A challenge by Jacoby & Meyers to New York state’s ban on law firms accepting equity investments from non-lawyers has been dismissed by a federal judge.

Southern District Judge Lewis A. Kaplan (See Profile) on March 8 said the personal injury firm’s lawsuit challenging Rule 5.4 of New York’s Rules of Professional Conduct must fail because the rule is not the only one in New York that “forecloses plaintiffs from receiving non-lawyer equity investment,” but it was the only one challenged by the firm.

The judge’s ruling did not come as a surprise, as he had expressed severe doubt whether Jacoby & Meyers had standing during two hearings on the matter in November and February.

Even if the state statutes at issue were unclear, Judge Kaplan said at the February hearing, he still would have abstained from hearing the case and stayed the action pending state court resolution of the state law issues (NYLJ, Feb. 8).

Judge Kaplan said on March 8 that provisions independent of Rule 5.4 prevented the plaintiffs from accepting non-lawyer equity investments, “even if they won on the merits of their constitutional claims,” so that 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.”

Judge Kaplan’s decision on standing, while a setback for the personal injury firm, at least leaves its lawyer, Jeffrey I. Carton of Meiselman, Denlea, Packman, Carton & Eberz, the chance to pursue an appeal at the U.S. Court of Appeals for the Second Circuit.

Mr. Carton said the firm is ready for a long battle.

“These issues are far too important not to be addressed substantively and Jacoby & Meyers will continue with the fight,” he said.

Abstention by the judge under the Pullman Doctrine, after Railroad Commission of Texas v. Pullman Co., 312 U.S. 496 (1941), would have forced Mr. Carton into state court.

“Abstention,” he told the judge at the February hearing, “would send us back to the very body that enacted the rule.”

The relevant part of Rule 5.4 states that “(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 any interest therein.”

Jacoby & Meyers’ complaint says the firm has several offices in New York state as well as offices in Connecticut and New Jersey, where it has launched similar challenges, with affiliates in other states.

In New Jersey on March 2, U.S. District Court Judge Peter G. Sheridan denied the state’s motion to dismiss and remitted the case to the New Jersey Supreme Court for its review and analysis, while retaining jurisdiction over the federal constitutional claims. Jacoby & Meyers Law Offices LLP v. The Justices of the Supreme Court of New Jersey, Civil Action No. 11-2866.

The Jacoby & Meyers complaint in New York states that it needed a “substantial infusion of new capital” because other sources of funding, including bank loans and capital contributions by partners, were either too expensive or unavailable.

It also claimed that it had a number of people ready and willing to invest capital in the firm in exchange for an equity interest but was blocked by the rule from accepting any offers.

Jacoby & Meyers said the rule puts small firms at a competitive disadvantage because they do not have the same access to capital as do large firms.

“The parallels that can and should be drawn to the challenge was the ban against attorney advertising decades ago, so in some respects, history repeats itself, it took those efforts all the way up to the U.S. Supreme Court,” Mr. Carton said. “I would hope it wouldn’t take that much of an effort but, if it does, Jacoby & Meyers is in it for the long haul.”

New York Assistant Attorneys General Daniel A. Schulze and Michael J. Siudzinski represented the state in Jacoby & Meyers, LLP v. The Presiding Justices of the First, Second Third and Fourth Departments, Appellate Division of the Supreme Court of the State of New York, 11 Civ. 3387.

The attorney general’s office declined to comment.