LegalZoom Suffers Setback in North Carolina

[Correction: This post erroneously described an Alabama lawsuit against LegalZoom as active when, in fact, it had been dismissed in January 2014. See this post for a full explanation.]

When LegalZoom issued a press release last month announcing that the South Carolina Supreme Court had issued a determination that the company is not engaged in the unauthorized practice of law in that state, the news was widely reported by news media and blogs.

However, just two weeks later in neighboring North Carolina, a Superior Court judge handed the State Bar a partial victory in its six-year fight to shut down LegalZoom for unauthorized practice. That news seems to have slipped through the cracks.

In the North Carolina case, the court dismissed two counts in LegalZoom’s 2001 lawsuit against the bar, in which LegalZoom alleged that the bar’s efforts to shut it down violated the anti-monopoly and equal protection clauses of the state constitution.

At the same time, the court deferred ruling on the bar’s claim that LegalZoom is engaged in unauthorized practice, concluding that a more extensive factual record is required in order to explain questions such as how LegalZoom’s process prepares complex documents for its customers.

A separate issue also still pending in the North Carolina case involves LegalZoom’s application for approval to operate a prepaid legal services plan there. The company is registered to operate prepaid plans in 41 states and the District of Columbia.

Court Not Yet Comfortable

In 2008, the North Carolina State Bar ordered LegalZoom to cease-and-desist from the unauthorized practice of law. Although the bar took no further enforcement action, LegalZoom took the offensive and sued the bar in 2011, to which the bar then filed a counterclaim. Both parties then filed motions for judgment on the pleadings.

On March 24, Business Court Judge James L. Gale issued his ruling (see below), denying LegalZoom’s motion and partially granting the bar’s motion. Gale put off deciding the unauthorized practice issue, indicating that he still has many questions about LegalZoom’s process.

“The court is not yet comfortable that it understands the overall process of preparing more complex documents,” he wrote.

South Carolina Order

The South Carolina petition, which I mentioned at the outset, was filed in 2012 by lawyer and former state attorney general T. Travis Medlock, asking the Supreme Court to declare that LegalZoom was engaged in unauthorized practice. The Supreme Court appointed a special referee to investigate, Circuit Court Judge Clifton Newman. With a hearing date approaching, the parties reached a settlement and asked Newman to recommend its approval.

On Oct. 18, 2013, Newman issued his report, finding that LegalZoom “does not provide legal advice to anyone” and recommending that the Supreme Court approve the settlement. The Supreme Court, in a two-paragraph order issued March 11, 2014, adopted the recommendation and concluded that LegalZoom’s practices in the state “do not constitute the unauthorized practice of law.”

In his report, Newman compared LegalZoom’s software to the work of a scrivener, who transcribes information without giving advice or consultation.

“LegalZoom’s software acts at the specific instruction of the customer and records the customer’s original information verbatim, exactly as it is provided by the customer,” Newman wrote. “The software does not exercise any judgment or discretion, but operates automatically in the same fashion as a ‘mail merge’ program.”

He also found that most of the form documents LegalZoom offers in South Carolina are already available from other sources, including the websites of state and local governmental agencies and courts.

In the settlement agreement, LegalZoom agreed to modify its business practices for South Carolina customers for 24 months. It agreed to offer only forms that match those already provided by government agencies or courts or that have been reviewed and approved by an attorney licensed in South Carolina.

Also as part of the settlement, it agreed to allow refunds to any South Carolina customer for 60 days from the purchase of a form and to pay $500,000 to the petitioner for his attorneys’ fees and costs.

Other States

Meanwhile, LegalZoom continues to face challenges in other states, including Alabama and Arkansas. On Oct. 3, 2013, the Supreme Court of Arkansas granted LegalZoom’s request to send a lawsuit pending there to arbitration, pursuant to the mandatory arbitration clause in LegalZoom’s terms of service.

Elsewhere, LegalZoom has settled unauthorized practice lawsuits. In California in 2012, it settled two class actions. It also settled a class action in Missouri in 2012, agreeing to pay $1.9 million in attorneys’ fees and to modify certain aspects of its business, and in 2010, it settled a lawsuit brought by the state of Washington alleging violations of that state’s consumer protection law.