Tennessee Rejects Nonlawyer Ownership of Law Firms, Keeping Private Equity Out

Tennessee will not allow nonlawyer ownership of law firms: in an order dated Friday, October 2, 2026, the Tennessee Supreme Court declined to authorize nonlawyer ownership or fee sharing with nonlawyers, so private equity firms and other outside investors still cannot buy equity in a Tennessee law practice. The court kept Rule 5.4 of the Tennessee Rules of Professional Conduct as it is, while separately ending the American Bar Association's exclusive role as the gatekeeper for bar admission and creating three task forces to study other ways of widening access to legal services.

The decision on Tennessee nonlawyer ownership of law firms closes a review the court opened a year earlier, on September 16, 2025, when it asked the bar and the public whether it should "modify, reduce, or eliminate regulations prohibiting nonlawyer ownership of law firms or fee sharing with nonlawyers." It matters well beyond Nashville. Personal injury and mass tort practices have been the main targets of outside capital in the handful of jurisdictions that allow it, and Tennessee had been the most closely watched state considering whether to join Arizona, Utah and Puerto Rico. Its answer, for now, is no.

What did the Tennessee Supreme Court decide on October 2, 2026?

The order, captioned In re: Regulatory Reforms to Increase Access to Quality Legal Representation, No. ADM2025-01403, did four things.

First, it declined to change the rules on law firm ownership and fee sharing. The operative sentence, as reported by Bloomberg Law and Holland & Knight, reads: "At this time, the Court has not identified sufficient need or support for reforms related to non-lawyer ownership of law firms or fee-sharing with non-lawyers." The court added that it "may revisit this topic in the future as additional data regarding the success of these reforms becomes available."

Second, it amended Tennessee Supreme Court Rule 7, the bar admission rule. Section 2.02 now requires graduation from a law school accredited by an "Approved Accreditor," replacing the reference to an ABA-accredited law school. According to the ABA Journal, an Approved Accreditor is any entity the Tennessee Supreme Court approves, including other state supreme courts, and the council of the ABA Section of Legal Education and Admissions to the Bar remains one.

Third, it set up three task forces: one on alternative licensure pathways, one on interstate mobility for lawyers licensed elsewhere, and one on limited-licensed paraprofessionals. Holland & Knight's summary of the order reports that appointment orders are expected later in 2026 and into 2027, and that the court directed the state's Access to Justice Commission to monitor reform developments in other jurisdictions.

Fourth, by leaving Rule 5.4 untouched, it left management services organizations (MSOs) as the only practical route for outside investors who want exposure to Tennessee legal fees.

Did Tennessee approve nonlawyer ownership of law firms?

No. Tennessee did not approve nonlawyer ownership of law firms, and it did not approve fee sharing between lawyers and nonlawyers. Rule 5.4 continues to bar a lawyer from sharing legal fees with a nonlawyer, from forming a partnership with a nonlawyer to practice law, and from practicing in a firm in which a nonlawyer owns an interest or directs the lawyer's professional judgment.

The court did not frame the decision as a permanent rejection. Its stated reason was evidentiary: it had not identified "sufficient need or support." That framing invites future petitions supported by data, particularly from Arizona, the one US jurisdiction with a large, multi-year population of nonlawyer-owned firms. But for the foreseeable future, the regulatory map for Tennessee nonlawyer ownership of law firms is the same as it was before the September 2025 order.

Can private equity invest in Tennessee law firms?

Not directly. A private equity fund, hedge fund, litigation funder or other nonlawyer investor cannot buy an ownership stake in a Tennessee law firm or take a share of its fees. Bloomberg Law's headline on the order put it plainly: private equity is blocked from buying stakes in Tennessee law firms.

What remains open is the indirect route. In an MSO structure, lawyers own the law firm outright, while an investor-backed company owns the business platform that serves it: technology, intake systems, marketing, billing, staffing, office space and similar functions. The firm pays the MSO for those services. Holland & Knight's reading of the order is that properly structured MSOs remain the go-to compliant model in Tennessee, provided they are paid through flat or hourly fees not tied to the firm's profits and exercise no control over legal decision-making.

Are MSOs allowed in Tennessee? The practical red lines

Because Rule 5.4 is unchanged, the compliance questions for any Tennessee MSO are the familiar fee-sharing and independence questions, now with the added certainty that the court will not relax them soon:

• Fee basis. A management fee calculated as a percentage of legal fees, revenue or profits is the clearest risk; it looks like fee sharing with a nonlawyer. Fixed, cost-plus or hourly service fees are the conventional answer.
• Control. The MSO cannot direct case selection, case strategy, settlement decisions or the professional judgment of the firm's lawyers. Nor should it hold contractual levers, such as veto rights or termination triggers keyed to case outcomes, that achieve the same thing indirectly.
• Client files and confidentiality. Ownership of client records, access to privileged material, and data-sharing between the firm and the MSO need to be structured so that confidentiality duties remain with the lawyers.
• Marketing and intake. For personal injury and mass tort practices, where the MSO commonly runs advertising and lead generation, payments tied to the number of signed clients raise separate referral-fee and solicitation issues on top of Rule 5.4.

