IP Firm Files $60M Antitrust Suit vs. LegalZoom, State Bars

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By Samson Habte

LegalZoom and bar regulators were hit Dec. 19 with a $60 million federal antitrust suit that alleges the legaltech giant “surreptitiously violates unauthorized practice of law rules” and that bar authorities “turn a blind eye” to those violations.

Plaintiff Raj V. Abhyanker, a prominent IP attorney and entrepreneur, told Bloomberg Law his suit aims to ensure attorneys can “compete on an equal footing” with a company that is gobbling up market share in the legal services world by disclaiming status as a law firm and avoiding the regulatory costs associated with being one.

The 81-page complaint also charges the U.S. Patent and Trademark Office and the state bars of Arizona, California and Texas—all of whom are named as “necessary defendants"—of abetting LegalZoom’s monopolistic actions.

It says those entities do so by refusing to subject LegalZoom to ethics rules that govern unauthorized practice, conflicts of interest, nonlawyer assistants and trust accounts—all of which carry huge compliance costs.

“Attorneys who have spent years going through law school, taking a difficult bar exam, maintaining an IOLTA trust account, and performing conflict checks cannot effectively compete against non-law firm competitors like LegalZoom,” the complaint says.

‘Aspiring Competitor’

Abhyanker’s focus is the market for patent and trademark filing services, the primary practice area for his Silicon Valley-based firm, LegalForce RAPC Worldwide.

Uniquely, the firm was hatched a sister entity to a tech startup that Abhyanker, a former engineer, established in 2009. That startup, Trademarkia.com, provided consumers who wanted to register trademarks with a free search engine to search for words, pictures and marks associated with existing, protected trademarks—and it gave those consumers the option of hiring Abyhanker’s firm for additional legal help.

Trademarkia, which a legal technologist described in 2013 as “the legal web site with the most traffic on the Internet,” was folded into Abhyanker’s firm in 2013. In the five years since, the firm has filed more trademarks than any firm in the U.S.

But the firm has lost market share in recent years to LegalZoom, and Abhyanker’s antitrust lawsuit—filed in the U.S. District Court for the Northern District of California—says that development is partly attributable to LegalZoom’s anticompetitive conduct.

The USPTO and state bar co-defendants declined to comment on Abhyanker’s complaint. LegalZoom was less circumspect.

In a written statement, LegalZoom dismissed the lawsuit as an attempt to achieve through litigation what Abhyanker and his companies and law firm have failed to achieve through competition.

“We are seeing an aspiring competitor angrily lash out after failing to compete in the marketplace,” said Ken Friedman, LegalZoom’s VP of Legal & Govt. Affairs. “We will not be distracted, but rather will maintain focus on our critical mission of increasing affordable access to the law.”

Friedman also said that LegalZoom “follows all legal requirements and applicable ethical regulations,” and that the company looks forward to defending itself and is confident it will prevail.

‘I Want to Adopt Their Model’

Abhyanker had a surprising response to LegalZoom’s statement. “I agree with them,” he told Bloomberg Law in a Dec. 20 interview.

Abhyanker went on to qualify that statement. He said he knows and admires some of LegalZoom’s executives, and that he thinks the company is doing good by helping to close the access-to-justice gap.

Abhyanker even agreed with part of the LegalZoom statement that may have been intended as a barb—the allegation that he can’t beat them so he’s suing them, that he’s trying to achieve through litigation what he couldn’t through competition.

What Abhyanker disputes is the notion LegalZoom is competing on an equal playing field. That is the whole point of this lawsuit, he said.

“I would love to do what they do,” Abhyanker told Bloomberg Law. “The reality is, I want to adopt their model.”

Abhyanker explained that while he is seeking $60 million in damages, he’s made an important prayer for relief in the alternative: a request for a declaratory judgment that would allow him, and any other lawyer, to do what he claims LegalZoom does—operate free from the burdensome regulatory constraints that the government co-defendants apply to attorneys but refuse to impose on LegalZoom.

What would that relief look like? The complaint asks the court to declare that lawyers can sell form documents, like trademark applications, and “employ non-lawyer assistants to recommend and advise” buyers on how to customize them—something that would likely violate the UPL regulations of every state bar and the USPTO.

But that’s not all.

In addition to immunity from UPL enforcement, the complaint asks for a declaration that law firms, and technology companies owned by attorneys, are “not required to conduct conflict checks before assisting customers” with trademark filings, or to “deposit money collected from customers” into trust accounts.

Most ambitiously, the complaint seeks a declaration that attorneys can sell ownership stakes in their firms to nonlawyer investors—something largely forbidden in every U.S. jurisdiction.

Innovator’s Dilemma

In 2013, Abhyanker was one the ABA Journal’s Legal Rebels, an honorific bestowed annually on a handful of change leaders in the legal profession.

The profile discussing his selection said Abhyanker sees himself as more of an engineer than a lawyer, and it quoted him saying he “wanted to create a law firm that allows me to support myself and fund my engineering projects.”

He did so with LegalForce, which generated $8.5 million in revenues in 2013, according to the profile.

But the lawsuit suggests Abyhanker has even bigger ambitions—and it blames LegalZoom and the regulator co-defendants for thwarting those ambitions.

“Defendants’ unlawful and unreasonable exclusion of licensed lawyers from performing services the way LegalZoom does in the Relevant Market has injured competition in the Relevant Market and caused Plaintiffs to lose more than twenty million dollars ($20,000,000) of sales,” the complaint reads.

The $60 million damages request is based on those alleged actual damages, plus treble recovery under the Sherman Act.

But Abhyanker could walk away with no money and still come out happy, he told Bloomberg Law.

“My first preference is we’ll get a declaratory judgment that will allow us to compete on an equal footing with them,” he said. “And if I get no damages from LegalZoom, that’s fine.”

“Equal footing” means, among other things, being able to adopt what Abhyanker alleges is LegalZoom’s staffing model—hire nonlawyers to provide advice on customizing form trademark applications, and pay them "$15 dollars an hour” for work he has to “pay an associate $200,000 a year to do.”

Equal footing also means being able to raise outside capital from non-lawyer investors—something that Abhyanker said he would be able to do fairly easily if not for state bar and USPTO variants of ABA Model Rule 5.4(d), which forbids nonlawyers from acquiring equity stakes or investing in law firms.

“I have lots of VC’s I can go to, but they can’t invest in a law firm,” Abhyanker said.

LegalZoom is not so constrained. “They have $300 million in venture funding,” Abhyanker said. “I as a lawyer have no way to compete. I’m stuck.”

The case is LegalForce RAPC Worldwide, P.C. et al v. LegalZoom.Com, Inc. et al, N.D. Cal., No. 5:17-cv-07194, complaint filed 12/19/17).

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

To contact the editor responsible for this story: S. Ethan Bowers at sbowers@bloomberglaw.com

For More Information

The complaint is at http://src.bna.com/vaV.

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