LegalZoom says Bar’s delays, not new law, is reason for lawsuit

LegalZoom sued the N.C. State Bar one day before a new law went into effect that allows a new cause of action against unauthorized practitioners. But the company says that was coincidence – not the impetus for the suit.

LegalZoom general counsel Chas Rampenthal said the new cause of action doesn’t apply to LegalZoom because the company is not engaged in the unauthorized practice of law. The company sued the Bar, he said, because the agency refused to withdraw a public cease-and-desist letter it sent LegalZoom three years ago and because it refuses to register the company’s prepaid legal service plans.

In its suit, LegalZoom alleged that the impression that it engages in the unauthorized practice of law was fostered, at least in part, by the Bar’s May 5, 2008 cease-and-desist letter. That letter, LegalZoom alleged, has disparaged its name and caused it “incalculable” economic harm.

The company asked the Wake County Superior Court to declare that LegalZoom is not engaged in the unauthorized practice of law and to order the Bar to publically withdraw the letter and all public comments and reports about the company from its site. LegalZoom also asked the court to order the Bar to register its Legal Advantage Plus and Business Advantage Pro prepaid legal services plans.

All companies that offer prepaid legal services plans must register them with the Bar before they can legally operate them in North Carolina. LegalZoom sought to register its plans in 2010, but that effort was rebuffed by the Bar’s Authorized Practice Committee on Oct. 27, 2010, according to the complaint.

Issue brought to a head

Charlotte, N.C. attorney Adam Foodman said the fact that the lawsuit was filed one day before the new law took effect caught his eye. Foodman, who is president of the Real Estate Lawyers Association of North Carolina, was one of the bill’s primary backers.

While the bill – which Gov. Beverly Perdue signed into law June 27 – was aimed at unauthorized practitioners in real estate transactions, under its broad language any unauthorized practitioner could be targeted.

Foodman didn’t say whether he thinks LegalZoom is engaged in the unauthorized practice of law, but he said the company’s concerns are understandable. “It’s not good for the state of the law or the people of North Carolina to have businesses not knowing whether they are operating legally,” he said.

Gastonia, N.C. attorney Keith Hance said he thinks the lawsuit is a good thing because it will require a court to draw a clear distinction between what is and isn’t the unauthorized practice of law.

Hance thinks LegalZoom engages in the unauthorized practice of law and points to the way the company promotes its services.

“LegalZoom purports to give documents that are valid and binding in all fifty states,” Hance said. “Its advertisements say the documents are prepared by legal professionals. It is providing consumers a service that affects their rights and obligations in a setting in which, explicitly or implicitly, it is holding itself out as having expertise.” That, Hance said, is the practice of law.

Raleigh, N.C. attorney A.P. Carlton, who represents LegalZoom, said the case may be the first to address the application of laws prohibiting the unauthorized practice to the provision of law-related goods and services over the internet, but he said LegalZoom merely provides legal aids. It doesn’t practice law.

He said LegalZoom continues to operate in North Carolina despite the Bar’s cease-and-desist letter, which Carlton said is still “lying there like a limp straw man after three-plus years.” Carlton said the letter has no legal effect, and merely represents a “request” by the Bar.

After three years, still waiting

In its complaint, LegalZoom wrote that it sought clarification of the Bar’s letter for over three years, without success. Rampenthal said he tried to arrange a meeting between LegalZoom and Bar executives as recently as six weeks ago to iron out differences. Bar President Anthony di Santi said the meeting would not be productive, according to LegalZoom’s complaint. Rampenthal said the offer is still on the table.

While LegalZoom claims “incalculable” economic harm in its suit, it did not seek damages. Carlton described the suit as one based upon principle. “This is about the right to do business freely without unlawful interference by an agency of the state,” he said.

The lawsuit seeks reimbursement for fees, costs and expenses associated with the suit in addition to an order requiring registration of the prepaid legal services plans and removal of statements about the company from the Bar’s site.

State Bar Counsel Katherine Jean said the Bar has been informed of the existence of the lawsuit and has seen a copy of the complaint, but she said it would not be appropriate to discuss the lawsuit.

Company’s constitutional claims may be first of their kind

Two of LegalZoom’s claims against the N.C. State Bar involve state constitutional provisions and could be matters of first impression for the Wake County Superior Court, says Raleigh, N.C. attorney A.P. Carlton, who represents the company.

The lawsuit alleges that the Bar has “engaged in monopolistic and anticompetitive conduct” that violates the so-called “Monopoly Clause” of the constitution. That clause provides that “monopolies are contrary to the genius of a free state and shall not be allowed.”

Carlton said the case may be the first in North Carolina in which a business has challenged a state agency’s illegal exclusion of its products or services from the marketplace under the monopoly clause. Carlton called that kind of exclusion a “horizontal restraint.”

In antitrust law, “horizontal restraint” refers to concerted efforts by competitors to control a market. A drug cartel, by way of example, uses horizontal restraint to illegally exclude competitors and fix prices. Purveyors and competitors of any legal product, in theory, could make an agreement to set prices, but the monopoly clause bars it.

LegalZoom general counsel Chas Rampenthal said he thinks some lawyers use unauthorized practice laws to seek “to fashion a monopoly that does not and should not exist.” A small percentage of lawyers, he said, first fought legal self-help books, then software, and now they are fighting the internet. Unauthorized practice laws, he said, were designed to protect consumers, not to protect attorneys from competition.

Gastonia, N.C. attorney Keith Hance agreed that lawyers don’t have a monopoly on anything. “A monopoly in the strict sense is when a single entity dominates an entire field of commerce,” he said. The Bar is merely an entity that has regulatory authority over lawyers, he added, not a vehicle through which lawyers enforce a monopoly.

But Hance said the reasons for requiring licensing of professionals are important.

“Only licensed electricians install wiring in houses because we don’t want people’s houses to burn down,” Hance said. By the same token, only licensed attorneys can practice law, he said, because “we don’t want people’s lives destroyed by pikers and halfwits purporting to have legal knowledge that they don’t have.”

LegalZoom’s equal protection action under the N.C. Constitution’s “Law of the Land Clause” may also be a first, Carlton said.

Equal protection actions involving property rights were effectively read out of the 14^th Amendment to the U.S. Constitution by U.S. Supreme Court decisions upholding New Deal-era legislation aimed at regulating businesses. Now most federal actions brought by businesses challenging regulations are brought under the U.S. Constitution’s Commerce Clause.

The “Law of the Land Clause” in the N.C. Constitution does not have the same case history as its federal equal protection counterpart does, however, and actions by companies like LegalZoom involving substantive property rights – the right to do business in the state – may still be recognized under state law.

In its complaint, LegalZoom alleged that it was being singled out and excluded “from the opportunity to provide its products and services in North Carolina” due to the Bar’s hold on registration of its prepaid legal services plans, in violation of the “Law of the Land Clause.”