Settlement Allows LegalZoom to Offer Legal Services in N.C.

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By Joan C. Rogers

Nov. 16 — LegalZoom and the North Carolina State Bar are no longer at loggerheads over whether the company's offer of personalized legal services to consumers amounts to the unauthorized practice of law. A consent decree entered Oct. 22 ends years of state-court UPL litigation between LegalZoom and the state bar. It also puts to bed a federal antitrust suit the company recently filed against the bar.

The settlement clears the way for LegalZoom to offer not just online document services but also prepaid legal services plans in the Tar Heel state, provided that certain consumer protections are added.

“We're very pleased that we're able to stop fighting and that we can start providing more legal services to the North Carolinians who really want access,” LegalZoom General Counsel Charles E. “Chas” Rampenthal said in an interview with Bloomberg BNA.

“We're also pleased that we can start engaging them in a friendly and open way about how LegalZoom and the attorneys who are looking for work in North Carolina can start working together to increase access to the people who just aren't getting quality legal help,” he said.

In a statement on its website, the bar group said:

The State Bar's officers and Executive Committee carefully considered the issues raised in the litigation with LegalZoom and whether the resolution of the litigation as set forth above was in the best interests of the people of North Carolina. After much discussion and deliberation, the State Bar concluded that entering into the Consent Judgment at this time, and in these circumstances, fulfills its statutory duties as an agency of the State of North Carolina to the State, the public-at-large, and the State Bar's members.

Harbinger?

The settlement may discourage other state bars from going to the mat with LegalZoom. Instead, states might opt to build on the consumer protections packaged in the North Carolina settlement.

The tide is turning, Rampenthal said, from “rear guard actions” that try to stop LegalZoom to “how we can work with technology and companies like LegalZoom to start expanding access” to people who need affordable legal services.

From that perspective, he said, “even though the North Carolina agreement was just one settlement, it has a very resounding effect across the entire country.”

‘Momentum Shift.'

UPL accusations have dogged LegalZoom ever since it began offering online customized legal document preparation 15 years ago. In a May 2012 prospectus filed with the Securities and Exchange Commission for a possible public offering, LegalZoom listed a variety of pending litigation matters and said it anticipated continuing to be a target of UPL lawsuits. See 28 Law. Man. Prof. Conduct 312.

In a setback for LegalZoom several years ago, the company failed to win dismissal of a Missouri federal class action alleging unauthorized practice. After that ruling, the company agreed to a settlement. See 27 Law. Man. Prof. Conduct 508; 28 Law. Man. Prof. Conduct 468.

Another negative development was that several bar association pronouncements concluded that the company was engaged in UPL. See 27 Law. Man. Prof. Conduct 508.

But recently there's been a “momentum shift” for LegalZoom concerning UPL disputes, according to Ken Friedman, the company's vice president of legal and government affairs. “It's coming to an end,” he told Bloomberg BNA.

The North Carolina cases are the only litigation LegalZoom has ever had with any state bars, Friedman said. In addition to the successful resolution of that litigation, he said, a favorable UPL ruling (discussed below) was issued last year by the South Carolina Supreme Court.

At this point, Friedman said, there are no UPL class actions left against LegalZoom. As for the negative bar opinion letters, he downplayed them as stale.

And while some lawyers still passionately oppose LegalZoom's services, Friedman characterizes them as “dinosaurs, a smaller and smaller minority.”

Another factor that may deter lawyers from filing consumer complaints against LegalZoom is a 2013 Arkansas Supreme Court decision upholding an arbitration clause in the company's contract with its customers. LegalZoom.com, Inc. v. McIllwain, 429 S.W.3d 261, 29 Law. Man. Prof. Conduct 646 (Ark. 2013).

In that case, Friedman said, “once they realized there's not a pot of gold in UPL actions, they walked away.”

Focus Now on Legal Plans

More than 3.4 million customers have made a purchase from LegalZoom since its inception 15 years ago, and there have been close to 200,000 consultations in its legal plans, Rampenthal said. In California, he said, LegalZoom is involved in customers' forming one out of every four limited liability companies established there; nationwide, he added, every three minutes a new business is formed through LegalZoom.

