California Governor Gavin Newsom has signed Assembly Bill 931 (AB 931) into law, introducing significant restrictions on fee-sharing arrangements between California attorneys and out-of-state law firms owned by non-lawyers, commonly referred to as Alternative Business Structures (ABS). This legislation, effective January 1, 2026, prohibits California lawyers and firms from sharing contingency fees with ABS entities located outside the state.
AB 931 defines an ABS as any entity, excluding nonprofit organizations, that provides legal services while allowing non-attorney ownership or decision-making authority. While ABS law firms are already prohibited from operating directly in California, the new law extends this prohibition by restricting California attorneys from sharing legal fees with out-of-state ABS-associated attorneys unless specific criteria are met. These criteria include the attorney being licensed in the state where the ABS is located, performing legal services in that state, and the fee-sharing agreement outlining a specific dollar amount for services rendered, rather than being contingency-based. Notably, 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. However, a court may approve a fee-sharing arrangement upon attorney request if it determines that such an arrangement is fair, reasonable, and necessary for the administration of justice. ([hklaw.com](https://www.hklaw.com/en/insights/publications/2025/09/regulatory-retrenchment-in-california-what-ab-931-means?utm_source=openai))
The penalties for non-compliance are severe, including fines of $10,000 per violation or treble actual damages, as well as allowing for injunctive relief and the reimbursement of attorneys’ fees. Additionally, violations may result in mandatory discipline by the California State Bar, ensuring a significant deterrent effect on ABS-associated practice. ([hklaw.com](https://www.hklaw.com/en/insights/publications/2025/09/regulatory-retrenchment-in-california-what-ab-931-means?utm_source=openai))
AB 931 does not appear to ban properly structured management services organizations (MSOs) from operating in California, given that, in an MSO structure, a law firm must remain owned and operated by licensed lawyers. The law provides an explicit exemption for contracts that contain a flat fee structure for the services rendered, do not pay for referrals or lead generations, and 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. ([hklaw.com](https://www.hklaw.com/en/insights/publications/2025/09/regulatory-retrenchment-in-california-what-ab-931-means?utm_source=openai))
AB 931 represents a significant regulatory retrenchment in California’s approach to legal services innovation. Although the law makes California’s climate challenging for ABS firms, the restrictions imposed are temporary, operative only from January 1, 2026, to January 1, 2030. This means that contracts entered into before that window are still permissible under the law. ([hklaw.com](https://www.hklaw.com/en/insights/publications/2025/09/regulatory-retrenchment-in-california-what-ab-931-means?utm_source=openai))
For the time being, ABS firms operating in multiple jurisdictions should carefully review contract structures to ensure compliance with AB 931. 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, it prioritizes traditional professional boundaries over market-driven reform, including protection of lawyers and law firms themselves. While 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. ([hklaw.com](https://www.hklaw.com/en/insights/publications/2025/09/regulatory-retrenchment-in-california-what-ab-931-means?utm_source=openai))