Illinois, one of the largest U.S. legal markets, has become the second state to enact legislation limiting investors' influence on law firms amid a surge of interest in deals pairing lawyers with outside capital.
Illinois Governor JB Pritzker on Friday signed a bill that prohibits any entity involved in a law firm's legal practice but not fully owned by lawyers from interfering with attorneys' professional judgment, controlling hiring decisions or revealing client documents.
Such entities are also barred under the new law from charging any fee "directly or indirectly based" on a law firm's fees, revenue or profits.
Investors and other non-lawyers are broadly prohibited in the United States from owning direct stakes in U.S. law firms or sharing in attorney fees.
The Illinois law is largely aimed at law firm management services organizations (MSOs), which allow law firms to receive outside capital by spinning off their non-legal, back-office operations like human resources or marketing into a separate organization owned or partly owned by outside investors.
The law does not bar law firm MSOs but could limit how they operate in the state. It also limits Illinois lawyers' ability to share fees with out-of-state "alternative business structures" like those allowed in Arizona unless the Illinois attorney is licensed where the ABS is approved, and the fees are for work performed in that state.
The statute applies only to lawyers and law firms that make less than $300 million in annual revenue or have derived more than 50% of their revenue from contingency fees for the past three years.
“This bill is about one simple truth: Illinois clients deserve attorneys who are loyal to them, not to some distant investor chasing a quarterly return,” Illinois State Senator Michael Hastings said in a statement. Hastings, a Democrat, was the bill's chief Senate sponsor.
A spokesperson for Pritzker did not immediately respond to a request for comment.
The legislation was backed by the Illinois Trial Lawyers Association and Illinois Defense Counsel, as well as the Illinois State Bar Association, which touts itself as the state's largest bar group with about 30,000 members. It was opposed by the Illinois Venture Capital Association and the International Legal Finance Association.
Trisha Rich, a Holland & Knight partner who advises on MSO deals, said in a statement that the new law "intrudes on the Illinois Supreme Court’s exclusive constitutional authority to regulate lawyers and the practice of law, while creating substantial uncertainty for Illinois lawyers, law firms and the many legitimate businesses that support them."
Rich, who has offices in Chicago and New York, said "we are actively evaluating a constitutional challenge and expect to have more to say soon."
Colorado in June enacted its own legislation targeting MSO and ABS firms. California is considering similar legislation.
