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A proposed law in California could derail efforts to liberalise the US legal market and curb competition from private equity and accounting firms seeking to take business from traditional law firms.
A bill passed unanimously by the California assembly in Sacramento last month would bar any lawyer in the state from sharing fees with a law firm that is part-owned by non-lawyers, in a move targeted at the new breed of firms springing up in neighbouring Arizona and elsewhere.
The legislation was introduced in February on the eve of KPMG winning approval to launch a law firm in Arizona under that state’s “alternative business structure” rules, which aim to increase competition and improve access to justice.
Arizona has loosened restrictions that historically prevented anyone other than lawyers from having an ownership stake in a law firm. Such rules remain common in other US states and are supposed to prevent commercial considerations from affecting the advice given to clients.
KPMG and others among the more than 100 alternative-structure law firms registered in Arizona are aiming to build nationwide businesses by setting up co-counselling arrangements with law firms in other states or hiring from legal staffing businesses with attorneys across the country. Several of the most ambitious alternative firms are backed by private equity.
Nancy Drabble, chief executive of Consumer Attorneys of California, which sponsored the legislation in Sacramento, said the Arizona law was being misused to undermine long-standing and important legal conventions.
“The reforms are touted as a way to promote access to justice for low-income people, but what we have seen in Arizona is that it is just providing opportunities for private equity and large economic entities to own practices,” she told the Financial Times. “That is not a policy goal that is supported in California.”
Supporters of US legal liberalisation have been frustrated in California in the past. An effort to launch a similar alternative system in the state ran into opposition from big law firms and was shut down by lawmakers in Sacramento in 2022.
Having been passed by California’s lower house, the new bill — AB931 — is currently with the senate and would go to Governor Gavin Newsom for signing if it also wins approval in the upper chamber.
“The proposed California legislation could significantly impact the ability of an Arizona ABS to co-counsel with firms outside of Arizona . . . [and] impact the broader geographic ambitions of an Arizona ABS,” said Matthew Bosher, a lawyer at Hunton Andrews Kurth who advises on alternative business structures.
The legislation could also have implications in other countries, including the UK, which liberalised its legal market more than a decade ago and has more than 1,000 law firms with an ABS licence.
The bar associations of some states, including New York, have ruled it is permissible for lawyers to share fees with ABS firms. The American Bar Association took the same view in a 2013 ruling shortly after the UK’s liberalisation took effect. However, individual states can make their own determinations and California has never made such a ruling.
Proponents of liberalisation are mobilising to try to defeat the California legislation. Don Bivens, president of the National ABS Law Firm Association, which counts KPMG among its members, said Arizona’s liberalisation aimed to encourage “innovation, technology and investment” in the legal market, as well as widening access to justice. Some of its members have hired lobbyists in Sacramento, and circulated a memo for legislators arguing the proposed bill unfairly targets businesses legally operating in other jurisdictions and will harm California clients with cross-border cases.
