NC Business Court Gives Full Faith And Credit To LegalZoom's California Class Action Settlement

There are probably some of you who lie awake at night wondering whether Leagalzoom's offering of do it yourself lawyering products will be found to be the unauthorized practice of law (UPL) in North Carolina.

For those few of you, that uncertainty will continue.  At the end of last week, Judge Gale issued an opinion in Bergenstock v. Legalzoom.com, Inc., 2015 NCBC 49, dismissing a putative class action by Plaintiffs seeking to represent all North Carolina residents who purchased Legalzoom products or services.  The claims were for UPL, unjust enrichment, and violations of the North Carolina Unfair and Deceptive Trade Practices Act.  Op. ¶28.

The Judge dismissed the complaint, but he did not make a ruling as to Legalzoom's business model, nor did he address the question whether its services constitute UPL.  The resolution of that issue will have to come in the still pending case brought by LegalZoom against the NC State Bar: LegalZoom.com, Inc. v. North Carolina State Bar.  See here for my last update on that case.

The reason for the dismissal in the Bergenstock case was the full faith and credit given to the settlement of a similar class action in 2012 in California (known as the Webster case).  Webster had sued Legalzoom on behalf of a nationwide class.

The Webster Settlement

The Webster settlement covered all claims:

asserted or that could have been asserted [in that case] arising out of the LegalZoom website, any materials available on or through the LegalZoom website . . . the unauthorized practice of law, or the purchase or use of documents prepared through LegalZoom.

Op. ¶17.

In consideration for the settlement, LegalZoom agreed to provide sixty days of free enrollment in its prepaid legal services Programs.  As Judge Gale described those Programs (known as the LegalZoom Legal Advantage Plus Program [for individuals] and the Business Advantage Pro Program [for businesses]), they involve:

services provided by licensed attorneys, including telephone consultations; review and written summary of legal documents; an annual legal checkup (which would be provided to Webster class members in the free sixty-day period), including a written summary and recommendations for legal documents and strategies; a ten percent discount on all LegalZoom products; access to the LegalZoom form library; electronic document storage; and a twenty-five percent discount on legal services not included under the Programs, but provided by a participating firm.

Op. ¶18.

The challenge presented by the Bergenstock putative class was that those Programs were not available in North Carolina.  (That is true, as the NC State Bar has refused to approve the Programs.  That refusal is the subject of litigation between the State Bar and LegalZoom.  Op. ¶20).  The Settlement dealt with members who did not live in states where those Programs were available by providing them with the lesser of (i) $75.00, or (ii) half of the current base price of the document that the class member had purchased from LegalZoom.  Op. ¶19.

The Bergenstock Plaintiffs said that they had not received due process in the Webster settlement because there was no counsel representing their interests and there was no named class representative who had interests in common with them.  They further argued that the California Court approving the settlement had not considered the adequacy of the alternative payment to the class members who did not have the LegalZoom payments available to them.  They asserted that the settlement was not entitled to full faith and credit as to them.

Full Faith And Credit To Class Action Settlements

The main road block faced by the Plaintiffs challenging the effect of the Webster settlement lies in a U.S. Supreme Court decision holding that:

a judgment entered in a class action, like any other judgment entered in a state judicial proceeding, is presumptively entitled to full faith and credit.

Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 374 (1996), under 28 U.S.C. § 1738 (2014).

The North Carolina appellate courts have accordingly held that courts should:

apply only a “very limited” scope of review when determining whether a foreign judgment is entitled to full faith and credit, with the inquiry limited to whether jurisdictional and due process considerations were “fully and fairly litigated and finally decided” by the court rendering judgment.

Op. Par. 32 (citing Boyles v. Boyles, 308 N.C. 488, 491, 302 S.E.2d 790, 793 (1983); Moody v. Sears Roebuck & Co., 191 N.C. App. 256, 275–76, 664 S.E.2d 569, 581–82 (2008).

If the out-of-state court found  jurisdiction and due process to have been "fully and fairly litigated" and they were finally decided, a "North Carolina court extends full faith and credit without further inquiry."  Op. ¶32.

The Bergenstock Plaintiffs argued that the California court had not specifically considered the adequacy of the settlement amount paid to persons living in states where LegalZoom's programs were not offered and that they therefore had not been afforded due process.

Judge Gale refused to accept that argument, holding that:

the record does not allow for this parsing of the settlement consideration. The full settlement consideration, including the consideration provided to the Alternative Payment Plaintiffs, was before Judge Highberger [the California Judge approving the settlement] for his review. The Court cannot infer that Judge Highberger failed to consider the adequacy of representation of or the adequacy of consideration for the Alternative Payment Plaintiffs merely because he did not make express findings in that regard. He made findings that the overall settlement was fair and reasonable and that the Settlement Class had been adequately represented. The Court then must conclude that the issues Plaintiffs now seek to litigate in this Court were fully and fairly litigated and finally decided by Judge Highberger.

