David Kluft asks: “Can an IPO underwriter’s counsel be adverse to the stock issuer in a subsequent patent case?” —

• “Company A, a sleep apnea device maker, retained a financial services company (the Underwriter) to launch its initial public offering. The Underwriter was represented by a law firm (the Firm) [Latham], which reviewed Company A’s financial and product information as part of the due diligence.”
• “The Firm withdrew after coming to the conclusion that Company’s A’s product infringed Company B’s patents. The Firm later filed a patent infringement suit on behalf of Company B against Company A. Company A asked the Firm to withdraw, but it refused and instead implemented an ‘ethical screen.’”
• “Company A moved to disqualify the Firm. The Firm argued that it could not find ‘a single case where a court has disqualified underwriter’s counsel for being adverse to the stock issuer in a subsequent case.’”
• “However, the Court agreed that Firm A’s continued involvement in the case ‘would appear deeply improper’ given its ‘repeated and consistent’ access to Company A’s internal documents while representing the accounting firm. The Court further stated that even if the ethical wall worked and the litigation team received no confidential information, the ‘appearance of impropriety extends to the … litigation team here.’”
• “The Court found that although the Firm and Company A ‘never had an attorney-client relationship … this case is one of the likely few where the appearance of impropriety of a continued representation is so striking that disqualification must follow.’”
• Order: here.

“Private Equity in Law Firms: Trend, Impact, and Legality” —

• “Private equity (PE) has been circling the legal sector for years—but in the last 24 months, the pace has quickened, powered by regulatory openings in the United States (notably Arizona and Utah), a decade-plus of experience in the U.K. and Australia, and mounting investor interest in professional services cash flows. Yet, the U.S. landscape remains a patchwork. Let’s look at the trend lines, how PE is getting access, and the legality in key jurisdictions.”
• “PE’s interest in law firms mirrors its push into other professional services (accounting, physician practice management, engineering): predictable cash flows, high margins, low capex, and a highly fragmented market ripe for rollups and platform plays. After years of structural barriers, dealmaking efforts accelerated over the last 12 months, aided by creative structures and a slowly improving regulatory environment.”
• “Model Rule 5.4, widely adopted by states, restricts fee-sharing and nonlawyer ownership. The American Bar Association reaffirmed that the ban reflects the profession’s core values in Resolution 402 (Aug. 2022), even while it encourages evidence-based regulatory innovation in separate policy statements. That said, the door has opened in a few places: Arizona abolished its version of Rule 5.4 in 2021 and created a licensing regime for alternative business structures (ABS) entities, and Utah launched a supreme-court–supervised ‘regulatory sandbox’ in 2020, extended through 2027.”
• “Managed services organizations (MSOs) and contractual workarounds. In non-ABS states, PE gravitates to MSO structures: Investors own the business services affiliate—marketing, HR, tech, intake—while the professional entity remains lawyer-owned. Properly constructed, MSOs avoid impermissible fee-sharing and preserve lawyers’ independent judgment, but they must be engineered carefully to withstand scrutiny under Rule 5.4 and UPL statutes.”
• “Adjacent bets—litigation finance and alternative legal service providers (ALSPs). Some PE funds back litigation financiers or ALSPs that contract with firms, creating capital adjacency without owning the law firm itself. As a policy matter, critics argue this still raises independence and conflict concerns if investors push for early settlement or aggressive portfolio economics; proponents counter that funding increases access to justice. The ethics literature has long flagged investments that intertwine with client matters as conflict-prone.”
• “The ABA House’s 2022 Resolution 402 distilled a long-standing concern: Outside owners may pressure firms to prioritize returns over professional duties, risking client confidentiality, conflicts, and independence. That resolution reaffirmed feesharing limits as core to the profession, even while keeping the door open to measured experimentation.”
• “ABS regimes commonly require designated compliance officers, suitability checks on nonlawyer owners, and firmwide undertakings to abide by professional rules. Arizona’s ABS framework mandates a compliance lawyer and disclosures for ‘authorized persons,’ while D.C.’s long-standing Rule 5.4 variant allows limited nonlawyer partners who provide professional services and agree to be bound by ethics rules—a narrow exception that has functioned without headlines for years.”
• “Whether PE invests directly or via MSOs, firms must enhance conflicts-checking to capture investor-level affiliations, portfolio company ties, and data-sharing risks. Ethics authorities have long warned that lawyers’ financial entanglements with clients or third parties heighten malpractice and fiduciary risks—lessons that carry over to investor relationships.”
• “Model Rule 5.4 baseline (most states). No nonlawyer ownership, no fee-sharing with nonlawyers (with narrow exceptions such as employee profit-sharing and payments to a deceased lawyer’s estate). Outside investors cannot own law firms or control legal practice.”
• “Critics argue that opening equity to nonlawyers risks subordinating the lawyer’s role as officer of the court to investor imperatives. The ABA’s 2022 resolution reanchors this value proposition, warning that incremental erosion of Rule 5.4 could ‘destroy our profession’ to the detriment of clients if not carefully checked.”
• “Advocates of targeted reform, including academics and APRL, contend that ethical independence can be preserved through governance, while capital is essential to scale consumer-facing innovation and improve access to justice—especially given the U.S.’s poor rankings on affordability of civil legal services. Their proposals seek informed consent-based fee-sharing and regulated ownership with enforceable independence safeguards.”

