Jacoby & Meyers got some breathing room on Nov. 21 in its uphill attempt to overturn New York state’s ban on outside investments in law firms.

The U.S. Court of Appeals for the Second Circuit vacated a lower court’s order dismissing the firm’s challenge to Rule 5.4 of New York’s Rules of Professional Conduct on standing grounds.

Jacoby & Meyers had lost before Southern District Judge Lewis Kaplan (See Profile) because the judge said the firm had no redressable injury—there was no indication it had an outside non-lawyer investor ready to buy a share of the firm (NYLJ, March 9).

Kaplan also said that, even if the firm successfully attacked Rule 5.4, there were a number of other provisions of New York law barring firms from taking on non-lawyer equity partners.

On Nov. 21, the circuit by summary order vacated that ruling and remanded to Kaplan to allow Jacoby & Meyers to amend its complaint to challenge those other provisions.

The decision in Jacoby & Meyers v. Presiding Justices, 12-1377-cv, came after Oct. 5 oral arguments before Judges John Walker Jr. (See Profile), Gerard Lynch (See Profile) and Eastern District Judge John Gleeson (See Profile), sitting by designation.

At the argument, Lynch called the merits of the case “probably pretty easy,” adding, “It’s kind of a mystery to me why we are debating these rather arcane issues of standing” (NYLJ Oct. 9).

The remand was a win for Jeffrey Carton and James Denlea of Meiselman, Denlea, Packman, Carton & Eberz, who got from the circuit the question they wanted when Walker asked about a remand to cure the standing defect.

“That would be more than acceptable, your honor,” Denlea responded.

Before Kaplan, the lawyers had argued the ban on outside investment violated the First Amendment and hurt the ability of small firms to expand and compete against larger firms.

Kaplan had told the lawyers that he might abstain pending state court resolution of the state law issues before him, which Carton said would merely put Jacoby & Meyers right “back to the very body that enacted the rule.”

Kaplan also said that, even if he found for the firm on its constitutional claims, with no outside investors on the table, any opinion he issued would merely be an advisory declaration of the sort that courts are barred from delivering under Article III of the U.S. Constitution.

Rule 5.4 states in part that “a lawyer or law firm may not share legal fees with a non-lawyer” and, “A lawyer shall not practice with or in the form of an entity authorized to practice law for profit, if (1) a non-lawyer has an interest therein.”

Now that they are free to amend, Carton and Denlea can add a similar claim against the other provisions, including New York Judiciary Law §495 and New York Limited Liability Company Law §201.

Section 495 bars corporations or voluntary associations from practicing or appearing as an attorney-at-law, rendering legal services or providing legal advice.

LLC §201 is a catchall statute that, by reference to other sections, limits the practice of law to lawyers.

Assistant Solicitor General Won Shin argued for the state that the choice of Jacoby & Meyers to challenge only Rule 5.4 and not the other provisions was a strategic one the firm should have to live and die by.

Kaplan, Shin said, had “explicitly warned them about this problem and they ignored that.”

Shin also said the other laws blocking non-lawyer equity investment are “crystal clear” so there was no need to certify questions to the New York Court of Appeals.

But Gleeson said he thought the case was perfect for a declaratory judgment, and there was no reason for the firm to risk its livelihood by taking outside investment just to have standing to challenge the rule.

In its Nov. 21 order, the Second Circuit said there also was no need for the district court to abstain from hearing the case under the abstention doctrine outlined in Railroad Commission v. Pullman, 312 U.S.496 (1941), in part because of Shin’s statement the laws were “crystal clear.”

“Because the district court and appellees agree that Judiciary Law §495 and LLC §201, as authoritatively interpreted by the state courts, unambiguously prohibit non-lawyer investment in law firms, Pullman abstention is unnecessary, and the district court can proceed to adjudicate the parties’ disputes as to whether those statutes, and Rule 5.4, are constitutional,” the Second Circuit said.

Outside equity investment is allowed in England and Australia. In the United States, only the District of Columbia allows it, but it places a cap on that investment at 25 percent. North Carolina is considering changing its law on outside investment.

Denlea in an interview said there are as many as five provisions of state law that Jacoby & Meyers will now be challenging below.

“The multiplicity of these laws is less important than the underlying constitutional issues,” Denlea said. “This is a significant decision. It’s very satisfying the court found that there was no need for abstention.”

The circuit ruling came less than a week after the New York State Bar Association affirmed its opposition to the ownership of law firms by non-lawyers.