Lawyers are attacking a new law in California that could affect their wallets by preventing them from taking some of the clients who are referred to them.
The mass tort law firm Wisner Baum sued Nov. 25 in Los Angeles federal court over Assembly Bill 931, a recently signed law that prohibits lawyers from sharing contingency fees with out-of-state firms that are run by non-lawyers, like some referral companies.
Those companies advertise for clients then send them to law firms that agree to pay a chunk of whatever is earned from their claim. Under AB 931, that can’t happen if the referring firm has an owner that is a non-lawyer or a non-lawyer making business decisions.
The bill targets the litigation-funding industry and was supported by the Consumer Attorneys of California, among others. Business groups opposed the measure because it allows funders and lawyers to keep their deals a secret.
“This bill ensures that consumers are better informed about the terms of their loan agreement, can rescind agreements signed under duress, and protects the sanctity of the attorney-client relationship by prohibiting litigation funding companies from dictating legal strategy,” wrote Ash Kalra, the bill’s sponsor who is a Democrat and a lawyer.
But Wisner Baum says provisions of the bill go too far. R. Brent Wisner created an Arizona firm, Eleos Law, to service 20,000 plaintiffs and operate as an “alternative business structure.” Wisner Baum litigates the cases while Eleos Law, whose ownership is 46% non-lawyer, focuses on client services and other matters.
Among Eleos’ workload are 9,400 cases over Zantac and 8,450 over alleged contamination of baby food. It is funded by 5% of the attorneys fees recovered by Wisner Baum.
“Moving forward, California lawyers will now have to police referral services and will, necessarily, be less competitive in the mass tort marketplace,” Wisner Baum’s suit says.
“California lawyers, unlike other lawyers in other states, will need to investigate any law firm that wishes to refer a case to them to determine whether they meet the exceedingly broad definition of an ABS, as defined by California law.
“How a California lawyer is expected to investigate each referral source – without prying into detailed operations of the law firm, including whether some non-lawyer is exercising decision-making in some unobvious way – is as unclear as it is ominous to California practitioners.”
Gov. Gavin Newsom signed the bill on Oct. 10 and it is set to go into effect on Jan. 1. It was introduced in response to recent rules in Arizona and Utah that allowed firms to form alternative business structures owned by non-lawyers.
Wisner’s lawsuit says there are 114 ABS law firms now in Arizona and 11 more in Utah. He said the concerns of a corporate takeover of law firms are legitimate but “overblown.”
The suit makes several constitutional arguments, including a violation of substantive due process in that it deprives him of his economic liberty.
“AB 931’s narrow exceptions (limited to court-approved common benefit funds and specific-dollar-amount-contracts with no contingency element) highlight that AB 931 is not narrowly tailored to achieve any compelling regulatory objective,” it says.
