california ab 931: four-year freeze on alternative business structures

california assembly bill 931, signed into law by governor gavin newsom on october 10, 2025, represents a significant regulatory retrenchment in the national movement toward alternative business structures (abs) for law firms. the law imposes a four-year freeze on california-licensed attorneys’ ability to share fees with out-of-state firms featuring non-lawyer ownership, while explicitly preserving pathways for properly structured management service organizations (msos).

overview

effective dates:

• law takes effect: january 1, 2026
• automatic sunset (expiration): january 1, 2030
• duration: four years

key prohibition: california-licensed attorneys may not share legal fees with firms featuring non-lawyer owners or managers, including:

• accepting referral fees from non-lawyer entities
• sharing contingency fees with “out-of-state alternative business structures”
• working with abs firms from arizona, utah, puerto rico, and washington d.c.

penalties:

• state bar discipline
• statutory damages: $10,000 per violation or three times actual damages, whichever is greater

[source: holland & knight, california legislature ab 931]

legislative history

• february 2025: assemblymember ash kalra (d-san jose) introduces ab 931
• april 2025: unanimously passed by california assembly
• summer 2025: passed senate judiciary committee
• october 10, 2025: signed into law by governor newsom
• january 1, 2026: law takes effect
• january 1, 2030: law automatically sunsets (expires)

[source: holland & knight]

why ab 931 was enacted

response to arizona’s abs expansion

california enacted ab 931 in direct response to arizona’s 2020 decision to completely remove its ban on non-lawyer ownership. arizona has approved over 136 alternative business structure entities as of april 2025, including:

• private equity-backed law firms
• big four accounting firms like kpmg entering legal services
• technology companies offering legal services

[source: medium - california ab931 at the crossroads]

blocking kpmg law expansion

ab 931 was introduced shortly before kpmg received approval to launch a law firm under arizona’s abs program in february 2025, making it the first of the big four accounting firms to enter the u.s. legal market this way. kpmg’s plans to use staffing agencies and co-counseling models to serve clients in california would be curtailed by ab 931.

kpmg declined to comment on whether the california law will impact its expansion plans.

[source: bloomberg law - kpmg law firm faces california blockade, legal.io - california bill threatens kpmg’s expansion]

primary sponsor’s rationale

nancy drabble, ceo of consumer attorneys of california (caoc), the organization spearheading the bill, stated:

“we’ve seen an attempt by some of the abs’s to come in through the back door over the border to california.”

drabble argued that although abs reforms are marketed as promoting access to justice for low-income people, they actually “provide opportunities for private equity and large economic entities to own practices,” which is not a policy goal california should pursue.

[source: legal.io, ccb journal]

consumer protection focus

beyond abs restrictions, ab 931 includes provisions to regulate litigation financing companies providing cash advances to plaintiffs:

• five-day cancellation windows for client-attorney contracts
• transparency requirements in contracts
• elimination of hidden fees and compound interest

[source: 24-7 press release]

what ab 931 prohibits

definition of alternative business structure

ab 931 defines an abs as “any entity [excluding nonprofit organizations] that provides legal services while allowing nonattorney ownership or decisionmaking authority.”

[source: holland & knight]

fee-sharing ban

the law explicitly bars california-licensed attorneys from:

• sharing fees with firms featuring non-lawyer owners or managers
• accepting referral fees from non-lawyer entities
• sharing contingency fees with out-of-state alternative business structures

this prohibition creates a barrier between california’s legal market and jurisdictions permitting abs models, particularly arizona, utah, puerto rico, and washington d.c.

[source: bloomberg law]

jurisdictions affected

the law makes it harder for litigation firms in these abs-permitting jurisdictions to partner with california lawyers:

• arizona: eliminated rule 5.4 in 2021, 136+ abs entities approved
• utah: regulatory sandbox approach
• puerto rico: allows up to 49% non-lawyer ownership (2025)
• washington d.c.: permits limited non-lawyer ownership since 1991

[source: bloomberg law]

exemptions and workarounds

management service organizations (msos) explicitly permitted

ab 931 does not ban properly structured management service organizations from operating in california. the law provides an explicit exemption for contracts that meet all three criteria:

1. contain a flat fee structure for services rendered
2. do not pay for referrals or lead generation
3. do not scale payment based on the amount recovered

a properly structured and implemented mso meeting these requirements should be unaffected by ab 931.

