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Arbitrator, Not Court, Must Decide Issue Whether LegalZoom.com Engages in UPL

Wednesday, October 9, 2013

By Samson Habte  

Oct. 4 --A divided Arkansas Supreme Court Oct. 3 said federal law requires it to enforce a contractual provision that obligates LegalZoom.com customers to arbitrate claims they may have against the online document preparation service, including complaints that the company is engaged in the unauthorized practice of law (LegalZoom.com, Inc. v. McIllwain, Ark., No. CV-12-1043, 10/3/13).

The 5-2 decision reverses a trial court order that denied the company's motion to compel arbitration of a class action accusing LegalZoom of violating the Arkansas Deceptive Trade Practices Act by providing services that amount to the unauthorized practice of law.

The trial court held the mandatory arbitration clause in LegalZoom's contract was unconscionable and thus void because enforcing it would encroach on “the exclusive jurisdiction of the state courts to determine whether or not something constitutes unauthorized practice of law.”

Writing for the majority, Justice Josephine Linker Hart rejected that holding for two reasons.

First, she said, it is not clear the class action complaint even raises unauthorized practice questions given LegalZoom's assertions that it is not a law firm and that the documents it provides to customers are computer generated.

Moreover, even if the arbitration clause were unenforceable under state contract law, U.S. Supreme Court precedent makes it clear that “any rule prohibiting arbitration of unauthorized-practice-of-law claims would be preempted by the Federal Arbitration Act (FAA),” the court declared.

'Inherently Unique.'

The complaint was filed by Jonathan McIllwain, a LegalZoom customer who purchased a customized Last Will and Testament from the company over the Internet. In addition to a deceptive trade practices claim, McIllwain's complaint alleged that LegalZoom was unjustly enriched by charging clients for “per se illegal conduct.”

LegalZoom sought to compel arbitration of the dispute under a provision in its standard terms of service agreement stating that “all disputes and claims … rising out of or relating to any aspect of the relationship between us, whether based in contract, tort, statute, fraud, misrepresentation, or any other legal theory,” must be resolved by binding arbitration, and that interpretation and enforcement of the agreement was governed by the FAA.

McIllwain challenged the validity of the arbitration agreement under state-law principles governing contract construction. According to the court, he argued “that the arbitration agreement was unconscionable because LegalZoom.com advertised and performed services normally provided by attorneys and that it was engaging in the practice of law without benefit of a license.”

McIllwain further argued that LegalZoom's terms of service “violated the Arkansas Rules of Professional Conduct and breached its duty of good faith by blatantly attempting to limit its liability for the legal services provided in the contract, and thus place its interest--as an attorney--ahead of its client,” the court said. “As a result, he contended that, due to the unconscionability of the agreement, the arbitration provision was unenforceable under the FAA,” Hart stated.

McIllwain did not argue that the arbitration clause was one-sided. Rather, he maintained that the agreement was unconscionable because only state courts have “jurisdiction to oversee claims about the unauthorized practice of law,” the opinion states, “and further, the FAA does not contain a clear, manifest purpose to displace the court's historical police power to regulate attorneys within its borders.”

The trial judge agreed, concluding that state court jurisdiction over UPL matters is an “inherently unique” legal principle and that the arbitration agreement should be deemed unconscionable “for that reason.”

Higher Authority

In reversing that order, Hart questioned whether the complaint--or any other information placed before the trial court--necessarily raised questions regarding unauthorized practice.

LegalZoom has asserted that it is not a law firm, she explained, and two years ago the court decided “that maintaining a cause of action under the Arkansas Deceptive Trade Practices Act, which is the primary basis for McIllwain's complaint, did not offend our constitutional authority to regulate the practice of law when it involved nonlawyers.” See Campbell v. Asbury Auto. Inc., 381 S.W.3d 21 (Ark. 2011).

But the arbitration clause is enforceable even if the dispute implicates questions regarding unauthorized practice, the court continued.

The notion that “unauthorized practice of law [is] a unique type of claim that [is] not susceptible to arbitration,” Hart explained, was rejected by the U.S. Supreme Court in AT&T Mobility LLC v. Concepcion, 2011 BL 110648 (U.S. 2011). “When State law prohibits outright the arbitration of a particular type of claim,” that opinion stated, “the analysis is straightforward: The conflicting rule is displaced by the Federal Arbitration Act.”


Battling on Many Fronts

Although the ruling in McIllwain is a victory for LegalZoom, the company has in recent years faced several similar class actions across the nation, some of which remain pending. Those actions are disclosed in registration statements the company filed with the Securities and Exchange Commission after announcing plans to become a publicly traded company. (A planned initial public offering was postponed amid market concerns in August 2012).


Preemption principles, Hart said, thus require reversal. “While we confess that it is tempting to say that our authority to regulate the practice of law, granted to us by the Arkansas Constitution, empowers us to reserve questions regarding the unauthorized practice of law for the courts of this state over which we have superintending authority, we are chastened by the awareness of our duty to defer to the Supreme Court of the United States on matters of federal statutory interpretation,” Hart wrote.

Dissent

Chief Justice Jim Hannah, in a dissent joined by Justice Donald L. Corbin, said that the majority's ruling ran afoul of the state constitution and “several hundred years of the common law.”

“Regulation of the lower courts and jurisdiction over the practice of law lie with the court of last resort, in this case the Arkansas Supreme Court,” Hannah declared.

The majority erred in concluding that Arkansas law ran afoul of the FAA, as the provisions that vest exclusive jurisdiction over attorney regulation in the court do not “prohibit outright the arbitration of a particular type of claim,” Hannah said.

“It is not the claim that is precluded from arbitration,” he said. “The analysis does not reach that far. Had LegalZoom's conduct come to the attention of this court, this court would have been bound to act on its own regardless of whether there was a contract or whether any person had filed a complaint,” he said.

Richard T. Donovan and Amanda K. Wofford of Rose Law Firm, Little Rock, Ark., represented LegalZoom. William N. Riley and Joseph N. Williams of Price Waicukauski & Riley, LLC, Indianapolis, represented McIllwain.

To contact the reporter on this story: Samson Habte in Washington at shabte@bna.com

To contact the editor responsible for this story: Kirk Swanson at kswanson@bna.com


Full text at http://opinions.aoc.arkansas.gov/WebLink8/0/doc/318153/Electronic.aspx.

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