Illinois lawmakers have amended and advanced a proposed bill that would place ethical firewalls between law firms and outside capital, as interest in back-office partnerships and other law firm investment deals has grown.
The Illinois Senate’s Judiciary Committee on Wednesday voted 8-1 in favor of an amended version of House Bill 5487, which will now be considered by the full state Senate. The legislation would prohibit any entity involved in a law firm’s legal practice but not fully owned by lawyers from interfering with the lawyers’ professional judgment, controlling its hiring or access to documents.
Such outside entities would also be prohibited from charging any fee “directly or indirectly based” on a law firm’s fees or revenue.
The bill is largely aimed at law firm management services organizations (MSOs), as well as legal providers operating as “alternative business structures” based in other states.
Investors and other non-lawyers are broadly prohibited from owning direct stakes in U.S. law firms or sharing in attorney fees. An MSO can provide an influx of capital for a law firm and returns for investors without breaching those rules: The firm spins off its non-legal, back-office operations like human resources or marketing into an MSO, which can be owned or partly owned by outside investors. The law firm pays the MSO from its revenues but does not share fees.
The Illinois bill would require lawyers to disclose any agreement they have with an MSO to their clients.
As amended, the bill allows for firms to pay back loans and credit extensions to MSOs and other entities, as long as the loan was not contingent on a firm’s “fees, revenues, profits, or other financial performance.” The amended bill also states that these restrictions apply only to “Illinois attorneys and law firms that represent clients in whole or in part on a contingent fee basis.”
“This legislation is about ensuring that legal decisions in Illinois are made by attorneys, not by outside investors focused on profits,” State Sen. Michael Hastings, one of its chief sponsors, said in a statement.
The bill is now teed up for a vote as early as this month before the full Senate. The Illinois House approved a prior draft of the bill last month but must consider the amended version before it goes to the governor.
Trisha Rich, a Holland & Knight partner who has worked on a growing number of MSO deals, said the language of the amended bill would make it illegal for Illinois lawyers to work with legal staffing companies, document service companies, court reporting companies and others.
“The bill is a breathtaking and unconstitutional usurpation of the Illinois Supreme Court’s inherent and exclusive power to regulate lawyers, judges, and the profession of law in the State of Illinois,” Rich said in an email.
Lawmakers in California and Colorado have also proposed similar legislation aimed at curbing the influence of outside investors on law firms.
