California Takes Aim at Investor Influence in Law Firms, but More Transparency Is Needed

A new California law is drawing attention to a growing and largely unregulated corner of the legal industry: outside investment in law firms. On September 20, Governor Gavin Newsom signed AB 2305 into law, barring private equity firms, hedge funds, and litigation funders from directing or influencing the law firms they back. The bill still allows non-recourse litigation finance "as long as funders do not interfere in the practice of law."

The law comes as investors are increasingly routing capital into management services organizations, or MSOs, vehicles that allow outside ownership of a law firm's non-legal back-office operations including IT, accounting, and marketing. As Bloomberg Law reported, the "vast majority" of investors are now choosing MSOs over other investment structures. Industry advocates have been quick to cast this as a matter of picking a more responsible option, arguing that the alternative fee-structure model is safer for the public because it comes with built-in oversight that the MSO model lacks. But that framing misses the point. The real issue isn't which unregulated investment vehicle is marginally less unregulated, it's that under either structure, consumers still have no way of knowing who is financing their case or how that outside money is shaping the outcome.

California's new law is a step in the right direction, but it does not require disclosure. Consumers still have no way of knowing when outside investors are influencing their cases or profiting from their settlements. Policymakers across the country should go further and mandate full transparency. Consumers deserve to know who is really behind their lawsuit.