New York appeal court rejects bid to overturn ban on external investment in law firms

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29 March 2017

Start spreading the news: ABSs still not allowed in New York

An American law firm that claims to have wealthy individuals and institutions lined up to inject money into its practice has lost its latest effort to challenge the ban on non-lawyer investment, this time in New York.

A federal appeals court rejected Jacoby & Meyers’ (J&M) argument that the state had unconstitutionally infringed First Amendment rights as lawyers to associate with clients and to access the courts.

J&M argued that, if it was allowed to accept outside investment, it would improve the firm’s infrastructure and efficiency and as a result reduce fees and allow it to serve more clients, including clients who might otherwise be unable to afford its services.

It reported receiving “numerous offers” from “prospective non‐lawyer investors… who are prepared to invest capital in exchange for owning an interest in the firm”. These included some “high net‐worth individuals” and “institutional investors”.

J&M lost its case at first instance, with the judge saying that the firm did not have the rights it claimed.

Upholding that decision, Judge Susan Carney in the Second Circuit Court of Appeals noted that the ban was “generally seen as helping to ensure the independence and ethical conduct of lawyers”.

Giving the ruling of the three-judge court, she cited a Supreme Court ruling that a “lawyer’s procurement of remunerative employment is a subject only marginally affected with First Amendment concerns. It falls squarely within the State’s proper sphere of economic and professional regulation”.

Judge Carney said: “Even were we to assume, given the evolving nature of commercial speech protections, that they possess some such First Amendment interests, the regulations at issue here are adequately supported by state interests and have too little effect on the attorney‐client relationship to be viewed as imposing an unlawful burden on the [firm’s] constitutional interests.”

She explained: “New York’s regulations proscribing non‐lawyer investment in law firms do not impede the lawyers’ constitutionally‐shielded ability to associate or petition. We think the only plausible argument that [J&M] could have in this vein is that they would be able to and would in fact associate with and serve more needy clients if the regulations are lifted.

“Any law firm, of course, might like to attract more clients, and any client would like to pay less for his lawyer’s services. But these observations do not mean that regulations that hypothetically and marginally raise the cost of legal services infringe any lawyer’s First Amendment right of association or access to the courts: the connection is simply too attenuated.”

J&M has tried and failed to push against bans in other states as well. It announced plans back in 2013 to enter the UK by creating an alternative business structure, but nothing ever came of it.

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