“States Consider Bans on Private Equity Law-Firm Acquisitions” —

• “Private equity has barely begun investing in law firms, but the backlash has already started. Lawmakers in three states are considering bills to make it harder for buyout firms and other corporate investors to buy law practices, a burgeoning investment strategy that was long off limits for private equity.”
• “In California and Illinois, legislators in April advanced bills that would cement prohibitions on nonlawyers’ owning or controlling legal practices. In Colorado, a bipartisan group of lawmakers introduced a similar bill last week, which on Wednesday passed the House Judiciary Committee.””California Assembly Bill 2305, which the state’s lower chamber approved on April 6, will ‘close the loopholes’ corporate investors use to influence legal practices, said Assemblymember Ash Kalra, who introduced the bill.”
• “Kalra, a Democrat who represents San Jose and neighboring areas, fears that private-equity money may reshape the legal profession like it has the medical sector and other industries. He thinks the bill has the support it needs to pass California’s state Senate by the Aug. 31 end of the legislative session. ‘We have seen how private equity has operated in many different industries to extract profit and not reinvest in the long-term health of the industry,’ Kalra said. “
• “His bill will ‘ensure that lawyers make decisions based on their clients’ best interests, not the best interests of their investors,’ he said”
• “But while it remains forbidden for private equity to directly own law firms in almost all states, firms have developed workarounds to control practices without violating the rules. Private-equity investors have realized that the same structure that allows them to invest in medical practices—the management-services organization, or MSO—can be repurposed to invest in legal practices.”
• “The interest is on both sides, as more lawyers reconsider their commitment to professional autonomy. The prospect of artificial-intelligence tools’ reshaping the profession has convinced some firms to seek outside capital to invest in technology and operations.”
  Private-equity deal activity is increasing, though mostly for smaller consumer-facing law firms or AI-focused startups rather than brand-name corporate firms. Blackstone, for instance, invested in AI law firm Norm Ai. In January, fledgling private-equity firm Uplift Investors acquired Louisiana personal-injury firm Dudley DeBosier Injury Lawyers.”
• “Activity is continually increasing, though few deals are made public, said Trisha Rich, a partner at law firm Holland & Knight who helps structure MSO investments. Rich says she has completed 15 MSO transactions in the past six months and is working on about a hundred more.”
• “But just as private-equity investment is coming under scrutiny in the healthcare sector, more critics are asking whether this wave of private equity money will improve the legal profession.”
• “‘I don’t want private-equity investment in law to have the same consequences we’re seeing in the healthcare industry,’ said Colorado State Sen. Lindsey Daugherty, a Democrat who co-sponsored the bill in the Senate. Daugherty, who represents suburbs northwest of Denver, says she is already seeing evidence of more out-of-state corporate investment in Colorado’s legal field.”
• “The California bill, for instance, has the backing of the Consumer Attorneys of California, a lobby group. Saveena Takhar, senior legislative counsel for the Consumer Attorneys of California and a lobbyist for the bill, said she is not certain how much private-equity money is flowing into California’s legal field, but there are some indications—an increase in attorney advertising, for instance—that it is significant.”
• “This raises the possibility that undisclosed financial interests could be compromising the attorney-client relationship, she said. ‘Part of the problem is how opaque this all is,’ Takhar said.”
• “In Colorado, a bipartisan group of legislators on April 21 introduced their own bill, which among other changes would prohibit law firms from sharing revenue with nonlawyers. The bill has until May 13 to be approved by both chambers.”
• “The Illinois General Assembly in April passed a similar bill to bar private-equity interference in legal practices, and the measure is now under consideration in the Senate. “