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.
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.
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
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
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
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.
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.”
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,”
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.”
that order, Hart questioned whether the complaint--or any other information
placed before the trial court--necessarily raised questions regarding
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.”
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
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.
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.
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,”
“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
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Full text at http://opinions.aoc.arkansas.gov/WebLink8/0/doc/318153/Electronic.aspx.
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