Illinois lawmakers move to limit investor influence as law firms, private equity edge closer

By David Thomas and Mike Scarcella

WASHINGTON, Feb 19 (Reuters) - (Billable Hours is Reuters' weekly report on lawyers and money. Please send tips or suggestions to D.Thomas@thomsonreuters.com.)

Legislation introduced in Illinois this month would sharply curb private-equity involvement with law firms, erecting new state-level guardrails just as investors and lawyers nationwide are increasingly exploring back‑office partnerships and taking advantage of loosened regulations on law firm ownership in Arizona.

Investors and other non-lawyers are broadly prohibited from owning direct stakes in U.S. law firms. One partial workaround that's recently gained attention is the management services organization, or MSO: a separate company that runs a law firm’s business functions such as technology, HR and operations, collecting service fees without receiving a share of its profits.

The matching Illinois House and Senate bills, introduced on February 6, would bar private equity groups, hedge funds and MSOs they control from interfering with “the professional judgment” of lawyers; from owning or determining the content of client records; from hiring or firing attorneys or staff based on competency or proficiency; or from setting those proficiency parameters.

The bills would also prohibit outside investors from charging any fee “directly or indirectly” tied to a firm’s fees, revenue or profits and from imposing non-compete agreements and non-disparagement agreements on lawyers and staff.

They would also limit 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.

Violations could carry steep consequences: attorney discipline, statutory damages of $10,000 per violation, or treble actual damages, plus fees and injunctive relief.

The bills' sponsors, State Sen. Michael Hastings and Rep. Jennifer Gong-Gershowitz, are both attorneys, Democrats and committee chairs of their chambers' judiciary committees. They told Reuters they worry that investor incentives and capital expectations could lead law firms to favor certain clients or distort the resources they devote to representing them.

"I have a grave concern as to the adequate representation of the client," Hastings said.

The proposed legislation comes after McDermott, Will & Schulte, a Chicago-founded law firm with 1,750 lawyers, acknowledged last year that it was exploring MSO arrangements. The firm did not immediately respond to a request for comment. Litigation financier Burford Capital told Reuters in August that it has held discussions with firms about potential MSO partnerships.

Arizona, meanwhile, has licensed more than 125 entities to provide legal services through its alternative business structure program, making it the most permissive jurisdiction for non-lawyer ownership of legal service providers and a key testing ground for non-lawyer or investor-backed law firms. Last year, KPMG under Arizona's program became the first of the Big Four accounting firms to launch an affiliated law firm.

Some legal ethics practitioners argue the Illinois bills may test constitutional boundaries. Holland & Knight partners Trisha Rich and Joshua Porte, who have advised on MSO deals, said in a client alert that the legislation may intrude on the Illinois Supreme Court’s exclusive authority over attorney regulation.

Austin Maloney, a Hunton Andrews Kurth partner who advises MSO investors, said the proposal is “somewhere between a nothing-burger and problematic,” pointing particularly to the language barring "indirect" ties between law firm and MSO fees. Because every vendor relationship ultimately depends on firm revenue, “everything is indirectly tied,” he said.

Both bills sit in early committee stages, and Hastings has said he is open to refining the legislation based on feedback he receives. Gong-Gershowitz said passing this bill is "one of my top priorities because I definitely think it is one of the most consequential."

GOLDSTEIN SOLD SCOTUSBLOG TO HELP PAY FOR DEFENSE IN CRIMINAL TAX PROSECUTION

Tom Goldstein sold the popular U.S. Supreme Court news website he founded to help fund his defense against tax charges tied to his side career as a high-stakes poker player, Goldstein's lawyer told jurors as trial in the criminal case was reaching its conclusion on Wednesday.

Goldstein had testified at the trial in Greenbelt, Maryland, that running the SCOTUSblog site costs millions of dollars. He sold the site last year to help pay for his defense, his lawyer Jonathan Kravis of law firm Munger Tolles told the jury.

The sale price was not disclosed. Goldstein has pleaded not guilty to tax and mortgage fraud charges, with jury deliberations set to begin on Thursday.

Munger did not immediately respond to a request for comment about its billing rates for Goldstein. Dispatch Media Inc. last year acquired SCOTUSblog, which was originally founded in 2002. The company did not immediately respond to a request for comment.

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