Editors’ Note: This article has been updated to reflect a Clarification.
On the heels of an American Bar Association commission vote to circulate a proposal to permit non-lawyers to hold a minority ownership role in law firms, Jacoby & Meyers on Friday fired broadside at a New York court rule barring firms from accepting outside investments.
The firm’s memorandum, which was submitted to the U.S. District Court for the Southern District, comes in response to a motion filed earlier this summer by Attorney General Eric T. Schneiderman.
Mr. Schneiderman is seeking dismissal of a suit Jacoby & Meyers lodged against the four presiding justices of the Appellate Division departments seeking to topple a court rule prohibiting non-lawyers from owning an equity interest in a law firm (NYLJ, May 20). The rule is designed to insulate attorneys and their firms from the explicit or implicit influence of non-lawyer investors.
In the weeks since Mr. Schneiderman filed a motion arguing that the Jacoby & Meyers’ suit “border[s] on frivolous” and that elimination of Rule 5.4 undermine attorney independence and loyalty to clients (NYLJ, July 26), the ABA Ethics 20/20 Commission circulated a proposed rule change to model Rule 5.4, on which New York’s court rule is based. The proposed change would allow some “alternative business structures,” which are now barred in every U.S. jurisdiction outside the District of Columbia, and permit partial non-lawyer ownership of law firms. The commission has not yet taken a position on the draft rule and is requesting comment.
In its filing Friday, Jacoby & Meyers contends the rule violates a host of constitutional provisions, is outmoded and ultimately harms law firms and its clients.
“The new realities of the global legal marketplace should be recognized and Rule 5.4′s absolute bar of non-lawyer investments in law firms should be struck down as unconstitutional,” Jacoby & Meyers argued in the memorandum. “To do otherwise is tantamount to the ostrich which buries its head in the sand, and will only perpetuate a legal system in which access to much needed legal services by qualified lawyers in New York is denied to millions of lower, working, and middle class residents throughout the state.”
The memorandum by Jeffrey I. Carton of Meiselman, Denlea, Packman, Carton & Eberz, a White Plains firm representing Jacoby & Meyers, largely mirrors one filed last Tuesday in New Jersey, where a similar action is under way. Jacoby & Meyers has a third case pending in a Connecticut federal court.
Mr. Carton’s papers document a litany of alleged federal constitutional infirmities in Rule 5.4, ranging from First Amendment violations to breaches of the commerce clause. He has abandoned previously asserted state constitutional claims “in the interests of judicial economy,” as Jacoby & Meyers did in New Jersey as well.
But he spends much of his energy attempting to counter the claims of Mr. Schneiderman and others that having non-lawyers in a position where they could potentially influence legal decision-making is inherently troublesome.
“The ethical practitioner will not become less so if adequately capitalized and the unethical practitioners exist even with the present proscriptions,” Mr. Carton said in his memorandum, dismissing the attorney general’s argument as a “shop-worn, tired refrain that restricting non-lawyer ownership of law firms is somehow essential to preserve” the independence and client loyalty of lawyers.
“Nowhere…do defendants explain how the manner in which a law firm finances its operations mandates that divided loyalties or compromised independence necessarily result,” Mr. Carton wrote. “They do not because they cannot.”
Jacoby & Meyers maintains that the “parade of horrors” predicted by Mr. Schneiderman have not materialized in the District of Columbia, which has allowed partial non-lawyer ownership for two decades, or in Australia and the United Kingdom, both of which permit non-lawyers to obtain ownership interests in law firms.
Rather, the firm claims, Rule 5.4 puts law firms at a disadvantage to Internet legal service providers, such as LegalZoom, and outsourcing companies, such as Pangea3, which are not law firms and which can access capital markets to expand and adapt to changing economic conditions.
“Nonlawyer investment capital is simply not the evil defendants wish to portray it as,” Jacoby & Meyers said in the memorandum. “Rather, it should be treated as a creative method of extending legal services to the masses. The key is to regulate conduct, not preclude access to capital.”
Jacoby & Meyers implies that some restriction, perhaps barring outside investors from holding a controlling or majority interest in a law firm, could be imposed without violating the federal constitution. However, it does not indicate where the line should be drawn.
Mr. Carton said in his filing that Jacoby & Meyers requires outside capital to fulfill its business plan of expanding into “communities in which working-class, blue collar and immigrant families reside.”
Mr. Schneiderman’s office declined to respond.
Jacoby & Meyers v. The Presiding Justices, 11-cv-3387, is pending before Southern District Judge Lewis A. Kaplan and Magistrate Judge Kevin N. Fox.
@|John Caher can be contacted at email@example.com.