Legalzoom may be a step closer to overcoming the NC State Bar’s assertion that its online legal document service constitutes the unauthorized practice of law (UPL), following yesterday’s ruling in LegalZoom, Inc. v. North Carolina State Bar, 2014 NCBC 9. Or it may be only a few questions away from a ruling that would impact its ability to conduct business in North Carolina, depending on how you read the decision.
If you need some background on LegalZoom, you probably don’t own a television or you haven’t read my two previous posts on this long simmering dispute, from January 2012 and August 2012. The company is constantly advertising its legal document generation service which it says on its website "strive(s) to be the best legal document service on the web." It prepares incorporation papers, wills, trademark applications, and divorce documents and other things for its customers, who want a "do it yourself" approach to law. LegalZoom has been battling with the NC State Bar in the Business Court since 2010 over whether its service constitutes the UPL.
Yesterday, Judge Gale denied the State Bar’s motion for judgment on the pleadings, ruling that he needed a "more developed record" to make a decision, in 2014 NCBC 9. Op. ¶50.
Exceptions To The Unauthorized Practice Of Law and Judge Gale’s Questions
The definition of the "practice of law" is contained in G.S. §84-2.1. LegalZoom argues that it falls within recognized exceptions to states’ prohibitions on the UPL. One is known as the “self-help” or the “self-representation” exception, which means "that one can legally undertake activities in his own interests that would be UPL if undertaken for another, or to “practice law” to represent oneself." Op. ¶58.
The NC Supreme Court weighed in on the "self-help" exception fifty years ago, in State v. Pledger, 257 N.C. 634, 127 S.E.2d 337 (1962), in which it held that a non-lawyer employee of a company in the business of constructing and selling of homes did not engage in the UPL by preparing deeds of trust for homes that his employer sold. The Court said that:
[a] person, firm or corporation having a primary interest, not merely an incidental interest, in a transaction, may prepare legal documents necessary to the furtherance and completion of the transaction without violating [the law].” Id. at 637, 127 S.E.2d at 339.
Op. ¶61. Since LegalZoom doesn’t have a "primary interest" in its customers’ business, it wasn’t able to successfully avail itself of the "self-help" exception.
The second exception, relied on more heavily by LegalZoom has been referred to as a “scrivener’s exception,” which essentially means "that unlicensed individuals may record information that another provides without engaging in UPL as long as they do not also provide advice or express legal judgments." Id.
Judge Gale had a number of questions whether the operation of LegalZoom’s online software fit within the scrivener’s exception. Those questions could not be answered on the existing record. He posed the following:
if a customer makes one choice presented to him by the [LegalZoom] software, are there portions of the template that are then never shown to the customer? If so, what is the reasoning behind and the legal significance of the software’s determination not to present that portion of the form? [Does the premise of the Pledger decision] require that only the unlicensed individual make choices in drafting a legal document, and that the choice or risk of an incorrect choice about which portions of a form to include must belong exclusively to the individual? Is there then a legally significant difference between how one engaging in self-representation uses a form book versus LegalZoom’s interactive . . . software? A form book presents the customer with the entire form, often accompanied by opinions or directions on how to use the form, but any choice and its implications are solely the customer’s. Does the LegalZoom software effectively make choices for its customer? 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?
Op. ¶66. Although the Judge was careful to say that these were not the "controlling or only relevant questions," Op.¶67, they certainly provide a road map for future resolution of the case via a motion for summary judgment.
LegalZoom’s Prepaid Legal Services Plan
There’s another aspect to the case, which involves Legaloom’s prepaid legal services plans. The State Bar, which is responsible for registering such plans, refused to register LegalZoom’s plans. The online vendor said this refusal violated the equal protection clauses of the U.S. and North Carolina Constitutions.
Judge Gale dismissed that claim, because LegalZoom had not exhausted its remedies by failing to request a hearing before the State Bar. The Administrative Procedure Act, to which the State Bar is subject, requires a final agency decision before judicial review is allowed.
LegalZoom had taken the position that requesting a hearing was only optional, and that a hearing would have been futile. Judge Gale observed that both arguments were foreclosed by NC appellate decisions. Op. ¶¶46, 47.
LegalZoom’s Claim that it has been Defamed by the NC State Bar was Dismissed
LegalZoom had made a claim against the State Bar that the Bar’s statements that it was engaging in the UPL were "false and untrue" and that those statements disparaged its product.
Judge Gale found those statements to be barred by the doctrine of sovereign immunity.