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California Gov. Gavin Newsom signed Assembly Bill (AB) 931 on Oct. 10, 2025, largely freezing California lawyers' ability to experiment with and accommodate the development of burgeoning Alternative Business Structures (ABS) for the next four years.1 Though jurisdictions such as Arizona, Puerto Rico and Utah have adopted innovative programs to permit limited non-lawyer ownership of law firms, the new law signals that California is skeptical and poised to move in the opposite direction.
AB 931 defines an ABS as "any entity [excluding nonprofit organizations] that provides legal services while allowing nonattorney ownership or decisionmaking authority." Although ABS law firms are already prohibited from operating directly in California, as of Jan. 1, 2026, California attorneys will also be prohibited from sharing legal fees with an out-of-state ABS-associated attorney unless they meet the following narrow criteria: 1) they must be licensed in the state where the ABS is located, 2) they must perform legal services in the state where the ABS-associated fees are shared and 3) the fee-sharing agreement cannot be contingency-based, but rather must outline "a specific dollar amount for services rendered." Most important, fee sharing with an ABS is not permitted for referral fees or the purchasing of a lead – a common practice for personal injury law firms. That said, a court may approve of a fee-sharing arrangement upon attorney request if the court determines that such arrangement is fair, reasonable and necessary for the administration of justice.
The punishments for non-compliance are severe. The statute provides a $10,000 fine per violation or trebled actual damages, as well as allowing for injunctive relief and the reimbursement of attorneys' fees. The monetary consequences are also coupled with mandatory discipline by the California State Bar, which promises a chilling effect on ABS-associated practice.
However, AB 931 does not appear to ban properly structured management services organizations (MSO) from operating in California given that in an MSO structure, a law firm must remain owned and operated by licensed lawyers. (See Holland & Knight's previous article, "Restructuring Law Firms Through Management Service Organizations," July 10, 2025). In particular, AB 931 provides an explicit exemption for contracts that 1) contain a flat fee structure for the services rendered, 2) do not pay for referrals or lead generations and 3) do not scale payment based on the amount recovered. Thus, a properly structured and implemented MSO should be unaffected by the passage of AB 931, even if firms operating under an ABS are effectively neutered.
Takeaways and Considerations
AB 931 represents a significant regulatory retrenchment in California's approach to legal services innovation. Although AB 931 makes California's climate toxic for ABS firms, the restrictions imposed by the law are temporary, operative only from Jan. 1, 2026, to Jan. 1, 2030. This means that contracts entered into before that window (however small) are still permissible under the law.
For the time being, ABS firms operating in multiple jurisdictions should carefully review contract structures to ensure that they do not accidentally run afoul of California's broad strictures on the practice of law. Businesses and law firms must act promptly to ensure compliance and to explore permissible alternatives for operational efficiency and growth.
At a minimum, ABS firms should:
- review all existing and planned business structures and fee-sharing arrangements to ensure compliance with AB 931
- consider whether utilizing an MSO can achieve the same operational goals of an ABS during the pendency of AB 931's applicability
- seek court approval early for any fee-sharing arrangements that may otherwise fall afoul of the statute
In sum, AB 931 signals California's skepticism of the experimental frontier of legal service innovation. Instead, AB 931 prioritizes traditional professional boundaries over market-driven reform, including protection of lawyers and law firms themselves. Though the law imposes sweeping restrictions on ABS participation and fee-sharing arrangements, its sunset and seemingly permissive attitude toward MSOs leave a viable path for firms seeking operational flexibility. Ultimately, AB 931 underscores the tension between consumer-focused modernization and entrenched regulatory frameworks. In the mixed regulatory environment the legal profession now finds itself in, only one thing is certain: The profession will continue to see different jurisdictions act and react in the coming years.
Footnote
1. AB 931 (Accessed Sept. 25, 2025).
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