Highlights
- Colorado Gov. Jared Polis recently signed House Bill (HB) 26-1421, which prohibits alternative business structures in the state, significantly restricts management services organization (MSO) arrangements and creates new private enforcement mechanisms with broad extraterritorial reach.
- The act expands enforcement beyond attorney discipline by allowing clients and certain competing law firms to bring private lawsuits seeking remedies that include injunctive relief, disgorgement and the voiding of contracts.
- Firms with any connection to Colorado should review ownership structures, MSO compensation arrangements and existing agreements before the law takes effect on August 12, 2026.
Colorado Gov. Jared Polis on June 4, 2026, signed House Bill (HB) 26-1421, the Colorado Legal Practice Integrity and Fee-sharing Prohibition Act. When the act takes effect on August 12, 2026, it will effectively prohibit alternative business structure (ABS) models and impose limitations on the types of fees management services organizations (MSOs) can charge in the state for the next three years. The act creates new enforcement mechanisms with significant consequences for noncompliance and has extraterritorial reach. Though some states, including Arizona and Utah, have supported innovative new law firm ownership and management structures, Colorado joins the ranks of states such as Illinois, California and South Carolina that have moved in the opposite direction.
What Does HB26-1421 Do?
HB26-1421 effectively bars ABS entities from operating in Colorado. It defines an ABS broadly as an entity that economically participates in, holds itself out as providing or shares legal fees generated from legal services, whether directly or indirectly. The act further defines "economically participates in" in broad terms, with language targeting private equity.
Although the act does not prohibit MSOs outright, it limits the types of fees an MSO can charge. MSOs may not receive compensation tied to law firm profits or calculated as a percentage of profits, recoveries or settlements. Luckily for MSO investors, this change will not substantially change business decisions. MSO structures compensated through flat fees or hourly payments not based on settlements, profits or recoveries remain permissible. Because such fee structures tend to be the default for MSOs, this change should not meaningfully affect operations. (See Holland & Knight's previous alert, "Colorado Introduces New Legislation to Attempt Regulation of ABSs and MSO Structures," April 23, 2026.)
Among the most significant aspects of HB26-1421 is its extraterritorial reach. The act explicitly prevents out-of-state entities from circumventing its prohibitions and applies to ABS structures wherever organized or denominated. It further defines "legal services" as those arising, in whole or in part, in Colorado. By extending beyond Colorado's borders in this manner, the act distinguishes itself from similar laws enacted in other jurisdictions.
The act's private enforcement mechanism is equally notable. Though Colorado Bar Association Rule 5.4 governs fee-sharing and nonlawyer ownership issues, with violators subject to attorney disciplinary proceedings, HB26-1421 expands enforcement beyond the disciplinary process. Clients may sue to recover fees paid in violation of the act. In addition, law firms that do substantial business, generate more than 10 percent of their revenue in Colorado, and suffer or may suffer economic injury from a noncompliant competitor can also bring suit. Available remedies include injunctive and declaratory relief, disgorgement of funds paid or received in violation of the act, and the voiding of contracts.
HB26-1421 carves out several exceptions, many of which were added during the act's revision process. The act protects in-house counsel arrangements under its definition of a "law firm" and exempts nonprofit organizations that provide or support legal services or access-to-justice services. Traditional litigation funding agreements are also permissible, as are salaries and benefits paid to nonlawyer employees for services rendered in the ordinary course of their employment.
Finally, in a notable revision since the bill's introduction, the act's duration was significantly shortened. Initially, HB26-1421 was set for review in 2032 but is now scheduled to be repealed on September 1, 2029, just three years after taking effect.
Takeaways and Considerations
HB26-1421 represents a significant shift in Colorado's approach to legal services innovation. Firms with ABS or MSO structures should promptly evaluate whether their activities have any connection to Colorado, however limited, and carefully review existing agreements, compensation structures and planned operations to ensure compliance before HB26-1421 takes effect. Importantly, the act makes clear that arrangements merely "characterized" as something other than an ABS will not avoid scrutiny; the act focuses on substance rather than form.
At a minimum, affected firms should:
- Review current and anticipated matters to determine whether the firm has any present or future connection to Colorado. Firms should evaluate existing contracts and any post-enactment renewals for compliance.
- For MSO arrangements, confirm that compensation does not depend on law firm profits, financial performance, recoveries or case outcomes. Firms should also ensure that nonlawyer MSO personnel do not exercise control over legal decision-making.
- For ABS entities, consider whether pivoting to an MSO structure can achieve similar operational objectives while complying with Colorado law.
Conclusion
HB26-1421 represents a setback for legal services innovation in Colorado. The act's prohibition of ABS structures and strict limitations on MSO arrangements signal continued regulatory skepticism toward innovative legal service models. With the August 12, 2026, effective date approaching, firms with any connection to or contact with Colorado should promptly assess and mitigate risks.
Despite these barriers, HB26-1421 largely codifies concepts already present in the Colorado Bar Association rules. A properly structured MSO will likely remain compliant.
At the same time, HB26-1421 remains vulnerable to legal challenges under state and federal constitutional principles. Whether such challenges emerge or succeed remains to be seen. All stakeholders should continue monitoring updates as questions regarding the act's interpretation, implementation and potential challenges begin to emerge.
For questions about these developments, please contact the authors or your Holland & Knight relationship attorney.
Holland & Knight Summer Associate Abigail Flynn contributed to this alert.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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