How a New California Law Could Transform Law Firm Growth and Investment Models

Assembly Bill 931 (AB 931) is a targeted new law in California that marks a notable shift in the state’s approach to regulating law firms and related legal services. For years, California maintained a cautious stance while other states, such as Arizona and Utah, experimented with reforms to law firm ownership and investment. AB 931 introduced a more structured, conditional framework that adjusted these rules without overturning them completely.

The bill’s primary mechanism is to prohibit certain financial arrangements while implicitly permitting others, thereby creating new avenues for outside investment and professional partnerships. This directly influences the potential for AB 931 law firm growth by allowing firms to enter into contracts with Management Services Organizations (MSOs) for capital, technology, and operational support under clear, non-contingency terms.

This change arrived amid broader industry discussions about alternative business structures (ABS), the regulation of third-party funding, and evolving fee-sharing ethics. This blog post examines what AB 931 actually does, from its key provisions and legislative history to its practical impact on how law firms structure themselves, attract investment, and navigate the new compliance landscape.

How AB 931 Changed California Law and Why It Matters Today

Assembly Bill 931 (AB 931) was a new California law that made targeted amendments, which were codified in the Business and Professions Code. Its three distinct sections address consumer legal funding, the regulation of Alternative Business Structures (ABS) and Management Services Organizations (MSOs), and litigation procedures.

For most law firms, the most significant changes are found in Section 2, governing ABS and MSOs. This represented a pivotal shift for California, which had previously positioned itself as a holdout against the trend of non-lawyer investment in law firms, led by states like Arizona and Utah. Following Senate hearings in July 2025, the final version of AB 931 pivoted from a stance of broad restriction to one of structured permission.

Specifically, Section 2 prohibits law firms from entering into contingency-fee-based financial arrangements with out-of-state ABS, a targeted restriction that, coupled with its five-year sunset clause, implicitly legitimizes non-contingency MSO partnerships. This allows firms to legally engage with MSOs for critical business support, such as technology, marketing, and back-office services, under flat-fee or subscription models.

To fully understand the implications of this change, it is necessary to examine the specific history of reform efforts in California and the key compromises that shaped the final text of AB 931.

Breaking Down the Key Changes Inside AB 931

The easiest way to understand AB 931 is to examine its three main parts, which cobble together distinct areas of law firm regulation. This accounts for the disparity in media coverage: some headlines emphasized the consumer protections in Sections 1 and 3, while for the legal industry, the most consequential changes are undeniably in Section 2. We broke down the context for each here:

Section 1: Business & Professions Code § 6255.1

This section addresses “consumer legal funding”: cash advances to plaintiffs for living expenses during litigation, in exchange for a portion of a future settlement. It does not regulate traditional third-party litigation funding for attorney fees or case costs. Following a well-established consumer protection model, the law mandates clear, plain-language contracts (translated if necessary), grants a right of rescission, and institutes penalties for violations. This section garnered the most unified support from the bar and public interest groups, as it aims to protect vulnerable consumers from predatory terms and reduce ethical complications in the attorney-client relationship.

Section 2: Business & Professions Code § 6156

To understand Section 2, some historical context is essential. After Arizona and Utah led the way in permitting non-lawyer investment in law firms, California seemed poised to follow. However, around 2021, the reform efforts stalled and were effectively abandoned, positioning California as a holdout. The dynamic shifted with AB 931. Following some critical Senate hearings in July 2025, Section 2 implemented a targeted approach. Its core provision is a prohibition on California law firms entering into contingency-fee-based financial arrangements with out-of-state Alternative Business Structures (ABS). But, by surgically banning only this one type of deal, the law implicitly provided a clearer regulatory footing for non-contingency arrangements with Management Services Organizations (MSOs). This allows firms to legally secure outside investment, technology, marketing, and back-office support through flat-fee or subscription models.

Section 3: The Consumer Legal Funding Act

This section establishes new procedural frameworks and amendments related to litigation, including provisions that strengthen the State Bar’s enforcement powers against unethical lawyer referral services. It functions as a complementary measure, reinforcing the consumer protections and business structure reforms established in the first two sections.

This pivot in Section 2 places California law firms at a crossroads: they can now navigate this new, structured landscape for growth and investment, but must do so with a clear understanding of the permissible boundaries and implications.

