California Governor Gavin Newsom signed Assembly Bill 2305 on Sunday, September 20, 2026, prohibiting business entities from influencing the professional judgment of licensed attorneys. The new law joins California with Illinois and Colorado in restricting the role of outside investors in the legal industry.
The legislation addresses a trend where law firms spin off non-legal operations, such as human resources or marketing, into management services organizations (MSOs) that can be owned by outside investors. While non-lawyers are generally barred from owning direct stakes in U.S. law firms, these MSO structures have allowed outside capital to flow into the legal market.
Under the new law, business entities are barred from attempting to influence a lawyer's decisions regarding substantive litigation, including settlement choices and the selection of clients or cases. The statute applies to any entity that raises or manages capital involved in litigation practice, regardless of its legal structure. Violators, including attorneys who receive the capital, face statutory damages of $10,000 per violation or three times the damages suffered by the client.
Assembly member Ash Kalra, the bill's author, stated that the person making decisions about a case should be the lawyer, not a private equity entity. The trade group Consumer Attorneys of California supported the bill, stating Monday that California is setting a national standard. Conversely, Trisha Rich, a partner at Holland & Knight, stated the law does not change existing practice because professional rules already protect legal judgment. She noted that similar laws in Illinois and Colorado have not affected deal-making or resulted in enforcement actions.
This legislation affects private equity firms, hedge funds, and corporate investors seeking to invest in California's legal market, as well as the law firms and attorneys who utilize management services organizations. By setting statutory damages at $10,000 per violation or triple the client's losses, the law establishes a specific financial liability for business entities that interfere with legal decision-making. Licensed attorneys in California are also affected, as they can be held liable for statutory damages if they are recipients of outside capital that results in a violation of these standards.
For a person involved in a lawsuit, the law is intended to ensure that their attorney’s advice on whether to settle a case or proceed to trial is not influenced by the profit motives of an outside investment firm. Clients may notice more explicit disclosures or contractual protections regarding the independence of their legal counsel. California is one of the largest legal markets in the nation, and one industry expert reported closing more than 30 management services organization deals in the legal sector this year alone.
The law sets a precedent for how states regulate the intersection of private capital and the practice of law. It builds on previous California legislation signed in 2025 that restricted fee-sharing with out-of-state "alternative business structures." While the law was signed on September 20, 2026, and the governor had a deadline of September 30, 2026, to act, the sources did not specify the exact date the restrictions become enforceable for existing or future management contracts.