No Tennessee court or disciplinary authority has yet drawn the line between permissible management services and impermissible control in a contested case. The order does not do so either; it simply leaves the existing rule in place.

Does Tennessee still require an ABA-accredited law degree to take the bar exam?

No, not exclusively. Under the amended Rule 7, § 2.02, a Tennessee bar applicant must graduate from a law school accredited by an Approved Accreditor. The ABA's council remains an Approved Accreditor, so every currently eligible graduate stays eligible, but the court may now approve other accreditors, including other state supreme courts.

Coverage of this part of the order split on emphasis. The ABA Journal described the change as broadening who can sit for the Tennessee bar; Law360's headline said the court kept the ABA as a law school accreditor. Both are accurate. Tennessee did not follow Texas, whose Supreme Court ended reliance on ABA accreditation in rules effective January 1, 2026 and now keeps its own list of approved schools, and it did not copy Florida, whose January 15, 2026 opinion, effective October 1, 2026, redefined an accredited law school by reference to accreditors recognized by the US Department of Education or approved by that court. Tennessee instead kept the ABA in place while ending its monopoly.

The pressure on this point came from Washington as much as from inside the state. On April 30, 2026, the Federal Trade Commission and the Department of Justice, joined by the US Attorney for the Middle District of Tennessee and Antitrust Division officials, filed a joint comment urging the court to reduce its reliance on the ABA, arguing that a professional association's accreditation power restricts the supply of lawyers and raises the cost of legal services. The ABA Journal noted that the ABA council is also undergoing the Department of Education's five-year review of its status as a national accreditor.

The three task forces

The task forces are where the court left room for change:

Task force	Subject	What it could lead to
Alternative licensure pathways	Routes to licensure other than the current law school and bar exam sequence	Supervised-practice or apprenticeship-style paths to a law license
Interstate mobility	Admission of lawyers already licensed in other states	Broader admission without examination or reciprocity changes
Limited-licensed paraprofessionals	Nonlawyer professionals licensed for defined tasks	A licensed paraprofessional tier for high-volume civil matters

None of the three addresses ownership of law firms. A limited-licensed paraprofessional program, if adopted, would expand who may deliver some legal services, but it would not let nonlawyers own or invest in firms that represent personal injury clients.

How the comment record split

The comment period, which the Tennessee Bar Association asked to extend in January 2026, ran into spring 2026 and produced a sharply divided record on nonlawyer ownership.

Opposed. On April 30, 2026, the American Tort Reform Association, the US Chamber of Commerce Institute for Legal Reform, the Washington Legal Foundation and organizations representing the civil defense bar filed a joint comment opposing nonlawyer ownership and fee sharing. Their argument was that outside owners whose primary goal is a return on investment would compromise lawyers' independent professional judgment and the integrity of civil litigation. Legal Newsline reported that the Chattanooga Bar Association also told the court that "reports out of Arizona are not particularly flattering," citing complaints about supervision, oversight and conflicts of interest.

In favor. The Beacon Center of Tennessee, a free-market think tank, filed a comment in March 2026 urging the court to reduce or eliminate the ownership and fee-sharing bans, arguing that outside capital would let firms invest in technology, expand into underserved rural and urban areas and build scalable models for routine matters. Memphis ethics lawyer Brian Faughnan told Bloomberg Law in 2025 that broader ownership would supercharge law firm growth through efficiency and access to capital.

The court's order reads as a judgment that the opponents had the better of the evidentiary argument for now, while the access-to-justice concerns behind the original order were redirected to the task forces and the accreditation change.

The Arizona example in the record

The case study most often cited against reform was the Arizona affiliate of Wisner Baum, the Los Angeles mass tort firm. Legal Newsline reported that Eleos Law was 46 percent owned by nonlawyers, was funded through 5 percent of Wisner Baum's attorney fees, and handled about 9,400 Zantac cases and 8,450 baby food contamination cases. That structure has since been unwound in part: Bloomberg Law reported that Eleos removed its nonlawyer owners to comply with California AB 931, which since January 1, 2026 has barred California lawyers from sharing contingency fees with out-of-state alternative business structures. Wisner and Eleos have challenged AB 931 in the Central District of California.

Which states allow nonlawyer ownership of law firms?

Only a few US jurisdictions allow nonlawyer ownership of law firms, and the trend in 2026 has run against expansion. The table summarizes where things stand after Tennessee's order.

