Attorneys pressing Jacoby & Meyers’ attack on New York State’s ban on law firms accepting outside investment from non-lawyers may have gotten a ray of hope Oct. 5 during oral arguments before the U.S. Court of Appeals for the Second Circuit.

Attorney James Denlea, after getting hammered by the panel for insisting he had standing to challenge Rule 5.4 of New York’s Rules of Professional Conduct, sat back and watched with pleasure as Judge John Walker Jr. (See Profile) asked Assistant Solicitor General Won Shin why the case shouldn’t just be remanded with instructions to amend the complaint and solve the standing problem.

Calling the merits of the case “probably pretty easy,” Judge Gerard Lynch (See Profile) said, “It’s kind of a mystery to me why we are debating these rather arcane issues of standing.”

When Denlea walked back to the lectern and Walker raised the possibility of remanding the case to the district court to cure the standing defect, Denlea replied “That would be more than acceptable, your honor.”

In Jacoby & Meyers v. The Presiding Justices of the First, Second, Third and Fourth Departments of the Appellate Division of the Supreme Court of the State of New York, 12-1377-cv, Jacoby & Meyers claims the ban on outside equity investments in law firms violates the First Amendment and hinders the ability of small firms to expand and compete against larger firms.

Read Jaboy & Meyers’ brief and the brief for the state

But Southern District Judge Lewis Kaplan (See Profile), held on March 8 that provisions independent of Rule 5.4 prevented plaintiffs from accepting non-lawyer equity investments, that the firm lacked standing to challenge Rule 5.4 and that “even if they won on the merits of their constitutional claims” any opinion he would issue would be a “purely advisory declaration of the sort that is forbidden to federal courts under Article III of the U.S. Constitution” (NYLJ, March 9).

Kaplan had also held out the possibility that he might abstain from hearing the matter, which would send the case back to state courts, a possibility the firm clearly dreaded.

“Abstention would send us back to the very body that enacted the rule,” Jeffrey Carton, Denlea’s partner at Meiselman, Denlea, Packman, Carton & Eberz, said at the February hearing before Kaplan (NYLJ, Feb. 8).

But an amended complaint on remand from the Second Circuit would allow Denlea and Carton to add the other provisions of state law that block outside equity investment, including the state’s partnership law, §1500(a)(I), which prevents limited liability partnerships from having non-lawyers as partners.

The attorneys elected to challenge only Rule 5.4 as a matter of strategy and because they say it is the law that most directly blocks outside investment. The relevant part of the rule states “(a) A lawyer or law firm shall not share legal fees with a nonlawyer” and “(d) A lawyer shall not practice with or in the form of an entity authorized to practice law for profit, if (1) a nonlawyer has an interest therein.”

In a November 2011 hearing before Kaplan, the judge told Carton he was “pushing a huge rock up a hill” to convince the court first on standing, then on ripeness and finally on abstention under the “Pullman doctrine.”

On Friday, Denlea pushed that rock up the hill at the Second Circuit, as Walker went after him on the issues of “redressibility.”

Walker wanted to know why was Kaplan wrong in stating that a finding that Rule 5.4 was unconstitutional would have no preclusive effect and other provisions would still prevent Jacoby & Meyers from pursuing outside investment.

Lynch said, “You’re asking us to rule that if the disciplinary rule falls, so will these other statutes, when those other statutes are not before us,” asking later, and “doesn’t that seem like a rather extraordinary thing for us to do?”

Denlea said all he was asking the court to do was to make a “narrow ruling on redressibility.”

But Walker wondered, “How about the fact that we don’t have enough information?”

When Shin began his argument, Walker said it seems that Jacoby & Meyers should have included the other statutes in their lawsuits.

Shin said Kaplan had “explicitly warned them about this problem and they ignored that” because “they made a strategic choice.”

But then the judges began firing away at Shin.

Lynch said that it was “quite a risk for a lawyer to take” to try and take outside investment in order to be in position to challenge the rule.

And Walker asked, “How are you going to attract investment?” if Jacoby & Meyers took the risk of violating the rule.

Shin answered that Jacoby & Meyers could have amended its complaint. He also said the other laws blocking outside investment are “crystal clear” so there was no need to certify questions to the New York Court of Appeals or abstain.

Eastern District Judge John Gleeson (See Profile), sitting by designation, said, “I don’t get why the use of the declaratory judgment statute isn’t ideal” for this case.

“Why should they potentially want to place their livelihoods on the line?” Gleeson asked.

Shin then answered a question on enforcement of the ban and the consequences for violating it. The possibilities include a criminal prosecution or civil enforcement action by the attorney general or a criminal contempt finding by a state Supreme Court justice for attempting to litigate before the court.

“Why wouldn’t it be useful to have a judgment that says at least, in this setting, it violates their First Amendment rights?” Gleeson asked. “Why isn’t that sufficient?”

Gleeson said the state was placing Jacoby & Meyers in the position of having to “find every single prohibition and seek to challenge all of them” or they “lack standing to challenge one of them.”

But Shin insisted “there is no discernible interest here.”

After a brief statement by Denlea, Lynch then thanked the lawyers. “It’s a very interesting case and interesting arguments on both sides,” he said.

After the arguments, outside of court, Denlea and Carton said they were pleased that the judges were just as tough on Shin as they were on Denlea.

“They were throwing furniture at both of us,” Denlea said with a smile.