The Multiple Forces and Political Compromises That Shaped AB 931

Support for AB 931 was not monolithic across the legal industry. The bill’s unusual structure, blending three separate reforms, reflects the distinct (and sometimes conflicting) priorities of its stakeholders.

A review of the testimony at public hearings during the legislative process suggests that the most unified push for the bill came from those advocating for the Consumer Legal Funding Act (Section 3). This coalition included public interest law firms, pro bono organizations, and bar associations. Their motivation appears to have been twofold: to protect vulnerable clients from predatory contract terms and to reduce the ethical complications that unregulated third-party funders introduce into the attorney-client relationship. This section follows California’s traditional consumer-protection legislative model and was viewed as a straightforward regulatory improvement with little controversy within the legal community.

Meanwhile, the history of Section 2 suggests political negotiations rather than broad industry advocacy. Following the stagnation of California’s own reform efforts around 2021, the initial draft of AB 931 took a restrictive stance toward Alternative Business Structures (ABS) and Management Services Organizations (MSOs). This changed after Senate hearings in July 2025, where the proposal faced criticism for being too severe and for potentially handicapping California firms amid trends in other states, such as KPMG’s move to launch a law firm in Arizona.

The final version of Section 2 appears to be a direct result of that compromise. It prohibits contingency-fee arrangements with out-of-state ABS while implicitly permitting non-contingency MSO partnerships, a structure further defined by a critical five-year sunset clause. This permission hinges on a key clause, codified in Business & Professions Code § 6156(e), which states:

This section shall not apply to a contract in which all of the following are satisfied:

1. The contract outlines a specific dollar amount for services rendered.
2. No payment is related to the referral of legal services or purchase of a lead for a potential client or case.
3. No payment is contingent on the amount recovered in a specific case.

This outcome was less about the legal industry “pushing” for a specific model and more about legislators brokering a deal between opposing views. The resulting framework created clear winners (entrepreneurial lawyers and MSOs seeking regulatory clarity) and clear losers, namely, firms that have relied on now-prohibited contingency-based outside funding.

The Systemic and Institutional Pressures Driving Legal Industry Reform

It would be a misconception to view AB 931 as a direct response to shifting client demands. The drivers for this reform are more systemic and institutional. For years, a perceived “access to justice” crisis has highlighted the legal system’s failure to serve the middle class, evident in realities like the majority of divorces in Los Angeles being handled without legal counsel. This affordability gap, alongside the competitive pressure from alternative legal service providers like LegalZoom and the notable entry of accounting firms like KPMG into the legal market in other states, created a powerful imperative for regulatory modernization.

The impetus for legislative change did not directly originate with a public outcry, but from within the legal ecosystem itself. Academia, through influential reports, diagnosed the affordability problem. Public interest law firms and bar associations, concerned with the unregulated practices of “notarios” targeting immigrant communities and the complications of third-party consumer funding, advocated for clearer consumer protections. The push for reforming law firm ownership structures emerged from this confluence of diagnostic analysis and professional advocacy, framed as a necessary, though not guaranteed, step toward building more efficient and potentially more accessible legal service models.

AB 931 is the legislative compromise that resulted from these overlapping pressures, aiming to address market failures and ethical concerns that the traditional regulatory model could not resolve.

How AB 931 Opens the Door to New Growth Models for Law Firms

Section 2 AB 931’s framework makes partnerships with Management Services Organizations (MSOs) a viable strategy for growth. These partnerships provide more than capital; they offer a suite of professional services that can transform a firm’s operations. The key areas where MSO support can be leveraged include:

New Ways Law Firms Could Attract Outside Investment

• Technology & Infrastructure: An MSO can provide the integrated systems and platforms that form the backbone of a modern practice: case management software, cloud infrastructure, AI-assisted legal research tools, and secure client portals. This allows firms to automate routine tasks and operate with greater efficiency from the outset.
• Marketing & Consumer Outreach: With dedicated resources, a firm can execute sophisticated marketing strategies. This includes data-driven digital marketing (SEO, PPC), professional content creation, and brand-building initiatives to generate a consistent pipeline of qualified client leads.
• Financial Controls & Data Analysis: A critical, often overlooked benefit is the implementation of professional-grade financial management. An MSO can install robust accounting systems, budgeting controls, and performance dashboards. This enables strategic decisions based on accurate revenue, profitability, and case-cost data for any law firm.
• PE-Backed Legal Tech Partnerships: This model is already materializing in other states. A private equity firm invests in an MSO, which then supports a networked group of law firms in a specific practice area (e.g., personal injury). The MSO handles capital, technology, and operations, while the law firms provide the legal work, creating a scalable, franchise-like structure that was difficult to achieve under prior regulations.

