The proposed California law could cause private equity and accounting firms to seek to seize business from traditional law firms to curb competition.
A bill unanimously passed in the California parliament in Sacramento last month would prohibit any lawyers in the state from sharing fees with a law firm composed of non-lawyers, which is targeting new companies in neighboring Arizona and elsewhere.
The legislation was proposed in February when KPMG won approval, setting up a law firm in Arizona under the state’s “alternative business structure” rule that aims to increase competition and improve judicial access.
Arizona has relaxed restrictions and historically, no one except attorneys has owned ownership in a law firm. Such rules are still common in other U.S. states and should prevent business considerations from affecting advice to clients.
KPMG and more than 100 other alternative structured law firms registered in Arizona are aimed at establishing a nationwide business by establishing co-sales arrangements with law firms in other states, or hiring legal staffing businesses with attorneys nationwide. Several of the most ambitious alternatives have been backed by private equity.
Nancy Drabble, CEO of California Consumer Attorney, who sponsors Sacramento legislation, said Arizona law has been abused to undermine long-term and important legal conventions.
“These reforms are touted as a way to promote the judicial power of low-income people, but what we’re seeing in Arizona is that it’s just an opportunity to provide private equity and large economic entities with their own practice,” she told the Financial Times. “This is not a policy goal that California supports.”
In the past, supporters of American legal liberalization have been frustrated in California. An effort to launch a similar alternative regime in the state has met opposition from large law firms and closed in 2022 by lawmakers in Sacramento.
After the California House of Commons passes, the new bill (AB931) is currently in the Senate and will go to Gov. Gavin Newsom to sign if it wins approval from the House of Lords as well.
"The proposed California legislation could seriously affect the ability of Arizona ABS to co-advisors with companies outside Arizona," said Matthew Bosher, an attorney for Hunton Andrews Kurth.
The legislation may also have implications in other countries, including the UK, which announced its legal market more than a decade ago and has more than 1,000 law firms with an ABS license.
Bar associations in some states, including New York, ruled that attorneys can share fees with ABS companies. Shortly after UK liberalization came into effect, the American Bar Association expressed the same view in a 2013 ruling. However, individual countries can make their own decisions, and California has never made such a ruling.
Supporters of liberalization mobilize legislation to try to defeat California. Don Bivens, president of the National ABS Law Firm Association, who owns KPMG, said that Arizona’s liberalization aims to encourage “innovation, technology and investment” in the legal market and expands judicial barriers. Some of its members hired lobbyists in Sacramento and circulated a memorandum for lawmakers that argued that the bill was unfairly targeting businesses operating legally in other jurisdictions and would harm California customers in the case of cross-border cases.