Op. ¶41.

Legalzoom Strikes Out In Declaratory Judgment Action Against NC State Bar

Sometimes you have a hard time telling who won and who lost a motion ruling.  That's true of Judge Gale's ruling on Monday in Legalzoom, Inc. v. The North Carolina State Bar, 2012 NCBC 47.

You are all undoubtedly familiar with Legalzoom, an on-line purveyor of do it yourself legal documents. This isn't the first time that I've written about Legalzoom. The NC State Bar has been making noise for several years that the vending of Legalzoom's documents is the unauthorized practice of law, and therefore illegal. 

This irked Legalzoom, so it hauled off and sued the Bar for a declaratory judgment in September 2011 seeking a ruling that it isn't engaged in the unauthorized practice of law.   It also made affirmative claims for "commercial disparagement" and for the Bar violating the Monopoly Clause of the state Constitution.  The State Bar made a motion to dismiss, arguing that all of Legalzoom's claims depended on it not being involved in the unauthorized practice of law.

So who won?  No one.  Judge Gale denied the motion to dismiss Legalzoom's claim for declaratory relief, and deferred ruling on the other claims.

The principal reason for the ruling was the Bar had not put the unauthorized practice issue in play by presenting a claim for unauthorized practice.  The Bar can do that by making a claim for injunctive relief to a Superior Court (per N.C. Gen Stat. §84-37), or a District Attorney can initiate misdemeanor proceedings against an unauthorized offender (per G.S. §§84-7, and 84-8).

Judge Gale said that "[a] declaratory judgment action is not generally envisioned as a proceeding to force a State agency or criminal authority to undertake an enforcement proceeding it has in its discretion to date elected not to take."  Op. 44.

Judge Gale said that a motion to dismiss "is seldom an appropriate pleading in actions for declaratory judgments."  Op. 28.

He invited the Bar to make a counterclaim raising the unauthorized practice of law issue.  I expect that will be coming soon, unless the Bar and Legalzoom patch up their differences.

There Won't Be Any Unauthorized Practice Of Law In The Business Court

Burgess v. Vitola, 2008 NCBC 7 (N.C. Super. Ct. March 26, 2006)(Diaz)

Bueche v. Noel, March 25, 2008 (Diaz)(unpublished)

The Business Court decided two cases this week involving what it found to be the unauthorized practice of law.  In the first, Bueche v. Noel, the Court held that a pro se defendant could not file an Answer on behalf of a corporation, because "a corporation must be represented by counsel and cannot appear pro se."  The Court struck the Answer filed by the defendant.

In the second case, Burgess v. Vitola, the issue was whether an out-of-state attorney who had apparently ghost written an Answer for a defendant had engaged in the unauthorized practice of law.

The defendant involved was Dr. Entezam, a California dentist sued by the plaintiff for allegedly trespassing on his computer through an unwanted advertisement.  (Whether those advertisements subjected the defendants to jurisdiction in North Carolina was the subject of an earlier post).  Dr. Entezam filed an Answer under her own pro se signature which had clearly been drafted by a lawyer.   

Burgess, a prolific pro se litigant in the Business Court (search this blog for "Burgess" if you are interested in Mr.Burgess' cases in the Business Court), moved to strike the Answer on the ground that it was prepared by a person not licensed to practice law in North Carolina.  Burgess pointed out a header on the supposed pro se Answer which referenced the name of a California lawyer.  The Court noted that the Answer was filed on ruled and number paper required by the federal courts in the district where the lawyer resided.  It also noted that the Answer raised legal defenses which "are not normally part of the dental school curriculum."

The Court observed that N.C. Gen. Stat. Sec. 84-2.1, which defines the "practice of law," includes "preparing or aiding in the preparation of any petitions or orders in any probate or court proceeding" and "assisting in any legal work."  It also observed that the unauthorized practice of law is a Class 1 Misdemeanor.

Judge Diaz concluded that the out-of-state attorney had engaged in the unauthorized practice of law.  Judge Diaz declined to sanction the attorney, because he had not appeared in the action, but the Court referred the matter to both the North Carolina and California State Bars.

The Court also declined to strike the Answer, since doing so would "unfairly penalize the [defendant] for the conduct of [her] attorney."  But the Court ruled that the defendant could not file further papers in the case unless she agree to proceed on a true pro se basis or she retained a licensed attorney to represent her. 

On the merits of the case, the Court deferred ruling on the defendant's motion to dismiss, finding that the Affidavit in support of her motion was not in proper form.  The Court held that North Carolina law requires "strict compliance with the requirement that an affidavit be properly sworn."  Compliance with the federal statute permitting a declaration to be signed "under penalty of perjury" (under 29 U.S.C. §1746) was not sufficient.