Most UPL disputes involving LegalZoom's activities have centered on its online legal document preparation services, but the North Carolina litigation highlighted the company's new direction—prepaid legal services plans.Although legal documents will still be available for customers who don't want an attorney, LegalZoom has shifted its focus to prepaid plans that provide consumers and businesses with legal services through a network of attorneys, Rampenthal said.

At present LegalZoom offers its plans in 42 states and the District of Columbia. By Jan. 1, that tally will rise to 48 states plus D.C., and the company hopes to have the plans in place in the two remaining states—Michigan and Tennessee—sometime in 2016, Rampenthal said.

For the subscription price, customers can obtain consultations with an attorney in the user's state about new legal matters; an “annual check-up”; attorney review of documents up to 10 pages in length, with flat fee pricing for longer documents; and certain other benefits, including a 25 percent discount on other services provided by the plan attorney.

The company offers both a business-oriented legal plan, starting at $23.99 per month, and a personal-oriented legal plan, starting at $9.99 per month. Customers can review the attorneys they consult through LegalZoom, and these reviews are posted on the company's website.

Friedman denied that these prepaid plans amount to a lawyer referral service or result in the sharing of legal fees with LegalZoom. The amount that LegalZoom pays participating attorneys is based on the number of plan members in the geographic area, he said.

‘Not a Law Firm.'

LegalZoom's website displays a disclaimer warning that its communications with users are not protected by the attorney-client privilege or as work product, and that LegalZoom is “not a law firm or a substitute for an attorney or law firm.” The website states that “LegalZoom provides access to independent attorneys and self-help services at your specific direction.”

As for resolving disputes with customers, LegalZoom provides a satisfaction guarantee rather than the particular warranties each state might have, and its terms of use call for binding arbitration of all disputes.

Friedman said LegalZoom believes the satisfaction guarantee and the arbitration terms are generous to customers. “We stack the deck in the consumer's favor” with features such as paying the costs of arbitration for any dispute under $75,000, he said.

LegalZoom has had the arbitration policy for four years now, and no one has had to go to a hearing, Friedman said.

Expanding Access

Rampenthal noted that according to the ABA's own estimates, 90 percent of people in the U.S. don't have effective access to legal services. LegalZoom aims to bring legal help to this underserved group, he said.

LegalZoom initially developed a reputation of a company trying to take business away from lawyers, “yet nothing could be further from the truth,” he said. “The reality is that LegalZoom is looking to work with the legal profession and not against it.”

For a more detailed explanation of LegalZoom's vision, see “A New Model for Law—For the Underserved,” which features a talk Rampenthal gave Oct. 9 as part of a lecture series on access to justice at the University of Akron School of Law.

See also Cody Blades, Crying Over Spilt Milk: Why the Legal Community Is Ethically Obligated to Ensure LegalZoom’s Survival in the Legal Services Marketplace, 38 Hamline L. Rev. 31 (Winter 2015).

And LegalZoom isn't limiting its vision to the United States.

In January, “Legal Zoom Legal Services Ltd.” was licensed in the United Kingdom as an “alternative business structure” under the 2007 Legal Services Act. “We want to apply new technology and make a difference for access,” Rampenthal told Bloomberg BNA.

While rules governing lawyers in the U.S. make it difficult for LegalZoom to employ lawyers, those barriers don't exist in the U.K., Rampenthal stated. “We're going to be able to employ lawyers and provide integrated services and bring a new suite of solutions,” he said.

End of UPL Action

The Oct. 22 North Carolina consent decree ends the state court action that LegalZoom filed against the state bar in 2011 asserting the right to provide its services to consumers in North Carolina, along with the state bar's counterclaim that the company's services constitute the unauthorized practice of law.

The settlement is premised on the idea that the use of software to generate legal documents on a website is not UPL if certain consumer protections are provided in the process. In the consent decree, the state bar agrees that if those protections are afforded, LegalZoom's interactive legal document services don't amount to the practice of law under N.C. Gen. Stat. §84-2.1.

In the settlement the bar and LegalZoom also pledge to support pending state legislation that would amend the definition of “practice law” to exclude “[t]he operation of a Web site by a provider that offers consumers access to interactive software that generates a legal document based on the consumer's answers to questions presented by the software,” provided that those same consumer protections are included.