Jurisdiction	Nonlawyer ownership?	Key detail
Arizona	Yes, through licensed alternative business structures (ABS)	151 ABS entities licensed as of January 2026; many are injury firms
Utah	Limited, through the regulatory sandbox	ABS-only entrants no longer eligible; participants fell from 39 in 2022 to 11 by April 30, 2025
Puerto Rico	Yes, since rules approved June 17, 2025	Nonlawyers may hold no more than 49 percent; client disclosure and pro bono conditions
Tennessee	No	October 2, 2026 order keeps Rule 5.4; MSOs remain the workaround
California	No, and fee sharing with out-of-state ABS barred	AB 931, effective January 1, 2026; under constitutional challenge
Colorado	No; statute bars fee sharing with nonlawyer-owned entities	HB26-1421 passed the Senate 33-2 and the House 53-11
Illinois	No; statute limits private equity control of firms	HB 5487 (2026) bars private equity and hedge fund interference with attorney judgment and revenue-based fees

Everywhere else, some version of ABA Model Rule 5.4 applies. Tennessee's choice keeps it in the majority and avoids a second Arizona in the Southeast, where personal injury advertising and intake are intensely competitive.

Tennessee's 2026 litigation-funding statute

The court's order lands five months after the Tennessee General Assembly moved on a related source of outside capital. Governor Bill Lee signed HB 2108 on May 19, 2026. According to summaries by the US Chamber of Commerce and Butler Snow, the law requires litigation funders to register with the state, requires disclosure of funding agreements to the court and defendants within 14 days of filing suit, bars foreign adversaries from funding Tennessee litigation, and prohibits funders from controlling the litigation they finance.

Taken together, the statute and the order give Tennessee one of the more restrictive environments in the country for outside money in plaintiffs' practice. Investors cannot own the firm, and if they fund the case instead, the agreement is disclosable and the funder cannot steer it. That parallels the direction of California's AB 2305 on funder control and Ohio's HB 105, which took effect October 6, 2026.

What it means for personal injury and mass tort firms

Tennessee plaintiffs' firms. Capital for advertising, case acquisition and docket financing must keep coming from lawyer-owners, bank credit, contingency-fee lending, compliant MSO arrangements or disclosed third-party litigation funding under HB 2108. Firms that had negotiated equity deals conditioned on a rule change should treat those as dead for now.

National mass tort firms and co-counsel. Arrangements in which a Tennessee lawyer splits a contingency fee with an out-of-state firm that has nonlawyer owners remain exposed under Rule 5.4's fee-sharing bar. Mass tort referral and co-counsel agreements with Arizona ABS entities should be checked for whether any Tennessee lawyer is sharing fees with a nonlawyer-owned entity.

MSO sponsors and investors. The order removes the near-term prospect of converting an MSO relationship into direct equity in Tennessee. It also means the MSO's fee design and control provisions will carry the full regulatory weight. Investors should expect bar regulators and opposing counsel to scrutinize revenue-linked fees and governance rights.

Defendants and insurers. The tort-reform groups that opposed reform got the result they asked for. Combined with HB 2108's disclosure rule, defendants in Tennessee cases have a clearer view of who is financing the other side than in most states.

Mass arbitration practices. Mass arbitration campaigns depend on heavy up-front spending on claimant acquisition and filing fees. In Tennessee, that capital still cannot be raised by selling equity in the firm, which keeps funding and MSO structures, with their disclosure and control limits, as the main options.

Could Tennessee revisit nonlawyer ownership in the future?

Yes. The order says the court "may revisit this topic in the future as additional data regarding the success of these reforms becomes available," and Holland & Knight reports that the court asked the Access to Justice Commission to monitor developments elsewhere. The data the court will see next includes Arizona's growing ABS population, the shrinking Utah sandbox, Puerto Rico's first years under its 49 percent cap, and the outcome of the constitutional challenge to California's AB 931. Any renewed petition would need to show the "need or support" the court found missing this time.

FAQ

Did Tennessee approve nonlawyer ownership of law firms?

No. On October 2, 2026, the Tennessee Supreme Court declined to authorize nonlawyer ownership of law firms or fee sharing with nonlawyers, leaving Rule 5.4 unchanged.

Can private equity invest in Tennessee law firms?

Not through equity. Private equity cannot own a stake in a Tennessee law firm or share its fees, but it can invest in a management services organization that sells services to a firm for flat or hourly fees not tied to profits, without controlling legal decisions.

Which states allow nonlawyer ownership of law firms?

Arizona, through licensed alternative business structures, and Puerto Rico, with a 49 percent cap, allow it; Utah allows limited participation through its regulatory sandbox. Tennessee, California, Colorado and Illinois have all moved the other way.

Does Tennessee still require an ABA-accredited law degree?

Not exclusively. Amended Rule 7, § 2.02 requires a degree from a school accredited by an Approved Accreditor; the ABA remains one, and the court may approve others, including other state supreme courts.

What does the decision mean for personal injury firms?

Tennessee personal injury and mass tort firms cannot sell equity to outside investors, must avoid sharing fees with nonlawyer-owned entities, and will rely on lawyer capital, compliant MSOs or disclosed litigation funding under HB 2108.

Could the court change its mind?

The order leaves that open. The court said it may revisit nonlawyer ownership as data on reforms in other jurisdictions becomes available, and its Access to Justice Commission is tasked with monitoring those developments.