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Jacoby & Myers Loses Appeal to Associate Nonlawyer Investors

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By William Vogeler, Esq. on March 28, 2017 4:14 PM

How many lawyers does it take to own a law firm?

One -- the rest are banks, landlords, and service providers who own everything that keeps the practice afloat.

So it's not a good lawyer joke, but comedy is sometimes born of sobering truth and many attorneys know the challenges of struggling to stay in business. If only there were an investor ...

It's not going to happen, according to a federal appeals court. Not even Jacoby & Myers, the poster boys of law firm expansion, could persuade the judges that attorneys should be able to reduce costs to clients by sharing ownership with non-lawyers.

First Amendment to Associate

Jacoby & Myers, with more than 300 lawyers around the country, argued that the firm had a First Amendment right to associate with non-lawyers as investors. The U.S. Second Circuit Court of Appeals said the Constitution does not recognize that right.

"Any law firm, of course, might like to attract more clients, and any client would like to pay less for his lawyer's services," Judge Susan Carney wrote for the unanimous panel. "But these observations do not mean that regulations that hypothetically and marginally raise the cost of legal services infringe any lawyer's First Amendment right of association or access to the courts: the connection is simply too attenuated."

The firm claimed that it needed investors to expand, hire new lawyers and buy more technology. With outside capital, the Jacoby's lawyers argued, they could lower fees and represent more low-income clients.

Jacoby & Myers gained notoriety 1977 when it started advertising on television after the U.S. Supreme Court ruled attorneys could advertise under ethics rules. The appeals court, however, said rule against fee-splitting has not changed.

Prohibition on Fee-Splitting

The American Bar Association and every state bars in the country forbid lawyers from splitting fees with non-lawyers. Attorneys for New York, where Jacoby challenged the rule, said the bar is designed to protect clients and not lawyer's First Amendment rights.

"There is no basis for J&M's claims that every state in the nation has, for many years, been violating the First Amendment rights of every lawyer in the country by prohibiting them from funding their practices with nonlawyer equity," the state Attorney General's office said.

Lawyers may associate with nonlawyers, but they may not split attorney's fees with them under Professional Rule of Responsibility Rule 5.4. It provides that lawyers may not share legal fees with nonlawyers, and specifically bars partnerships, corporations or associations with nonlawyers to practice law.

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