US judge tosses lawsuit on law firm ownership ban

Thu Mar 8, 2012 6:58pm EST

* Rule prevents non-lawyers from investing in firms

* Potential investors included executives of ES Bancshares

* Judge said law firm had not been harmed by rule

By Leigh Jones

NEW YORK, March 8 (Reuters) - A Manhattan federal judge has thrown out a closely watched lawsuit challenging a rule that bans non-attorneys from investing in law firms.

Jacoby & Meyers, a well-known personal injury law firm, had challenged the constitutionality of the New York state ethics rule that prohibits non-lawyers from having a financial stake in firms.

Jacoby & Meyers said in court papers that several investors, including Anthony Costa, Philip Guarnieri and Michael Ostrow, had expressed an interest in investing "significant sums of money" in the firm. The men are directors of ES Bancshares Inc (ESBS.OB), a holding company for Empire State Bank, and Costa and Guarnieri are also co-chief executives, according to the company's website and regulatory filings.

But U.S. District Judge Lewis Kaplan on Thursday found that the firm lacked standing to bring the case because it had not proved it had been harmed by the rule.

"The ruling they seek would be a purely advisory declaration of the sort that is forbidden to federal courts," he wrote.

Jacoby & Meyers has filed two similar cases in New Jersey and Connecticut. The defendants in the cases are state judges who authorize attorney rules.

The issue of non-lawyer ownership has gained attention in the United States since the United Kingdom and Australia recently changed their rules to permit non-lawyer ownership.

Rules in New York and in every jurisdiction in the country except the District of Columbia prevent non-lawyers from having an ownership stake in law firms because of the concern that the profit motive will undermine the duty to the client, said Stephen Gillers, an ethics professor at New York University School of Law.

"The investors would have power over the lawyers and the investors, unlike the lawyers, are not governed by ethics rules," Gillers said.

Jeffrey Carton, an attorney representing Jacoby & Meyers, said his client plans to appeal Kaplan's decision.

"Jacoby & Meyers is looking forward to changing the status quo," Carton said.

Representing the presiding justices named as defendants is New York State Assistant Attorney General Daniel A Schulze. A spokeswoman for the office declined comment.

The parent holding company of ES Bancshares did not immediately return a call after business hours seeking comment.

Kaplan's dismissal on Thursday came days after a federal judge rebuffed a bid to dismiss the New Jersey case brought by Jacoby & Meyers. The judge in the Connecticut case has not ruled on a pending motion to dismiss.

Non-lawyer ownership of law firms is under consideration by the American Bar Association and the New York Bar State Bar Association. On Feb. 2, NYSBA President Vincent Doyle announced that the association was forming a task force to study whether non-lawyers should be allowed to own equity in firms.

The case is Jacoby & Meyers v. Presiding Justice, U.S. District Court, Southern District of New York, No. 11-CV-3387.

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