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Jacoby & Meyers, LLP v. Presiding Justices of First, Second, Third & Fourth Dep'ts

United States District Court, S.D. New York

July 15, 2015


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For Plaintiffs: Todd S. Garber, D. Greg Blankinship, Jeremiah Frei-Pearson, FINKELSTEIN, BLANKINSHIP, FREI-PEARSON & GARBER; David J. Meiselman, MEISELMAN, PACKMAN, NEALON, SCIALABBA & BAKER.

For Defendants: Daniel A. Schulze, Special Litigation Counsel, Michael J. Siudzinski, Assistant Attorney General, ERIC T. SCHNEIDERMAN, ATTORNEY GENERAL OF THE STATE OF NEW YORK.

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Lewis A. Kaplan, United States District Judge.

This putative class action challenges--on First and Fourteenth Amendment and dormant Commerce Clause grounds--the constitutionality of several New York laws and regulations that, like those of all or most other states, prohibit non-lawyer equity ownership in law firms. The matter, which the Court previously dismissed for lack of standing, is on remand from the Court of Appeals and is before the Court on a motion to dismiss the third amended complaint (" TAC" ). The Court concludes that (1) it is constrained by the mandate rule to hold that the plaintiffs have standing and that their dispute is justiciable, but (2) the plaintiffs' constitutional challenges are entirely without merit.


New York Rule of Professional Conduct 5.4

Rule 5.4 of the New York Rules of Professional Conduct[1] (" New York Rule 5.4" ) and comparable provisions in effect across all or most of the country provide in substance that " [l]awyers in the United States are not now permitted to obtain equity investments in their practices from non-lawyers, which precludes them from, among other things, selling stock in their practices to the public." [2] It has its most recent origins in Rule 5.4 of the American Bar Association's Model Rules of Professional Conduct, which was adopted in 1983 and which, among other things, prohibits a lawyer from " practic[ing] with or in the form of a professional corporation or association authorized to practice law for a profit if . . . a nonlawyer owns any interest therein." [3] In the intervening years, nearly every state, including New York, has adopted Model Rule 5.4(d) or a variant thereof.[4]

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Prior Proceedings

The Complaint and the Amended Complaint

This action originally was filed on May 18, 2011 by Jacoby & Meyers Law Offices, LLP.[5] At a November 2011 hearing on defendants' motion to dismiss the complaint for lack of subject matter jurisdiction and for failure to state a claim, however, it became clear that there in fact was no such entity.[6] In part to cure that problem, and in part to respond to the Court's concerns about justiciability, the plaintiff moved orally for leave to amend its complaint--a request the Court granted on the record.[7]

On November 23, 2011, Jacoby & Meyers, LLP (" J& M" ) and Jacoby & Meyers USA, LLC (" J& M LLC" )--a limited liability company formed by J& M, allegedly to receive non-lawyer equity investment and to conduct J& M's practice following a proposed transfer to it of J& M's assets--filed an amended complaint (" AC" ) which did not vary from the original in any respect that remains material.[8] The AC, like the original complaint, named as defendants the presiding justices of the four appellate divisions of the New York Supreme Court, and sought principally a declaration that New York Rule 5.4 violated the First and Fourteenth Amendments and the dormant Commerce Clause.[9]

This Court's Prior Decision

Defendants moved to dismiss the AC, arguing, among other things, that the plaintiffs lacked standing, that their claims were unripe, and, alternatively, that the Court should abstain. At the heart of defendants' motion was an assertion that provisions of New York law independent of New York Rule 5.4 would preclude plaintiffs from accepting non-lawyer equity investors even if the Rule were deemed unconstitutional. In consequence, defendants argued, plaintiffs lacked standing because " their injury can neither be traced to the Rule, nor remedied by striking it down." [10]

