Illinois Governor JB Pritzker signed legislation on Friday restricting the influence that outside investors can exert over law firms, making Illinois the second state, after Colorado, to enact this type of law. Illinois is one of the largest legal markets in the country, and the law follows a surge of interest in deals that pair lawyers with outside capital.
The new law prohibits any entity involved in a law firm's legal practice, but not fully owned by lawyers, from interfering with attorneys' professional judgment, controlling hiring decisions, or accessing client documents. It also bars such entities from charging fees "directly or indirectly based" on a law firm's fees, revenue or profits.
These restrictions sit alongside an existing, broader U.S. prohibition on investors and other non-lawyers owning direct stakes in law firms or sharing in attorney fees.
The legislation is aimed largely at law firm management services organisations, structures that allow firms to draw in outside capital by separating non-legal, back-office functions such as human resources or marketing into a distinct entity that outside investors own or partly own.
The law does not prohibit these organisations outright but could constrain how they operate within Illinois. It further limits the ability of Illinois lawyers to share fees with out-of-state "alternative business structures," of the kind permitted in Arizona, unless the Illinois lawyer is licensed where that structure is approved and the fees relate to work performed there.
The statute applies only to lawyers and firms generating less than $300 million in annual revenue, or those that have derived more than 50% of their revenue from contingency fees over the past three years.
Illinois State Senator Michael Hastings, the bill's chief Senate sponsor, characterised the law as ensuring clients receive loyalty from their attorneys rather than from external capital providers focused on returns. A spokesperson for Pritzker did not immediately respond to a request for comment on the signing.
The legislation was supported by the Illinois Trial Lawyers Association, Illinois Defense Counsel and the Illinois State Bar Association, which describes itself as the state's largest bar group with roughly 30,000 members. It was opposed by the Illinois Venture Capital Association and the International Legal Finance Association.
Trisha Rich, a partner at Holland & Knight who advises on management-services-organisation transactions, said the law intrudes on the Illinois Supreme Court's constitutional authority over the regulation of lawyers and creates uncertainty for Illinois lawyers, firms and the businesses that support them. Rich said she and colleagues are evaluating a potential constitutional challenge, though no such challenge has yet been confirmed as filed.
Colorado enacted its own legislation targeting management-services-organisation and alternative-business-structure arrangements in June, while California is considering comparable legislation.
Compliance under the new law turns on annual revenue and contingency-fee-share calculations to determine whether the statute applies, requiring management-services arrangements and interstate fee-sharing terms tied to out-of-state alternative business structures to be reviewed for continued conformity with the restrictions.
