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Strategic win: New ruling strengthens LegalZoom’s position as it seeks to overcome unauthorized practice claim

LegalZoom wants a jury to decide whether its business model is legal, and a recent Business Court ruling puts the company one step closer to getting what it wants.laptop

Business Court Judge James Gale handed down the first significant decision in a closely watched and protracted lawsuit pitting LegalZoom.com against the North Carolina State Bar last week. LegalZoom’s suit, which was filed nearly three years ago, raises questions about the scope of the bar’s authority and the ambiguous state law governing the unauthorized practice of law.

The California-based website sells do-it-yourself legal documents, which the bar considers to fall within the realm of unauthorized practice. LegalZoom sued the bar to force the agency’s hand after it refused to seek a court order to enforce a cease and desist letter that it sent to the company.

Answering with more questions

The bar had asked Gale to find that LegalZoom’s document preparation services are illegal based on a review of the company’s website, and then dismiss the suit.

But Gale said in a March 24 order denying the bar’s motion for judgment on the pleadings that he needed to know more about how LegalZoom works before the court could determine if its services are exempt from the unauthorized practice statute.

The company’s attorney, A.P. Carlton of Raleigh, issued a statement that called the ruling “a victory for LegalZoom and for consumers in North Carolina.”

He added that the bar “attempted to ban LegalZoom on its own authority. The court agreed with LegalZoom that the bar did not have such authority and that the case, as we always anticipated, must move forward to a trial.”

The bar’s attorney, Special Deputy Attorney General Faison Hicks, has declined to discuss the suit.

In his order, Gale expressed curiosity about the technology behind LegalZoom’s document preparation service, which will likely be a key issue if the case goes to trial.

Gale wondered, for instance, whether a legal form template on the website changed in response to a customer’s answers or whether LegalZoom’s software would skip over forms based on certain responses.

Many of the forms sold on LegalZoom are available on other websites, including the state court system’s site. But Gale questioned whether LegalZoom’s business goes beyond simply providing forms and allowing customers to plug in the necessary information.

“Does the LegalZoom software effectively make choices for its customer?” he asked. “Do responses depend in any part on the effects of statements embodied in the software, either those that promote the program or those that disclaim legal advice being given?”

LegalZoom has argued that there is “no little man behind the screen,” asserting that it is merely acting as a scrivener for its customers. Under state law, non-lawyers are allowed to fill out a legal form for another person as long as they’re not providing legal advice.

So far, though, no state appellate court has ever considered the so-called “scrivener exception” to the unauthorized practice statute, according to Gale’s order.

The law allows for two other exceptions. One says it is OK for residents to represent themselves in legal matters. The other involves free speech, which Gale said would require the court to “seek a balance between the public interest being protected, and the corresponding First Amendment rights LegalZoom may have.”

He added, “The court remains uncertain how the interplay of those potentially competing rights and interests should affect the court’s overall interpretations of UPL [unauthorized practice] statutes, including application of recognized exceptions.”

Not a flawless victory

While LegalZoom considers Gale’s order a win, the company did not walk away from the decision unscathed.

LegalZoom had asked Gale to declare that the bar lacked the authority to refuse to register the company’s prepaid legal services plans. The company argues that the registration process is ministerial and that the bar has no choice but to approve completed applications.

Gale was uncertain as to whether the bar’s refusal to register the plans is based on its determination that LegalZoom is engaged in the unauthorized practice of law. But he denied the company’s motion for partial summary judgment after finding that it had not forced the bar to make a final administrative decision on the registration issue.

LegalZoom had argued that it was futile to continue its back-and-forth with the bar, which had turned down a request from the company’s president for an informal meeting, so it decided to sue before exhausting its administrative remedies. Gale found the argument “unavailing.”

Gale also dismissed LegalZoom’s equal protection claim against the bar because it hinges on the agency’s refusal to register the prepaid legal services plans, meaning that the claim could be resolved through the administrative process.

Doug Brocker is a Raleigh attorney who formerly represented the bar’s unauthorized practice committee. He now defends lawyers and other professionals facing disciplinary proceedings. Brocker said he’s heard clients make arguments similar to LegalZoom’s plenty of times before.

“We represent both sides and almost all of our clients who get a preliminary adverse decision think it’s pointless to go to the next level,” he said, “but that’s something you have to do.”

Gale dealt LegalZoom another final blow by tossing its commercial disparagement claim against the bar, finding that the agency is protected by sovereign immunity. LegalZoom had alleged that the bar hurt its business by publicly accusing it of unauthorized practice.

– Follow Phillip Bantz @NCLWBantz

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