These are the protections LegalZoom agreed to provide and also are included in the pending legislation:

• consumers get to see the blank template or the final document before finalizing the purchase;
• a North Carolina lawyer has reviewed all of the templates, and the name and address of each reviewing lawyer are kept on file and provided to the consumer upon written request;
• the provider tells the consumer that the forms aren't a substitute for an attorney;
• the company discloses its name, physical location and address;
• the provider doesn't disclaim any warranties or liability, nor does it limit the consumer's recovery of damages or other remedies; and
• the company doesn't require consumers to agree to jurisdiction or venue in any other state.

 

For location information required by the consent decree, LegalZoom will provide the address of its co-headquarters in Austin, Tex., to North Carolina consumers, Rampenthal said.

Antitrust Suit to Be Dropped

In speaking with Bloomberg BNA, Rampenthal attributed the settlement to strong leadership by current North Carolina State Bar President Ronald L. Gibson and his immediate predecessor Ronald G. Baker Sr., along with growing recognition that LegalZoom's personalized products increase access to affordable legal services for the underserved.

However, another big factor in getting to yes might be attributable to the fallout from a recent U.S. Supreme Court decision. After dragging on for four years, the state court action was wrapped up within six months after LegalZoom lodged a federal antitrust suit against the state bar and several bar officials for refusing to register LegalZoom as an authorized prepaid legal plan provider in North Carolina.

The complaint asserted that the defendants were an unsupervised group of market participants who were trying to monopolize and restrain trade in the state's legal services market—and that UPL committee members were co-conspirators (LegalZoom.com Inc. v. N.C. State Bar, M.D.N.C., No. 15-cv-00439, filed 5/3/15). See 31 Law. Man. Prof. Conduct 357.

LegalZoom's antitrust case was premised on N.C. State Bd. of Dental Exam'rs v. FTC, 2015 BL 48206, 31 Law. Man. Prof. Conduct 108 (U.S. Feb. 25, 2015), which held the N.C. State Board of Dental Examiners was subject to suit by the Federal Trade Commission under federal antitrust law for taking actions to prohibit nondentists from providing teeth whitening services.

The Dental Examiners decision is raising concerns about potential antitrust liability among lawyers who serve on panels that go after nonlawyers accused of UPL, as well as lawyers who issue ethics opinions that might be viewed as anticompetitive. See 31 Law. Man. Prof. Conduct 653.

The consent decree in the North Carolina state-court litigation calls for LegalZoom to drop the antitrust action, with claims against the state bar and “official capacity” claims against individuals to be dismissed without prejudice and “individual capacity” claims against named individuals to be dismissed with prejudice.

The consent decree also calls for dismissal of one other lawsuit LegalZoom filed against the state bar. That action was a “side skirmish over a public records request,” Friedman told Bloomberg BNA.

South Carolina Settlement

Friedman also directed attention to a decision last year from the South Carolina Supreme Court, in which the court approved a special referee's report concluding that LegalZoom's online interactive legal document preparation services do not constitute the practice of law. Medlock v. LegalZoom.com, Inc., 2014 BL 126159, No. 2012-208067 (S.C. March 11, 2014).

The South Carolina court also approved a settlement in which LegalZoom agreed to maintain or implement certain business practices for at least 24 months to ensure that its business fits within the bounds of South Carolina law.

The settlement requires LegalZoom to have South Carolina attorneys vet the company's form templates before it offers them for sale, and to allow purchasers to see the templates before buying them. LegalZoom must allow refunds, less third-party fees, within 60 days, must state on its website that LegalZoom is not a law firm or a substitute for an attorney, and must not represent that its documents comply with South Carolina law.

To contact the reporter on this story: Joan C. Rogers in Washington at jrogers@bna.com

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

Full text of consent decree at http://src.bna.com/4Y.

Rampenthal's talk at the University of Akron law school is at https://www.youtube.com/watch?v=W_-Ygm2KtR8.

Cody Blade's article on LegalZoom and access to justice is at http://digitalcommons.hamline.edu/hlr/vol38/iss1/2/.

The ABA/BNA Lawyers’ Manual on Professional Conduct is a joint publication of the American Bar Association Center for Professional Responsibility and Bloomberg BNA.

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