LegalZoom Fought the North Carolina Bar — And LegalZoom Won

Editor’s Note: The author of this article is a professor at University of Tennessee College of Law and wrote the book, Glass Half Full: The Decline and Rebirth of the Legal Profession .

By Ben Barton, Professor of Law, University of Tennessee College of Law

LegalZoom has settled its twin law suits against the North Carolina Bar. LegalZoom has basically won the battle and the war.

According toForbes , LegalZoom agreed to have a licensed North Carolina attorney review its online forms and to inform potential customers that its forms are not a substitute for advice from a live attorney. LegalZoom says it was already doing that anyway. In return the State Bar Association appears to be rolling over on the unauthorized practice of law (“UPL”) fight, going so far as to support a change in North Carolina law to make LegalZoom and other forms providers 100 percent street legal. So what does it all mean?

LegalZoom is now likely in the clear on UPL, after a period of some uncertainty. LegalZoom faced UPL suits in other states and settled some of them, usually on worse terms than they faced in North Carolina. In Washington State it paid $20,000 in costs and in Missouri it paid attorneys fees and changed some parts of its site for Missouri customers . The Missouri case was a particularly close call, as the district court strongly suggested that LegalZoom was in violation of UPL in its summary judgment ruling, Janson v. LegalZoom, 802 F.Supp. 1053 (2011).

So what changed in North Carolina? LegalZoom changed from prey to predator. North Carolina issued a cease and desist letter to LegalZoom in 2008 (which LegalZoom essentially ignored) and then refused to register LegalZoom’s prepaid legal services plan in 2010. At this point LegalZoom went on the offensive, filing suit against the State Bar for declaratory relief on the UPL question. The Wall Street Journal has a copy of the complaint here .

This was a gutsy move on LegalZoom’s part though not necessarily a good idea. From its inception LegalZoom had operated according to the Internet entrepreneur handbook: start the business first, worry about legal questions later. But there is a big difference between passive resistance (ignoring cease and desist letters, settling the lawsuits that eventually come up) and taking the fight to the regulators. If LegalZoom had lost in North Carolina, it would have been a stinging defeat and might have even have provided a damaging precedent in other states.

And yet the gamble paid off, mostly because of two different intervening legal cases. The first was LegalZoom’s win on UPL before the South Carolina Supreme Court. LegalZoom argued that its interactive forms were very similar to online forms offered various South Carolina governmental agencies. LegalZoom argued that because those forms were legal, LegalZoom’s should be as well. The Court agreed and LegalZoom had its first unequivocal win on merits on UPL.

The second was the U.S. Supreme Court’s decision in North Carolina Board of Dental Examiners v. FTC . In that case the Court held that state professional boards could face antitrust scrutiny for anticompetitive actions, like the North Carolina dental board sending cease and desist letters to non-dentist teeth-whiteners.

It is still unclear how that case might apply to State Bar regulators, but LegalZoom thought it opened the door for a $10.5 million antitrust suit . This was a significant upping of the ante by LegalZoom, and the North Carolina Bar suddenly had to decide whether it was willing to go to the mattresses with LegalZoom in a true “loser leaves town” battle: if LegalZoom prevailed on its antitrust suit the Bar might, as a practical matter, lose some or all of its regulatory power. The timing of the settlement (just four months after LegalZoom filed the antitrust suit) speaks volumes about how seriously the State Bar took this threat.

Taken together, the South Carolina and North Carolina precedents will likely end all state bar action on UPL. South Carolina offers legal support for LegalZoom, and North Carolina offers the explicit threat that any UPL actions will be followed briskly by an antitrust suit.

And of course LegalZoom was already a wealthy, well-known, and popular adversary, making it a very costly target for regulators in terms of funds and political capitol. Historically state bars have done best when they use UPL against individual conmen and worst when they faced an organized opponent, like title search companies or forms book publishers. These previous opponents look like pikers in comparison to LegalZoom.

LegalZoom still might face the threat of private class actions on UPL, but it has good news on that front as well. In 2013, the Supreme Court of Arkansas held that UPL claims must be arbitrated, rather than handled by class action. Because the UPL damages are small (and probably non-existent), if other courts follow Arkansas’s lead the class action threat will also likely end.

The bottom line is that LegalZoom has plowed the road for other online forms providers and is likely now in the clear on UPL. LegalZoom still faces challenges from Rocket Lawyer and others. There is also the worrisome irony of its successful South Carolina UPL argument: is it good news that most states offer some or many of LegalZoom’s forms online for free? Nevertheless, given the existential threat that UPL seemed to present just a few years ago LegalZoom (and its lawyers) should take a victory lap.