What AB 931 Means for Third-Party Litigation Funding

A critical clarification is necessary: AB 931 does not regulate traditional third-party litigation funding. Despite some reporting from the media, the law’s scope is specifically limited to a related but distinct practice. Here’s the difference:

• Third-Party Litigation Funding: When a company provides capital to cover the direct costs of litigation (attorney fees, expert witnesses, court costs) in exchange for a portion of the recovery.
• Consumer Legal Funding (Governed by AB 931): When a company provides a cash advance to a plaintiff for personal living expenses (e.g., rent, groceries, medical bills) during pending litigation, in exchange for a portion of the future settlement or award.

AB 931 left the market for commercial litigation funding untouched. For consumer legal funding, it establishes a robust regulatory framework focused on consumer protection. This includes requirements for clear, written contracts (with translation provisions), a right of rescission, and a strict prohibition against using the advance to pay for legal fees or court costs, thereby reinforcing the bright line between the two types of financing. It’s important to note that traditional commercial litigation funding is already subject to regulation in California; AB 931’s new rules apply specifically to the distinct consumer legal funding market.

The practical impact of these new rules, however, will depend almost entirely on California’s commitment to enforcement. If rigorously enforced, the law could professionalize the market, deter predatory terms, and provide safer options for consumers. A likely consequence would be that some providers exit the market due to the heightened burden and risk. Conversely, if enforcement is perceived as weak or under-resourced, a risk remains that some portion of this activity could be driven underground, creating a less transparent and potentially riskier black market. Therefore, while AB 931 creates a stronger statutory framework for consumer protection, its ultimate effect on risk, cost, and availability for plaintiffs is not yet determined.

Who Wins and Who Risks More

The impact of AB 931 created distinct advantages and challenges, best understood by examining the key stakeholders affected by its two most consequential sections.

Section 1: Consumer Legal Funding:

• Winners: Consumers (Plaintiffs): Consumers are protected by mandatory clear contracts, translation services, and a right to cancel, which reduces predatory risks. This was the primary goal of the coalition that pushed for the bill’s passage.
• Losers: Predatory or Non-Compliant Funders: Funders who relied on opaque, high-pressure, or confusing terms face new legal liabilities and compliance costs.

Section 2: ABS & MSO Regulations:

• Winners: The biggest single winners are the MSOs themselves, and the people who run them. They receive clear legal recognition and a pathway to operate. Law firms seeking capital and scale, along with the private equity and venture capital firms that contract with or invest in MSOs, are also among the biggest potential winners. They gain a legal framework for non-contingency partnerships that provide capital, tech, and operational scale.
• Losers: Law firms with existing contingency-fee ABS deals (especially in personal injury), as their funding model is now prohibited. Traditional “mom and pop” firms, particularly in fields like personal injury, now face transformative competition from well-capitalized rivals who can deploy massive resources (e.g., spending $100,000 a week on SEO) that were previously inaccessible.

Let’s not forget, however, that a critical uncertainty for all stakeholders engaged with Section 2 is the law’s five-year sunset provision. This creates a built-in reassessment period that may exist not to reinstate old barriers, but to pave the way for even fewer restrictions after a trial period. This signals that in 2031, all restrictions on MSOs, including those on contingency fee arrangements, could be removed. This injects a profound note of long-term strategic uncertainty into every investment and partnership decision made today, potentially favoring those positioned for maximum growth if the rules loosen further.

How Fee-Sharing Rules Could Change Under AB 931

AB 931 does not directly amend California’s strict rules prohibiting attorneys from sharing legal fees with non-lawyers. However, its creation of a regulated pathway for law firms to partner with Management Services Organizations (MSOs) raises complex questions about how traditional fee-sharing ethics may interact with these new business arrangements.

