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Nonprofit groups celebrated Thursday after the California Supreme Court unanimously affirmed their right to practice law without registering with the State Bar. But the party mood was tempered slightly by the high court’s decision to ask the State Bar to conduct a thorough study and recommend whether regulation really is warranted. “It is incumbent upon the State Bar,” Chief Justice Ronald George wrote, “to study whether [such] groups … actually imperil client interests despite the absence of a profit motive, and to consider how such a danger, if it exists, may be mitigated by regulations consistent with First Amendment principles.” Brad Seligman, executive director of The Impact Fund in Berkeley and one of two attorneys who argued the nonprofits’ point of view during oral arguments, saw the bright side, saying the decision “dispels a cloud” that had hovered over the groups’ legal work and predicting that the State Bar will propose no changes. “I think they will conclude there’s no problem here that needs fixing,” he said. His opponent, Zacks Utrecht & Leadbetter partner Paul Utrecht, disagreed, contending that a study will conclude “that some kind of State Bar regulation is appropriate — and I don’t think it would be burdensome.” San Francisco’s Tenderloin Housing Clinic, which provides various legal and nonlegal services for residents of one of the city’s most run-down neighborhoods, brought the case to the high court after the First District Court of Appeal ruled that state Corporations Code §13406(b) requires nonprofit organizations to register with the State Bar or forfeit the right to get attorneys fees. The ruling held that unregistered nonprofits couldn’t practice law. THC had been sued by Roy Frye and 14 other residents of a shabby Tenderloin hotel. THC had represented the tenants in a landlord dispute, but the residents weren’t pleased with their final share of the financial award. More than 70 nonprofits across the political spectrum — from the liberal American Civil Liberties Union to the conservative Pacific Legal Foundation — signed on as amici curiae in support of THC. In Thursday’s ruling, the Supreme Court called the appellate court’s reasoning “flawed.” The justices said California and federal case law have embraced nonprofit groups’ right to practice law to ensure advocacy for the poor, the disabled, ethnic minorities and others — even to protect the environment. “Courts have accepted the premises that legal aid societies serve an important public interest,” George wrote, “and that the nonprofit nature of the enterprise reduces or eliminates the risk that the entity will compromise the loyalty of attorney-employees to clients or otherwise threaten clients’ interests.” Without commenting directly about THC, George also said that the First Amendment in general “protects the associational and expressive rights of persons — both lawyers and nonlawyers — to join together to employ litigation to seek redress of grievances.” George said the First District’s interpretation would have raised “grave First Amendment questions.” The chief justice also refused to disgorge attorneys fees of about $170,000 to the plaintiffs. “The remedy of disgorgement,” he wrote, “is grossly disproportionate to the asserted wrongdoing on THC’s part and would constitute a totally unwarranted windfall to Frye.” The court’s referral to the State Bar was extremely detailed, advising officials to consider whether existing ethical rules regarding individual attorneys already provide adequate safeguards, and directing their attention to a 1981 New Jersey Supreme Court ruling regarding proper regulation. “It may be that additional regulation of groups such as THC is not needed,” George wrote, only to add in the very next paragraph that “reasonable regulation, directed at the employing entities as well as their individual lawyers and designed to govern the day-to-day conduct of litigation, may be appropriate.” In a prepared statement, THC staff attorney Stephen Collier hailed the ruling. “The decision,” he said, “is a broad affirmance of the importance of nonprofit legal advocacy groups in providing legal services for disadvantaged groups.” Utrecht said he was disappointed by the overall ruling, but looked hopefully ahead to the State Bar study. “I believe that if the State Bar does what the Supreme Court told it to do,” he said, “they’ll discover that THC is operating in a way that’s not appropriate.” Robert Hawley, the State Bar’s deputy executive director, said that in anticipation of the court’s ruling, the organization had pulled together a task force shortly after January oral arguments in the case. With Wednesday’s referral, he said, the high court “is not saying, ‘We think there’s a problem here,’” but rather, “Is there a problem here? Is there something that needs to be addressed?’” The ruling is Frye v. Tenderloin Housing Clinic, 06 C.D.O.S. 2060.

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