Read enough deal memos and marketing decks and you notice that the entire private-equity push into personal injury law turns on one word nobody has bothered to define. The word is indirectly. It is the load-bearing term in California’s new fee-sharing ban and in the Illinois bill moving behind it. And it will settle the question everything else hangs on — whether the structure now being sold to plaintiff firms is a legitimate vehicle for outside capital, or a workaround waiting for a test case.

The setup is familiar by now. Most states forbid non-lawyers from owning a law firm or sharing in its fees. To get capital in anyway, firms split themselves in two: the law practice stays lawyer-owned, and the back office (marketing, intake, technology, HR) is carved into a separate company, the MSO, that investors can own. The MSO then sells those services back to the firm under a long-term management services agreement, frequently running twenty or thirty years. On paper, lawyers keep the law and investors keep the business. No fee is shared. Nothing is owned that can’t be.

That is the theory. The mechanics tell a different story, and the difference is the whole subject.

What Texas actually decided

In February 2025 the Professional Ethics Committee for the State Bar of Texas issued Opinion 706, the first modern ethics opinion to take MSOs head-on. It is cited constantly, usually as a green light. It is worth reading for what it actually says. The committee considered a non-lawyer-owned company offering a bundle of support services that proposed to charge firms a percentage of their revenue. That, the committee held, is prohibited fee-splitting with a non-lawyer under Rule 5.04(a). And, crucially, it remains prohibited even when the percentage is dressed up as payment for services rendered. Tying the MSO’s compensation to the firm’s legal revenue is the violation. The label on the invoice does not save it.

Opinion 706 is genuinely permissive in one respect: it confirms lawyers may hold equity in an MSO and that a properly built MSO can live inside the rules. But the bright line it drew is narrow and formal. It bans a percentage. It says nothing about a fixed fee that has been engineered to capture the same economics by a different arithmetic.

The tell is in the number

Here is how the fixed fee gets set. Transfer pricing is the intercompany-valuation method multinationals use to shift profit between subsidiaries. As Bloomberg Law reported in its recent survey of the trend, investors now use it to calculate how much value is “transferred” to the MSO, then size their investment off that number. The advisory firm L.E.K. Consulting, writing for investors rather than regulators, offers a worked example with admirable candor: a midsize firm generating $20 million in annual revenue might pay its MSO $18 million a year to run all non-legal operations. Work that forward and the investor’s math appears. The $18 million fee is the MSO’s top line. Subtract what the back office genuinely costs to run, say $8 million, and the MSO clears about $10 million a year. Capitalize that at a platform multiple of six and the entity is worth roughly $60 million. The investor buys a controlling stake against that figure. The valuation exists only because the management fee was set high enough to manufacture it.

An $18 million “fair market value” charge against $20 million of revenue is not the price of HR, IT, and a phone system. It is the firm’s profit, relabeled.

No one staffing the back office of a $20 million firm believes those functions cost $18 million. That figure is not derived from the cost of services plus a reasonable margin; it is derived from what the firm earns. Strip away the vocabulary and the structure is a ninety-percent revenue share wearing the costume of a flat fee. Texas 706 forbids the percentage and is silent on the costume. That silence is the opening, and everyone in the room knows it.

California reached for the economics but left a gap

California tried to close exactly this opening, and the way it did so is instructive. Assembly Bill 931, effective for agreements entered on or after January 1, 2026, bars California lawyers and firms from sharing contingency fees, “directly or indirectly,” with an out-of-state alternative business structure. It is codified at Business and Professions Code section 6156. The penalties are real: $10,000 per violation or three times the client’s actual damages, whichever is greater, plus fees and costs, on top of State Bar discipline. It also carves out genuine flat-fee arrangements not tied to recovery. And it is temporary by design. The statute includes a sunset clause set for 2030, meaning the ban expires automatically that year unless the legislature affirmatively votes to renew it. As written, it reaches only agreements entered during the roughly four-year window before it lapses.

