New California Law Prohibits Fee Sharing With Alternative Business Structures

California legislation effective as of January 1, 2026, prohibits California lawyers and law firms from directly or indirectly sharing legal fees with an out-of-state "Alternative Business Structure" (ABS). The new law applies to contracts entered into on or after January 1, 2026. An ABS is any entity other than a nonprofit that provides legal services while allowing ownership or decision making by nonlawyers under Cal. Bus. & Prof. Code § 6156(c). What counts as "decision making" by nonlawyers is not defined within the new law, nor does the new law explain "indirect" fee sharing. An early challenge to the law on constitutional grounds was dismissed after a detailed opinion denying a temporary restraining order.

While the national debate continues over ABS regulation, such entities are permissible in a few states when operated within regulatory guidelines. Pilot ABS programs are also available or under consideration in other states. Those supporting ABS adoption tout the potential to expand the availability of legal services and foster innovation and efficiency in the delivery of legal services including through the use of technology. California's new law continues the traditional limitations on legal services delivery, in an effort to protect against commercialization of the practice of law and to preserve consumer protection.

Under California's new law there are some exceptions. California lawyers who are also licensed in states where the ABS structure is approved may engage in fee sharing if the fees are compensation for services in that state and the law of that state is controlling under Rule 8.5 of the California Rules of Professional Conduct (CRPC). Rule 8.5 provides that California lawyers are subject to California disciplinary authority regardless of where their conduct occurs and provides guidance regarding choice of law as to the governing rules to be applied. Where a matter is before a tribunal, the rules of the state in which it sits apply unless those rules provide otherwise. For any other conduct, the rules where the lawyer's conduct occurred will govern, or the rules of the jurisdiction in which the predominant effect of the conduct occurs will govern, which provides a safe harbor against discipline.

The new law applies to contingency fee agreements, primarily targeting personal injury and mass tort firms partnering with out-of-state entities. It imposes mandatory fines of $10,000 per violation or three times the consumer's actual damages, whichever is greater, along with attorneys' fees and costs. Cal. Bus. & Prof. Code § 6156(b). Violations may also result in discipline by the California State Bar.

The CRPC permit fee-sharing among lawyers who are not in the same law firm, with client consent and a written agreement between the lawyers, after full disclosure of the fee-sharing arrangement at the time the fee-sharing arrangement is made. Cal. Rule of Prof. Conduct 1.5.1. California lawyers are prohibited from directly or indirectly sharing legal fees with nonlawyers, with very limited exceptions. Cal. Rule of Prof. Conduct 5.4.

The policy underlying the California law protects legal representation against potential interference motivated by nonlawyers, including outside investors in ABS entities, who could be motivated by return on investment, rather than the clients' best interests.

There are several exemptions available:

1. Court-approved exceptions. Courts may order or approve exceptions that are fair, reasonable, and necessary for the administration of justice, including common benefit funds in coordinated, consolidated, or multidistrict litigation. Cal. Bus. & Prof. Code § 6156(d).
2. Flat fee arrangements. Flat fee structures that are not based on the amount recovered in a case are permitted, including agreements specifying a fixed dollar amount for services rendered, provided that payment is not contingent on recovery and is not tied to the referral of legal services Cal. Bus. & Prof. Code § 6156(e). These provisions would permit agreements with management services organizations, such as entities providing billing, human resources and IT consulting services to law firms, depending on how those agreements are structured.
3. Nonprofit entities. The statues also exclude certain nonprofit entities.

Lawyers engaged in fee sharing "directly or indirectly" should evaluate their fee-sharing practices for compliance with the new California law. Fee-sharing contracts should be reviewed for compliance, including arrangements with co-counsel.

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