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Jacoby & Meyers Continues Push for Non-Lawyer Equity Investors

Stack of worn-in law books in front of shelves filled with more books

Jacoby & Meyers LLP – one of the nation’s largest personal injury firms – is asking the Second Circuit to reconsider the constitutionality of a New York regulation prohibiting law firms from selling stakes to non-lawyers. Both the U.S. District Court for the Southern District of New York and the Second Circuit previously agreed that Jacoby & Meyers’ constitutional challenges were “entirely without merit.”

In Need of Funds

Originally filed in May 2011, Jacoby & Meyers’s suit claimed that Rule 5.4 of the New York Rules of Professional Conduct was unconstitutional. The personal injury firm claimed the ethical rule unconstitutionally blocked firms from accepting non-lawyer investments, including equity ownership.

Under First and 14rh Amendment, as well as Dormant Commerce Clause grounds, Jacoby & Meyers argued its “pioneering efforts . . . require a substantial infusion of new capital.”

Jacoby & Meyers continued by admitting in some circumstances, the infusion of new capital can be found in the obvious places: partner contributions, retention of earnings on fees, or bank loans. However, the firm opined these routes are now becoming “too expensive” to promulgate its “pioneering efforts to provide quality legal services at a reasonable cost to economically challenged individuals who would otherwise have no access to the legal system.”

The Second Circuit opinion sarcastically responded:

“But fear not. Jacoby & Meyers says it has received ‘numerous offers from prospective non-lawyer investors who are prepared to invest capital in exchange for owning an interest in the firm. Indeed, there allegedly are ‘several high net-worth individuals’ and institutional investors who ‘have expressed their commitment to invest significant sums of money’ in [the firm] in exchange for equity in the firm. It is only the ban on non-lawyer equity ownership of law firms . . . that has prevented J&M from entertaining these offers.”

Overhaul of regulation of legal services

The UK (a nation that shares our language and legal history) has a striking revolutionary approach to non-lawyer equity investors compared to that of the United States. The U.K. Legal Services Act—adopted in 2007, three years after the blockbuster Clementi report —radically overhauled the regulation of legal services in England and Wales. The 400-page act instigated hundreds if not thousands of changes, including allowing non-lawyers to hold ownership and management positions in law firms.

“The U.K. reforms are about putting the customer at the heart of the relationship, and about prioritizing the needs of the customer. The reforms allow for people who have different skills and expertise to be brought together—people who typically aren’t brought together—in order to meet customer needs, and in order to improve access to justice and to legal services,” said Alex Roy, the then-head of the Legal Services Board of England and Wales.

Under UK's Legal Services Act, the creation of new ways of providing legal services—including through alternative business structures—is more than simply permitted; it is actively encouraged.

Serving the Under-Served

The firm said in its complaint that it “has become synonymous” with providing legal services for under-served populations and that without being allowed to receive non-lawyer investments, it would not be able to provide “low-cost legal services to the poor.”

The lawsuit experienced many incarnations, including three amended complaints that named the presiding judges of the state Appellate Division’s four departments as defendants. The first amended complaint was dismissed because the court said the firm did not show Rule 5.4 caused Jacoby & Meyers any actual injuries.

On appeal, the firm argued before the Second Circuit that it had not challenged any other provisions of state law in the suit out of concern and caution that the circuit might abstain from deciding the case.

The Second Circuit appellate panel vacated the earlier judgment and remanded the suit so that the plaintiff firm could file another amended complaint in June 2013. This amended complaint allowed Jacoby & Meyers to tack on more than a dozen state statutes that purportedly blocked the investments too.

The latest amended complaint was filed in March 2015. In dismissing the suit again, U.S. District Judge Lewis A. Kaplan issued a strongly-worded, blunt opinion rejecting the personal injury firm’s arguments.

Judge Kaplan wholly rejected the firm’s arguments, calling some “frivolous” and others a misstatement of the law that reflected “a fundamental misunderstanding” of constitutional law that rests on a “woefully misguided premise.”

Todd S. Garber, one of the lawyers for Jacoby & Meyers said in a response to the district court opinion, “While we are disappointed with the decision, we look forward to the Second Circuit’s review of the District Court’s ruling.”

The case is Jacoby & Meyers, LLP, and Jacoby & Meyers USA II, PLLC v. The Presiding Judges of the First, Second, Third and Fourth Departments, Appellate Division of the Supreme Court of the United States, New York. Case No. 11 Civ. 3387 (LAK). Read the opinion here.

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