The core ethical prohibition remains: a lawyer cannot share a percentage of a legal fee with a non-lawyer. AB 931 does not overturn this. Yet, by implicitly authorizing certain flat-fee, subscription, or service-based contracts between law firms and MSOs, the law potentially creates a parallel structure for financial partnerships that operates outside the traditional “fee-sharing” definition. This is an indirect change.

One interpretation is that this framework could enable more sophisticated investment models. For example, an MSO might provide capital for marketing and technology infrastructure in exchange for a fixed monthly service fee, a structure that does not directly share legal fees but still facilitates firm growth through outside capital. Whether this constitutes a meaningful shift in the practical landscape of law firm financing, or simply a new form of compliance with old rules, is a nuanced question that the State Bar and courts may need to clarify.

What the Expanded Influx of Capital Could Mean

The new MSO model flips the script on law firm growth. Instead of the slow, labor-intensive grind of networking and referrals, firms can now pursue capital-intensive growth. The stable capital from an MSO partnership lets firms fund aggressive marketing like professional SEO, pay-per-click campaigns, content creation, and even broadcast ads, turning the firm into a lead-generation machine. Business development becomes a funded department, not a side hustle.

Backed by an MSO’s resources and data, old pricing models shift, and firms can confidently ditch the billable hour. They can create flat-fee packages, subscription services, or bundled deals that offer clients the predictability they want but were too risky to manage alone.

It also changes how money gets used. Instead of profits going straight to partners’ pockets, a firm can strategically reinvest more revenue back into better technology, new practice areas, top talent, and further expansion. This aligns finances with long-term growth, not just short-term payouts.

The Ethical Concerns and Risks Critics Want Firms to Consider

AB 931’s new pathways for law firm growth are accompanied by significant ethical debates that the legal industry is now grappling with. The core concerns focus on the MSO model enabled by Section 2, raising questions about the preservation of attorney independence when a firm’s operations are funded by an entity with its own financial objectives.

Critics point to potential conflicts between a lawyer’s duty to the client and an MSO’s duty to its investors, which could influence case selection or resource allocation. Further debates center on whether the drive for investor returns and efficiency could impact the quality and personal nature of legal service.

Adding to the uncertainty are regulatory gray areas (the law defines what is prohibited but leaves room for interpretation on permissible control) and the inherent instability of the five-year sunset clause. Proponents argue that these risks can be managed through strong contracts and existing ethics rules, positioning AB 931 as a major test of how traditional professional safeguards function within a modern, investment-driven framework.

Operational and Compliance Challenges Firms Need to Prepare For

AB 931 creates significant opportunities, but they come with a new layer of complexity. Moving to an MSO or investor-backed model requires substantial updates to how a firm operates.

First, you need meticulously defined operational protocols. A definitive service agreement (SLA) must spell out exactly what the MSO handles (like marketing or IT) and what stays under the firm’s sole control, especially all legal work and client decisions. Without this, the MSO could cross the line into the unauthorized practice of law, creating major regulatory issues.

Next, your accounting controls must be rigorous and transparent. Mixing money with a non-lawyer entity is a serious ethical violation. You will need completely separate financial systems and clean, transparent invoicing for MSO services. This demonstrates to regulators that fees are not being improperly shared, even under a flat-fee contract.

Your compliance system also needs an upgrade. It must continuously monitor this new structure, ensuring you follow both AB 931 and all existing state bar requirements for trust accounts, conflicts, and confidentiality. You must be able to demonstrate that the MSO does not influence legal strategy or case selection.

Inadequate preparation in these areas can jeopardize your growth plans. Entering an MSO deal without strong operational firewalls risks ethics complaints, disqualification from cases, and bar discipline. That kind of reputational damage can outweigh any short-term gain and may deter serious investors who require regulatory certainty. Under AB 931, success is likely to favor those prepared.

How AB 931 Compares to ABS Models in Other States and Countries

While AB 931 represents California’s statutory step into this arena, it follows a well-established national trend of bar associations permitting MSO-like arrangements through formal ethics opinions. For decades, states including Texas, New Hampshire, Michigan, Connecticut, North Carolina, and Ohio have approved law firms’ use of professional employer organizations (PEOs), employee-leasing companies, and management service providers.

As highlighted in a comprehensive analysis by Holland & Knight, these opinions have consistently upheld such partnerships under a uniform set of guardrails: the law firm must retain absolute control over all legal work and professional judgment, client confidences must be safeguarded, and the non-lawyer entity’s compensation cannot be a share of legal fees (avoiding impermissible fee-sharing). Texas Ethics Opinion 706, the most recent and direct precedent, explicitly applies these long-standing principles to modern MSO structures.