At oral argument, the Court advised plaintiffs of its preliminary view that their failure to challenge any of the other provisions of New York law said by defendants to prohibit plaintiffs from accepting non-lawyer equity investment could result in dismissal for lack of standing.[11] Nevertheless, plaintiffs expressly confirmed that they were challenging only New York Rule 5.4, though they did dispute whether the other New York laws relied upon by the defendants applied, arguing that those laws " by necessity . . . would fall" if this Court issued a decision declaring New

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York Rule 5.4 unconstitutional.[12]

The Court began its analysis by examining state statutes (other than New York Rule 5.4) claimed by the defendants to foreclose non-lawyer equity investment in law firms. It held that Section 495 of the New York Judiciary Law and Section 121-1500 of the New York Partnership Law foreclosed J& M LLC and J& M, respectively, from accepting equity investment from non-lawyers.[13] Accordingly, the Court concluded that plaintiffs had not sufficiently alleged that New York Rule 5.4 caused their alleged injuries or that a decision invalidating the Rule would redress any such injury.[14] It therefore dismissed the AC for lack of subject matter jurisdiction.[15]

The Appeal

On appeal, plaintiffs asserted that this Court's standing determination was erroneous, arguing in a conclusory fashion, that " [w]here, as here, the plaintiff itself is the subject of the government action (or inaction) at issue, 'there is ordinarily little question that the action or inaction has caused [the plaintiff] injury, and that a judgment preventing or requiring the action will redress it.'" [16] Plaintiffs' appellate briefs for the most part did not even address the question whether their failure to challenge the constitutionality of state laws distinct from--but with the same practical effect as--New York Rule 5.4, deprived them of standing to challenge the Rule for the reasons provided by this Court in its opinion granting defendants' motion to dismiss the AC. The lone exception was a terse statement in plaintiffs' reply brief that assumed--as plaintiffs had argued unsuccessfully before this Court--that a ruling striking down New York Rule 5.4 necessarily would invalidate the other relevant state laws and thus would redress their alleged injury.[17]

At oral argument before the Court of Appeals, plaintiffs confirmed that they " had declined to challenge the other provisions of New York state law out of concern that the district court . . . would [have] abstain[ed] from deciding the case pursuant

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to" Pullman.[18] But after defendants argued that " alternative provisions of New York law unambiguously prohibit non-lawyer investment in law firms," plaintiffs voiced no objection to a remand " so that [they] could amend [their] complaint to challenge the other provisions of New York law as well." [19] Ultimately, the Court of Appeals vacated this Court's judgment without explicitly discussing standing, remanded the case with instructions to grant plaintiffs leave to amend their complaint, and said:

" Because the district court and appellees agree that Judiciary Law § 495 and LLC Law § 201, as authoritatively interpreted by the state courts, unambiguously prohibit non-lawyer investment in law firms, Pullman abstention is unnecessary, and the district court can proceed to adjudicate the parties' dispute as to whether those statutes, and Rule 5.4, are constitutional." [20]

Proceedings on Remand -- the Second and Third Amended Complaints

On June 21, 2013, seven months after the Second Circuit's remand, J& M and J& M LLC filed a second amended complaint (" SAC" ) challenging, in addition to New York Rule 5.4 and consistent with the Second Circuit's suggestion, more than a dozen state laws that allegedly prohibited non-lawyer equity investment in law firms.[21] Defendants again moved to dismiss. During briefing on that motion, however, it became clear that J& M--nearly three weeks after defendants filed their motion but 10 days before J& M filed its opposition--had organized a new entity, Jacoby & Meyers USA II PLLC (" J& M PLLC" ), presumably on the theory that it (unlike J& M LLC) would not run afoul of Section 201 of the LLC Law or Section 495 of the Judiciary Law, both of which prohibit limited liability companies from practicing law regardless of who their investors are.[22] J& M LLC soon merged with and into J& M PLLC.[23] Thus, one of the two plaintiffs in the case ceased to exist. Moreover, plaintiffs' opposition to defendants' motion to dismiss relied heavily on claims that appeared to be asserted by J& M PLLC, which was not a party to the action. Accordingly, the Court (1) ...

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