News: CJ Exclusives

State Bar Claims LegalZoom Practices Law Without a License

Online document provider says Bar is blocking its business illegally

RALEIGH — LegalZoom, the nation’s largest provider of online routine self-help legal documents, is suing the North Carolina State Bar following an eight-year battle over claims that the company has engaged in the unauthorized practice of law.

The lawsuit, filed in Wake County Superior Court Sept. 30, could become a landmark case because of the state constitutional issues it raises regarding property rights and antitrust. The attorney representing LegalZoom says state courts never have ruled on the central issue: whether an online services provider selling the same legal aid products as off-the-shelf books and software is practicing law illegally. Critics of the State Bar’s action call it an attempt to stifle competition and reduce consumer choice through the use of the Bar’s authority to license legal practice in the state. And if our State Bar prevails, other states may follow North Carolina and prohibit LegalZoom or other online self-help services from offering their products to consumers.

LegalZoom, a California-based company, was co-founded in 2001 by criminal defense attorney Robert Shapiro. Raleigh attorney A.P. Carlton Jr., who’s representing LegalZoom, told Carolina Journal that this is the first lawsuit the company has filed and it took this action only after reaching an impasse with the State Bar.

The first skirmish began in 2003 when the State Bar’s Authorized Practice Committee, which regulates attorneys, opened an inquiry into whether LegalZoom’s online legal documents service constituted the unauthorized practice of law. The battle continued until July 2010 when the company tried to register its prepaid legal services in North Carolina.

Carlton provided CJ with a copy of the LegalZoom complaint. In a lengthy letter to the State Bar responding to the March 2003 inquiry, LegalZoom CEO Brian Liu said the company’s legal document service is simply is “an online version of off-the-shelf legal software widely available throughout the United States” and stressed that customers select the forms themselves. Liu named other companies operating on the Internet and offline that offer comparable low-cost self-help law-related services, from wills and living trusts to corporate formations.

In August 2003 the committee sent a letter to LegalZoom, saying it had dismissed the complaint because it had found insufficient evidence to pursue the matter.

In January 2007 the committee opened a second inquiry, claiming that LegalZoom was engaging in the unauthorized practice of law regarding corporate formations for its North Carolina customers. In a letter to the State Bar on Feb. 13, 2007, LegalZoom again detailed its self-help legal document business model, including its incorporation service, emphasizing that its practices had not changed materially since the Bar had closed its 2003 inquiry.

In May 2008, the Bar sent LegalZoom a cease-and-desist letter, saying it believed the company had engaged in the unauthorized practice of law and threatened to seek an injunction against the company.

LegalZoom responded the following month, claiming inaccuracies in the Bar’s assertions and saying that the company does not prepare legal documents but offers an automated process allowing customers to choose and create the documents. If two customers completed an online questionnaire using the same answers and the same form, they would generate identical documents.

The company’s website publishes a disclaimer at the bottom of each page, stating that “the information in this site is not legal advice, but general information on legal issues commonly encountered. LegalZoom is not a law firm and is not a substitute for an attorney or law firm.”

The Bar never responded to LegalZoom’s 2008 letter, apart from acknowledging its receipt, nor did it seek a court injunction or criminal charges. According to state law, a cease-and-desist letter carries no legal weight unless accompanied by a judge’s order.

In July 2010 when LegalZoom tried to register its prepaid legal plans for individuals and businesses in North Carolina, but the Bar refused to consider the application, citing the 2008 cease-and-desist letter and requesting more info.

LegalZoom made five further attempts to resolve the matter and address any concerns the Bar might have over the company’s prepaid legal plans. Finally, in August 2011, Carlton contacted State Bar President Anthony di Santi to request a meeting to discuss the cease-and-desist letter and the company’s registration application for prepaid legal services.

According to Carlton, di Santi said the Bar’s officers didn’t think it would be productive to meet and they’d be sending a detailed letter on the Bar’s position. Carlton said LegalZoom still hasn’t received the letter.

The lawsuit states that the Bar’s conduct has harmed the company’s economic interests by wrongfully using its regulatory authority to attempt to prevent LegalZoom from offering its legal document aids to North Carolina customers and by failing to register its prepaid legal services.

The cease-and-desist letter remains posted on the Bar’s website. It has been disseminated to other state regulatory bars and has been cited by the Pennsylvania State Bar in prohibiting online legal document preparation and by a Missouri class-action lawsuit against LegalZoom.

The LegalZoom complaint says these private and regulatory actions are based on erroneous information that the N.C. State Bar has publicized, knowing it was erroneous.

Jeanette Doran, executive director of the Raleigh-based North Carolina Institute for Constitutional Law, told CJ this case is part of a troubling national trend. Citing North Carolina municipalities preventing food trucks from operating inside city limits, Doran said state and local governments are using regulations to restrict legitimate commercial activities, resulting in fewer consumer choices and higher costs.

Doran said the state doesn’t prevent Lowe’s or Home Depot from selling do-it-yourself products or services to customers, even though the state licenses electricians, plumbers, and other tradesmen. Many lawyers use the documents like those provided by LegalZoom and any “non-lawyer could purchase all the books in an attorney’s law library,” Doran said.

Noelle Talley, public information officer for the North Carolina Department of Justice, told CJ she could not comment on pending litigation but did confirm that the DOJ has until Dec. 5 to file on behalf of the State Bar.

Katherine Jean, general counsel for the State Bar, declined to discuss the case, citing Rule 3.6 of the Rules of Professional Conduct. Jean said, however, that the Bar’s Authorized Practice Committee routinely sends out cease-and-desist letters to parties the Bar believes are engaging in the unauthorized practice of law. She did not comment on why the Bar never sought court action against LegalZoom to enforce the letter.

Karen McMahan is a contributor to Carolina Journal.