Therefore, AB 931’s conditional authorization of MSO partnerships does not create a new ethical frontier but aligns California with a mature body of regulatory thought. The law provides a statutory framework for what many other jurisdictions have already deemed ethically sound under their existing rules of professional conduct.

Lessons from Early ABS Adopters for California Firms

Early adopters of alternative business structures offer crucial lessons for California firms as AB 931 takes effect.

What to Emulate:

• Scale and Access: Capital lets firms scale, which lowers costs and serves the middle-class market.
  • The lesson: Find a specific, unmet client need that technology and process can solve profitably at scale.
• Professionalization of Operations: Splitting legal work from business management (via an MSO) boosts efficiency, marketing, and tech.
  • The takeaway: Run your firm like a service business, not just a practice.
• Innovation Through Partnership: The model works when lawyers focus on law, and partners handle capital, tech, and ops.
  • The lesson: Choose partners who share your long-term vision, not just those with a checkbook.

What to Heed:

• The Consolidation Wave: Other jurisdictions saw small firms get squeezed out by larger, funded competitors.
  • For solos: differentiate deeply or plan to join a network. The standalone “corner pharmacy” law firm may end.
• Mission Drift and Ethical Strain: Pressure from investors (like private equity) can clash with client service and ethics.
  • The lesson: Picking a capital partner is an ethical choice. Set up strong governance from day one to protect legal judgment.
• Regulatory Uncertainty is a Constant: As Utah shows, rules can change. AB 931’s own sunset clause proves it. Build a business model that’s not just compliant, but adaptable.

The overarching lesson here from early adopters is that economic and tech needs drive reform, just like we saw with ride-sharing. Firms that design scalable, client-focused models now will lead. Those who ignore the shift will be left behind.

Smart Steps Firms Can Take to Navigate AB 931

The first and most important step is the mindset shift. Getting ready is smart business planning, not just filling out a checklist; you need to start factoring in the potential for outside money and professional help. Start by asking a tough question about your investment readiness: Is your firm a scalable business that a partner would want, or just a group of lawyers working independently?

A Practical Checklist for Assessing Opportunity and Readiness

• Run a brutally honest self-assessment. What’s your firm’s real strength? A niche? A location? A service? Know what you’re scaling before you try it.
• Define your “scalable need.” Don’t start with the money. Start by finding a clear, unmet client need in your market that could be served profitably at a larger scale. This is your growth strategy foundation.
• Audit your financials like an investor would. Clean up your books. Can you show profitability by practice area or attorney? This is basic investment readiness.
• Align your leadership team. Have the tough talk with all partners. Is there agreement on going for aggressive growth, staying put, or planning an exit? If you’re not aligned here, any partnership deal will fail.
• Model different growth paths. Sketch out what growth looks like on your own, with an MSO’s help, and with an MSO’s capital. What changes for workflows, marketing, and your time?
• Start exploratory conversations. Talk to MSO providers and firms that have made this shift. Don’t aim to sign a deal yet, just learn the landscape, structures, and key terms.
• Plan for client impact. How would a new structure or pricing model affect your current clients? Plan how you’ll communicate it to keep their trust.
• Set up a risk management framework. Based on the ethical concerns, draft your core governance principles upfront. What are the absolute firewalls between legal decisions and business management?
• Review your tech stack. Is your current case management, CRM, and accounting software built to scale, or will it crash under more volume? This is a major factor for potential partners.
• Create a 1 to 2-year strategic business plan. Write down your vision, goals, and what you need to reach them. This plan guides you, whether you bring in a partner or grow on your own. This is proactive business planning.

Partner with Rainmaking for Lawyers to Navigate AB 931 with Confidence

Since 2008, Rainmaking for Lawyers has guided firms through transformative transitions. We understand that capitalizing on AB 931 means architecting a smart business model that aligns with your long-term vision. We help you identify your strategic opportunity, navigate the critical compliance and ethical landscape, find the right MSO or capital partner for your goals, and execute a concrete plan for marketing, pricing, and sustainable growth. Turn regulatory change into your competitive advantage. We are here to help you thrive in this new environment.