby & Meyers.

"It would have been a bold and very courageous action to purposefully violate the rule, sticking a finger in the eye of the state bar grievance committees," Carton says. "But defending a grievance is not the best way to tee up a constitutional challenge."

Andrew G. Finkelstein, managing partner of Jacoby & Meyers's Northeast offices, says the decision to file the suits had a twofold basis. First, he explains, "We had a lack of confidence in the various administrative bodies responsible for enforcing the ethical rules. There have been no meaningful modifications in the rule, or any sense of urgency."

To be fair, the ABA recommended amending MR 5.4 twelve years ago--but its House of Delegates overwhelmingly rejected the proposal. In 2001 the State Bar of California's Task Force on Multidisciplinary Practice voted down a measure that would ease the ban on sharing fees with nonlawyers, and its rules revision commission recently endorsed a version of MR 5.4. This spring, the ABA Commission on Ethics 20/20 recommended no changes to the rule, although it will hear further comment from members at the Annual Meeting this month.

Jacoby & Meyers's second basis for heading to court was economic. While the ABA continues to debate the issue, Finkelstein complains, Australia and the United Kingdom have permitted nonlawyer equity ownership of law firms. Australia's Slater & Gordon held a public stock offering in 2007, and the UK's Legal Services Act--which gives law firms access to equity capital--takes effect in October. Lyceum Capital, a UK-based private equity firm, anticipated the development last year by investing 㿅 million in a legal services business that provides back-office support to law firms.

"The ABA may be OK being behind the curve, but Jacoby & Meyers is not," Finkelstein says. "I'm already competing against legal entities that have an unfair advantage."

Should the Jacoby & Meyers class actions reach the U.S. Supreme Court--and Carton anticipates appeals--the significance of the global market in legal services may influence Justice Anthony Kennedy, who has expressed interest in arguments based on international law. And given the current makeup of the Court, the real kicker may well be the plaintiffs' First Amendment claim.

Renee N. Knake, an associate professor at Michigan State University College of Law, anticipated Jacoby & Meyers's free speech and association claim in an article due to be published next year by the OHIO STATE LAW JOURNAL. Knake cites Justice Kennedy's recent observation in Citizens United v. FEC (130 S. Ct. 876, 913 (2010)) "that the Government may not suppress political speech on the basis of the speaker's corporate identity. No sufficient governmental interest justifies limits on the political speech of nonprofit or for-profit corporations."

"Citizens United is very much part of our interest in bringing these actions," Carton says. "And after the First Amendment cases decided by the Supreme Court this term, it feels like we're on the side of the angels."

The gist of the First Amendment argument is the right of lawyers to associate with nonlawyers in their businesses, and the right of the recipients of speech--potential clients and the public at large--to receive unencumbered information and ideas from these firms. Knake contends it's grounded in a Civil Rights-era case holding that the state cannot ban the delivery of legal services through an arrangement involving the NAACP, its affiliates, and lawyers (NAACP v. Button, 371 U.S. 415, 42829 (1963)).

Knake believes the First Amendment "situates the argument in economic reality" by simultaneously addressing Big Law's desire for cheaper working capital, the public's unmet need for legal services, and the profession's inability to absorb young lawyers at anything near the rate that law schools are producing them.

"It's difficult to predict what a market for corporate-owned legal services would look like, but I like to use a Wal-Mart example," she says. "Corporate ownership could increase competition, drive down prices, depress some lawyer compensation, and serve people who don't even know how useful legal services can be."

Fellow legal academics--including Professor Larry E. Ribstein at the University of Illinois College of Law and Professor Milton C. Regan at Georgetown University Law Center--have proposed satisfying the concerns of state bar ethics panels with mechanisms for limiting the influence of private capital: derivative instruments, ownership qualifications, equity limits, and trading restrictions. Knake argues that there is little real difference, in the potential for nonlawyer influence on professional conduct, between lines of credit from banks and restricted equity capital.

What's driving the current campaign to open law firms to private capital, however, is competition with international firms. "The academic argument is no longer a [mere] diversion," Knake says. "Now we have traction."

Indeed, in early March a Republican state legislator and lawyer in North Carolina introduced a bill that would permit nonlawyers to own up to 49 percent of a law firm; outside investors could also buy into accounting firms.

As for the three Jacoby & Meyers suits, Carton says he has received notices of appearances from the respective state attorneys general who will represent the defendants. He anticipates a facial challenge on the pleadings for each, followed by briefing and oral arguments later in the year.

California's ban on nonlawyer equity capital, Carton says, is "on the drawing board" for another constitutional challenge. Jacoby recently sold a majority interest in the firm's Southern California region to Kabateck Brown Kellner of Los Angeles, telling reporters he "felt it was time to get the next generation involved and spend more time on expanding."

State bars had better get used to it: Capital is your daddy.

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