The Firms

August 30, 2011 12:54 PM

Ban on Nonlawyer Investments Defies Reality, Firm Argues

Posted by John Hazard

By John Caher, New York Law Journal

In a memorandum filed Friday in a New York court case, Jacoby & Meyers called the prohibition on nonlawyer ownership of law firms outdated and unrealistic, sibling publication the New York Law Journal reported.

The rule–-Rule 5.4 of the American Bar Association, on which New York’s court rule is based--is designed to insulate attorneys and their firms from the influence of nonlawyer investors who are untrained in legal ethics, but is out of touch with reality, Jacoby & Meyers claimed in the memorandum, submitted to the U.S. district court for the Southern District.

"The new realities of the global legal marketplace should be recognized and [the] absolute bar of nonlawyer investments in law firms should be struck down as unconstitutional," Jacoby & Meyers argued in the memorandum.

The memorandum was a response to a motion filed earlier this summer by New York attorney general Eric T. Schneiderman to dismiss a suit by the law firm that seeks to topple the New York court rule that prohibits law firms from granting equity to nonlawyers. Jacoby & Meyers is seeking to raise outside capital from nonlawyers in order to pursue a planned expansion.

The memorandum, submitted by Jeffrey I. Carton of Meiselman, Denlea, Packman, Carton & Eberz, a White Plains firm representing Jacoby & Meyers, countered the state's claim that having nonlawyers 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," Carton said. Jacoby & Meyers maintains that the "parade of horrors" predicted by Schneiderman have not materialized in the District of Columbia, which has allowed partial nonlawyer ownership for two decades, or in Australia and the United Kingdom, both of which permit nonlawyers to obtain ownership interests in law firms.

Earlier this month an American Bar Association panel reviewing changes to the organization's ethics rules voted in favor of circulating a proposed change to Rule 5.4. The ABA panel would allow some "alternative business structures" and permit partial nonlawyer ownership of law firms, but only to a minority share and only by individuals with demonstrably good character. The commission did not take a position on whether Rule 5.4 should be modified and at this stage is seeking comment.

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