Californian legislators bid to crush any ambitions to allow ABSs

California: Non-lawyer ownership ban

Californian legislators have blocked efforts by the State Bar to consider non-lawyer ownership of law firms, in the latest battle over alternative business structures (ABSs) in the US.

The California State Legislature this week passed the annual fees reauthorisation and legislative oversight bill for the State Bar of California, which this year specifically provides that plans to introduce a regulatory sandbox should “exclude corporate ownership of law firms and splitting legal fees with nonlawyers”.

It explained that this has “historically been banned by common law and statute due to grave concerns that it could undermine consumer protection by creating conflicts of interests that are difficult to overcome and fundamentally infringe on the basic and paramount obligations of attorneys to their clients”.

In the US, state supreme courts oversee lawyer regulation but California is unusual in that the legislature also exercises a significant level of control over the State Bar. The bill has still to be signed by California governor Gavin Newsom.

Briefings produced for the state assembly and senate criticised the State Bar for continuing to put “significant time, resources, and attention in work groups to expand the practice of law” when there were widespread concerns about its disciplinary regime.

The most recent audit of the system found “numerous lapses that allowed dishonest or incompetent lawyers” to continue to practise law, endangering the public.

The briefings referenced the recent story of “a well-connected attorney who was apparently able to steal millions of dollars from his injured clients over many years while the State Bar did nothing to stop it despite receiving decades of complaints”.

There have also been concerns about inadequate disciplinary action taken against some lawyers who acted in a high-profile class action but reportedly misused most of the compensation obtained.

Another major problem for the Bar was a leak of confidential and personal information from its disciplinary system over several months in 2021 and 2022, due to a “vulnerability” in the technology, for which it is being sued.

Legislators voted overwhelmingly in favour of the provision on non-lawyers, despite lobbying from the likes of the Institute for the Advancement of the American Legal System, which argued that there was no evidence of actual harm.

“The profession is operating on assumption alone – assumptions that are decades and decades old. It is time that we revisit these regulations with a view toward data-driven reform,” the institute said.

Earlier this month, the American Bar Association stressed its continuing opposition to non-lawyer ownership of law firms, with its House of Delegates – the association’s policy-making body –reaffirming a policy dating back to 2000 that described lawyers sharing fees or law firm ownership with non-lawyers as “inconsistent with the core values of the legal profession” and that the bans on them should be retained.

The move came against the background of the states of Arizona and Utah allowing ABSs, with other states also looking at regulatory reform.

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