[source: holland & knight, mondaq]

licensed attorney exception

ab 931 provides an exception when:

1. the attorney is also licensed in the state where the abs is approved
2. the fees are compensation for legal services provided in that state
3. the law of that state is controlling pursuant to rule 8.5 of the california rules of professional conduct

[source: holland & knight]

grandfathering of existing contracts

contracts entered into before january 1, 2026, remain permissible under the law, providing a limited window for existing abs arrangements.

[source: holland & knight]

industry reaction

opposition from innovation advocates

anne andrews (mass tort lawyer in newport beach) helped build a coalition to oppose the legislation:

“it’s being pushed by a small minority of private attorneys at firms that want to stifle competition from smaller firms that can only compete with innovative and diverse funding structures.”

broader criticism:

• opponents warn the fee-sharing prohibition could isolate california, reduce competition, and hinder access to affordable legal services
• groups representing minority-owned businesses urged lawmakers to amend the bill, arguing it would limit their ability to secure cost-effective legal representation
• critics argue the bill restricts innovation, hampers competition, and limits technological advancements that could expand access

[source: medium, ccb journal]

legal industry concerns

boris ziser (partner at schulte roth & zabel, who has helped establish around half-a-dozen abs in arizona):

“there is always a risk that when one state, particularly a big state, passes a law, other states will look at it. that’s one of the unfortunate byproducts of a bad law.”

[source: ccb journal]

support from consumer attorneys

the consumer attorneys of california (caoc):

• represents around 4,000 plaintiff-side lawyers
• spent nearly $350,000 lobbying on ab 931 and related issues in q1 2025
• argues the bill protects consumers from predatory financing and maintains traditional ethical boundaries

[source: legal.io]

impact on california’s legal market

creates regulatory divergence

while arizona, utah, and other jurisdictions move toward liberalization, california moves in the opposite direction, creating a regulatory patchwork across the united states. california’s approach may influence other large states considering abs reforms.

preserves mso pathway

despite the abs freeze, california’s explicit preservation of the mso structure provides a viable path for law firms seeking:

• operational flexibility through outsourced administrative services
• private equity investment in non-legal business functions
• scale and efficiency without violating rule 5.4

this dual approach—blocking abs while permitting msos—reflects california’s attempt to balance innovation with traditional professional boundaries.

[source: holland & knight]

four-year evaluation period

the sunset provision suggests the legislature recognizes the evolving nature of legal service delivery. the four-year window (2026-2030) allows california to:

• observe outcomes in arizona, utah, and other abs jurisdictions
• assess whether predicted harms materialize
• reconsider the policy based on empirical evidence
• decide whether to renew, modify, or let the restrictions expire

regulatory philosophy

ab 931 represents regulatory retrenchment in california’s approach to legal services innovation. the law signals california’s skepticism of experimental legal service models and prioritizes traditional professional boundaries over market-driven reform.

however, the law’s sunset provision and permissive attitude toward msos leave viable paths for firms seeking operational flexibility, suggesting california’s position may evolve based on evidence from other jurisdictions.

[source: holland & knight]

key takeaways

1. four-year freeze: ab 931 restricts california lawyers from sharing fees with abs firms from january 1, 2026 through january 1, 2030

2. mso exemption: properly structured msos with flat-fee arrangements remain explicitly permitted

3. significant penalties: $10,000 per violation or 3x actual damages, plus state bar discipline

4. blocks big four expansion: directly targets kpmg law and other accounting firm legal services

5. regulatory divergence: creates conflict with arizona, utah, puerto rico, and d.c. abs programs

6. temporary measure: sunset provision suggests potential policy evolution based on evidence

7. national implications: california’s approach may influence other states considering abs reforms

related topics

• alternative business structures - overview of abs programs nationwide
• management service organizations - mso structure preserved under ab 931
• arizona abs program - the program california seeks to block

references

1. california legislature - ab 931 full text
2. holland & knight - regulatory retrenchment in california
3. bloomberg law - california bans contingent fee sharing
4. bloomberg law - kpmg law firm faces california blockade
5. ccb journal - california targets private equity and big four
6. medium - california ab931 at crossroads of innovation
7. legal.io - california bill threatens kpmg expansion
8. mondaq - regulatory retrenchment in california