Illinois has moved to put tighter boundaries around outside investment in the legal industry, becoming the second U.S. state to adopt legislation aimed at curbing the influence of non-lawyer investors over law firms.
Governor JB Pritzker signed the measure into law Friday, placing new restrictions on entities involved in a law firm’s operations when those entities are not entirely owned by lawyers.
Under the legislation, such organizations cannot interfere with an attorney’s independent professional judgment, dictate hiring decisions or gain access to confidential client records.
The law also prohibits them from collecting fees tied directly or indirectly to a firm’s revenue, profits or legal fees.
The move comes as interest grows in arrangements that allow law firms to obtain outside capital without giving investors direct ownership of the legal practice. A common model involves management services organizations, or MSOs, taking over non-legal functions such as human resources, technology and marketing while outside investors provide capital.
Illinois has not banned MSOs outright. However, the new rules place limits on how those organizations can operate and the financial arrangements they can maintain with law firms.
The legislation also restricts Illinois attorneys from sharing fees with alternative business structures operating in states such as Arizona. An exception applies when the Illinois lawyer is licensed in the state where the alternative structure is permitted and the fees relate to work performed there.
The restrictions apply to lawyers and law firms with annual revenue below $300 million, as well as firms that have received more than half of their revenue from contingency fees during the preceding three years.
Supporters say the legislation is designed to keep attorneys’ duties centered on their clients rather than outside financial interests.
“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, the bill’s lead Senate sponsor, said in a statement.
The legislation received support from the Illinois Trial Lawyers Association, Illinois Defense Counsel and the Illinois State Bar Association.
Investor groups, however, strongly opposed the measure. The Illinois Venture Capital Association and the International Legal Finance Association were among those arguing against it.
Trisha Rich, a Holland & Knight partner who advises on transactions involving MSOs, said the law raises significant legal and constitutional questions. She argued that it interferes with the Illinois Supreme Court’s authority over the regulation of lawyers and the practice of law.
Rich said her firm is assessing the possibility of challenging the legislation in court.
Illinois is now part of a growing national debate over how much influence outside capital should have in the legal profession. Colorado adopted legislation targeting MSOs and alternative business structures in June, while lawmakers in California are considering similar restrictions.
The developments reflect a widening divide between those seeking new sources of capital for law firms and those concerned that investor interests could compromise lawyers’ professional independence.
