Last week I wrote about private equity courting law firms with “let’s move into together” messages, using the recent case of a California firm contracting with a Boston-based private equity (PE) firm. That blog explored the management services organization (MSO) agreements for such deals, which allow a non-lawyer investor to own the billing and software of a law firm as long as the “lawyering part” continues to be done by licensed lawyers — and how that squares with the ethical considerations for lawyers. The blog anticipated some issues and assumed a wait and see approach.
As it turns out, this week there is more to see. Just days ago, the Governor of California signed a proposed law that came to his desk on the subject. It seems that the legislature in CA has taken a dim view of the MSO arrangement when it comes to law firms, and so has the Governor.
The new CA law, which covers all contracts entered into on and after January 1, 2027, bars business entities from attempting “to influence the professional judgment of a licensed attorney or litigant regarding any substantive litigation decision.” It also carries some hefty damages for violation and associated fees and costs, and it joins jurisdictions like Colorado and Illinois in passing such a law. However, CA is a huge legal market and appears to be the big kahuna in the fight so far.
The salient issue appears to be the definitions of “legal control, and “litigation decisions,” and that could take a while to resolve. A reasonable interpretation of the CA bill seems to be that PE must have hands off when it comes to determinations about what cases a firm takes, which clients it signs, and if and when and for how much it agrees to settle a case. Those all look like money issues to little old me, and isn’t PE all about making money? Isn’t that the motive for the pitch?
Law firm practitioners — especially those who are looking for quick influxes of money to improve bottom lines — should keep a close eye on this. And there are a few of those firms — very prestigious firms, in fact — that are picking up the phone when PE calls.
There is sure to be more. Stay tuned!