The legislature plainly meant to reach past the label and grab the economics; that is what “indirectly” is doing in the sentence. But the statute never defines it. It does not define “indirect” fee-sharing, and it does not define what counts as non-lawyer “decision-making.” So California has enacted a prohibition that points directly at the transfer-pricing fee without telling anyone where it lands. Is a flat management fee, set by valuation to equal a firm’s profit, an “indirect” share of contingency fees? On the words alone, you can argue it either way, and able lawyers are being paid to argue both.

The natural place to resolve that would have been litigation, and for a moment it looked like we would get an answer. Two firms operating through an Arizona ABS, Eleos Law and Wisner Baum, challenged the California ban on constitutional grounds. In December 2025, U.S. District Judge Dolly Gee denied their request for a preliminary injunction, finding the state had a legitimate interest in keeping indirect non-lawyer ownership from entering California through cross-border arrangements. The plaintiffs then dropped the case. The statute stands, but it stands untested on its merits as applied to a real management services agreement. The hard question was raised and then withdrawn. It is still sitting there.

A second California measure, Assembly Bill 2305, has since advanced to the state senate; it goes after non-lawyer control of legal judgment more directly than the fee-sharing route. Its progress is worth watching precisely because it suggests Sacramento knows the first statute did not finish the job.

Illinois shows the other failure mode

If California’s drafting was too vague to bite, Illinois illustrates the opposite danger. House Bill 5487 and its senate twin would prohibit an MSO owned or controlled by a private equity group or hedge fund from charging a firm any fee “directly or indirectly based on the fees, revenues, or profits” of the practice. That language is aimed at the same transfer-pricing maneuver, but it is so broad that, as the ethics lawyer Trisha Rich has warned, it could swallow ordinary commerce. Every firm pays its vendors out of revenue. Read literally, the bill reaches document-management platforms, e-discovery providers, even court reporters, and arguably litigation funding itself. Rich’s objection is that the bill has no limiting principle that lets routine operations continue without technically violating it.

Between the two states you can see the drafting dilemma whole. Write “indirect” narrowly and the transfer-pricing fee slips through. Write it broadly enough to catch that fee, and you criminalize buying software. Nobody has yet written it in a way that catches the $18-million-on-$20-million arrangement and nothing else. Doing that requires a court or a regulator to articulate the economic difference between paying for services and paying for profit — and so far none has.

What I’ll be watching

The honest state of the law is this: the MSO structure is neither clearly permitted nor clearly barred in the jurisdictions that matter most to plaintiff firms. Texas blessed a version of it while forbidding the crude form. California aimed at the sophisticated form and missed the strike zone by leaving its key term undefined. Illinois aimed wider and may hit everything. And the one case that could have produced a merits ruling on a real agreement was dismissed before it got there.

Three things will tell us which way this resolves. First, enforcement: whether the California State Bar or a plaintiff’s-side opponent ever brings a section 6156 action against a live management agreement and forces a court to define “indirect” against actual deal documents. Second, valuation discipline: whether the management fees in these deals start to look like the cost of services or keep tracking the firm’s profit, because that ratio is the evidence any regulator will reach for first. Third, the 2030 sunset, which hands Sacramento a scheduled occasion to tighten the language, broaden the ban, or let the experiment lapse entirely. That deadline matters more than it first appears. A roughly four-year prohibition sits against management agreements written to run twenty or thirty years. It may bind only the opening seasons of a deal — and an investor with patience can wait out a rule scheduled to expire on its own. Whether it does expire, or gets renewed and hardened, is its own fight to watch.

Until one of those happens, every firm signing a thirty-year management services agreement is making a bet on a word. They are betting that “indirectly” means the narrow thing, not the broad thing. In California, they are also betting the ban sunsets before anyone tests it against their deal. And they are placing both bets years before anyone with the authority to settle them has spoken. That is a long time to be exposed on the strength of a definition that does not exist yet.