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March 8, 2012 6:22 PM

Jacoby & Meyers Defeated in Court Fight to Seek Outside Investors in New York

Posted by Sara Randazzo

A day after a federal judge in New Jersey allowed a similar lawsuit filed by the firm to proceed, a federal judge in New York on Thursday dismissed a suit in which Jacoby & Meyers challenged a state rule that prohibits nonlawyer investment in law firms.

The 40-year-old plaintiffs' firm filed the two suits—along with a third one in Connecticut—in May 2011 to challenge rules of professional conduct in all three states that prohibit law firms from tapping nonlawyer investors. Jacoby, which argues that allowing such investment could help smaller law firms compete with larger rivals, claims all three states' rules are unconstitutional and impair the firm's ability to offer low-cost legal services to underserved communities.

Manhattan federal district court judge Lewis Kaplan said in his ruling (PDF) that federal court lacks jurisdiction to hear the case, which involves state court issues. Kaplan also said Jacoby's suit falls short because it only challenges one of several New York ethics rules that ban outside investors, according to sibling publication New York Law Journal.

Kaplan previously expressed skepticism about the jurisdictional issue, as well as whether the firm had standing to bring the case (covered by The Am Law Daily here and here).

Though he did not go into the merits of Jacoby's argument on why outside investment should be allowed, Kaplan did say that allowing third-party investors to sink equity into law firms could amount to making "a deal with the devil."

As it happens, Kaplan's ruling came just a day after New Jersey federal district court judge Peter Sheridan denied a motion to dismiss Jacoby's suit there brought by the justices of the New Jersey Supreme Court. In his decision, Sheridan ruled that the court first needs to ascertain if outside investment may already be permitted under the state's rules of professional conduct.  

Sheridan asked the New Jersey Supreme Court to explore that issue, and added that the federal court still has jurisdiction over the constitutional issues raised by the suit.

Jeffrey Carton, an attorney with Meiselman, Denlea, Packman, Carton & Eberz who is representing Jacoby in all three suits, did not immediately return a call seeking comment Thursday.

In the Connecticut case, oral arguments on a motion to dismiss Jacoby's suit filed by a group of Connecticut Superior Court judges are scheduled for March 19. The Connecticut Bar Association has filed a lengthy amicus brief (PDF) siding with the state judges and criticizing Jacoby for attempting to circumvent "the careful and thorough process" in place to change Connecticut's rules of professional conduct. The bar group argues that Jacoby has undertaken its crusade because it finds the rules "inconvenient and inconsistent with its purely financial interests."

But in an opposition to the motion to dismiss filed in the New York action, Jacoby frames its case differently, saying it fears that "the practice of law in the United States is at serious risk of falling behind the rest of the world," citing the rise of alternative business structures in Australia and the United Kingdom.

Its motion explains the firm's need for an infusion of capital to hire more attorneys and staff, buy new technology, and improve its offices, as well as to help it expand "within communities in which working-class, blue-collar and immigrant families reside." The firm says it has a number of high net-worth individuals committed to investing in the firm, including Michael Ostrow, Anthony Costa, and Philip Guarnieri. Bloomberg notes that the trio are directors in an Empire State Bank holding company called ES Bancshare. Ostrow also is president of a New York Mercedes-Benz dealership.

In summing up its argument, Jacoby says it "is prepared to adapt to the new realities of the profession, but needs a jurist with the same profile in courage to ensure that antiquated barriers to its survival are cast aside."

An American Bar Association commission has been considering changes to model rules governing outside investment in law firms for several years. In December, the commission released a draft paper analyzing a recommendation to allow firms to give nonlawyers they employ a financial interest in the firm and a share in its profits. At the same time, the commission urged that an existing ban be maintained in the U.S. on the kind of outside investment in law firms that is now possible in the U.K. and Australia.

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