California law sets up new contingency fee-sharing roadblock

By Sara Merken and Mike Scarcella

Oct 16 (Reuters) - (Billable Hours is Reuters' weekly report on lawyers and money. Please send tips or suggestions to D.Thomas@thomsonreuters.com.)

California is clamping down on lawyers and law firms' ability to share certain legal fees with other kinds of businesses, putting the largest economy in U.S. largely off-limits to contingency fee-sharing deals with out-of-state firms in which non-lawyers have ownership or decision-making authority.

Governor Gavin Newsom signed the bill into law last week, barring attorneys in the state from splitting fees with out-of-state "alternative business structures," unless the contract specifies that the dollar amount be shared and other conditions are met. An earlier version of the legislation would have gone further, blocking lawyers in California's large legal market from sharing any fees with an ABS.

Only a few U.S. jurisdictions allow law firms and businesses with non-lawyer ownership to provide legal services. An effort to allow people who are not lawyers to share fees with or own law firms failed in California in 2022.

Firms and investors have flocked in particular to Arizona, which became the first state to permanently scrap rules prohibiting non-lawyer ownership in 2020. KPMG earlier this year opened a law firm subsidiary under Arizona's ABS program, which has now approved more than 100 entities including personal injury firms and legal technology companies.

Trisha Rich, a partner at Holland & Knight who has advised lawyers and firms on ABS operations, said California's new law will "be a limiting factor" for investors and ABS firms that work on contingency fee matters, given the size of the state's legal market and economy. But California is just one state, and it remains to be seen whether others will take up similar legislation, she said.

"If other jurisdictions start adopting these laws, it's going to make this sort of structure less attractive to both investors and ABS firms," and they may think about different ways to value their services or whether it makes sense to have an ABS if their model is based on contingency cases, Rich said.

The new California law applies to arrangements entered into after January 1, 2026, until 2030.

– Billionaire Elon Musk is opposing a bid to disqualify his prominent longtime lawyer Alex Spiro of law firm Quinn Emanuel from a securities fraud case over Musk’s 2022 online posts about his acquisition of Twitter.

The shareholders suing Musk in federal court in California say Spiro is a key witness in the case with unique knowledge of Musk’s motives and communications surrounding Twitter posts that allegedly misled investors.

They argued that allowing Spiro to be both defense lawyer and witness would "create a grave risk of jury confusion, make a mockery out of these proceedings, and inflict serious prejudice."

Musk’s legal team in a new court filing called the disqualification effort a “Hail Mary” ahead of a trial scheduled for January 2026. The investors waited too long to raise their concerns about Spiro, they said, and removing him would unfairly deprive Musk of his preferred counsel just months before trial.

Musk has consented to Spiro serving as both counsel and witness in the case and argued that Spiro’s testimony is limited and not central to any disputed facts, court filings show.

Spiro and Musk’s other lawyers did not immediately respond to requests for comment, and neither did lead attorneys for the plaintiffs.

Spiro's other clients have included actor Alec Baldwin and New York Mayor Eric Adams. Spiro is among lawyers at big-name law firms billing at $3,000 or more an hour. As recently as 2021, he was charging $1,595 an hour, according to a contract filed in an unrelated case in New York state court.

The lawsuit alleges that Musk's posts drove down Twitter’s stock price in order to escape his $44 billion acquisition deal or force a lower price for the platform, which has since been renamed 'X'. Musk has denied any wrongdoing.

U.S. District Judge Charles Breyer in San Francisco will hear arguments on the disqualification bid next month.

– A U.S. appeals court will soon hear arguments over legal fees stemming from a $600 million class action settlement over Norfolk Southern’s 2023 freight train derailment and chemical spill in East Palestine, Ohio.

National plaintiffs law firm Morgan & Morgan is challenging the fee distribution process, arguing it was improperly sidelined by its co-counsel.

The Cincinnati-based 6th U.S. Circuit Court of Appeals on Oct. 23 will weigh Morgan & Morgan's claims that a federal district court judge wrongly approved a “quick-pay” provision that allowed attorneys to collect $162 million in fees within days of final settlement approval.

“Many residents of East Palestine are waiting to find out if they will receive their damages while their attorneys get to leave town with $162 million,” lawyers for Morgan & Morgan told the appeals court in a filing.

They said the court should issue an order “bringing the attorneys back in line with the well-known ‘I don’t get paid unless you get paid’ principle.”

Morgan & Morgan and attorneys defending the fee allocation did not immediately respond to requests for comment. Norfolk Southern denied any wrongdoing in agreeing to settle.

Co-lead class counsel, represented in the appeal by veteran litigator Paul Clement, contend that Morgan & Morgan’s objections are untimely and amount to “sour grapes.”

Clement and the class attorneys said the fee allocation model is objective and fair, and that no other firm has challenged its share.

They told the appeals court that Morgan & Morgan had the fewest approved hours among the lawyers leading the case and that its exclusion from the allocation process was appropriate given what they said was a limited role in representing class members.

Read more:

Elite colleges target lawyers' funding in antitrust class certification fight

Big Law rates for small firms? US appeals court takes up fee fight

Humana whistleblower lawyers win $32 million as False Claims Act faces challenge