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Law Office Management
Sep. 2, 2010
Is LegalZoom's Gain Your Loss?
In less than a decade, online enterprise LegalZoom has take the document processing market by storm. But is the company practicing law without a license?
To get to the Los Angeles headquarters of LegalZoom.com, the popular online document preparation service that has taken the legal world by storm, you have to pass through the Hollywood Walk of Fame. Studded with pink and charcoal-colored stars, this is the iconic walkway that honors the entertainment industry's great, near great, and not-so-great - everyone from Cary Grant to Don Knotts. It's an incongruous setting for an enterprise that devotes itself to helping everyday people handle such serious matters as wills, trusts, and provisional patents. But as you follow the wandering herd of photo-snapping tourists to just within a stone's throw of LegalZoom's front door, you come across the star that honors Judith Sheindlin, the television personality known to millions as "Judge Judy," and suddenly, it all makes perfect sense. Like Judge Judy, LegalZoom provides legal services without officially engaging in the practice of law. Both have attracted a huge following by offering ordinary folks a cheaper, easier way to meet their routine legal needs. And both are viewed with skepticism, if not outright disdain, by many in the legal establishment. In 2008 a North Carolina State Bar committee concluded that LegalZoom was engaging in the unauthorized practice of law and sent out a cease and desist letter. (So far, LegalZoom says it continues to serve customers there, and indeed in all 49 other states as well.) More recently, a Connecticut Bar Association task force filed a report with that state's Department of Consumer Protection claiming that LegalZoom was operating illegally. The panel's chairman, construction and business litigation attorney Louis R. Pepe, says, "There are reasons why there are laws and rules regulating the practice of law, and that reason is to protect public interest." In Missouri, LegalZoom faces a direct legal challenge. There, a class action pending before a circuit court could, if certified, expose the company to massive punitive damages. The suit alleges that LegalZoom, by offering legal documents and instructions over the Internet, is illegally practicing law. The requested class certification would include all Missouri customers of LegalZoom for the past ten years, and the suit seeks actual damages for the fees they were charged. Meanwhile in Los Angeles Superior Court, a class action filed in May accuses LegalZoom of unfair and deceptive business practices as well as the unauthorized practice of law. The lead plaintiff, Katherine Webster, the executor of an estate and the trustee of a living trust, claims LegalZoom created a legally flawed living trust, requiring the estate to spend more than $10,000 on an outside attorney to fix the problems. The suit alleges that LegalZoom misleads customers about the degree to which its documents are customized and about their quality, compared with those prepared by an attorney. The complaint further contends that LegalZoom broke laws and regulations governing the practice of law in California, and employed fraudulent business practices. The suit seeks damages for negligence, elder financial abuse, consumer law violations, and illegal and unfair business practices. (See Webster v. LegalZoom.com, Inc., No. BC 438637 (Los Angeles Super. Ct. filed May 27, 2010).) "We believe LegalZoom is engaged in the unauthorized practice of law, just as the North Carolina State Bar said it was (in 2008)," says San Francisco elder abuse attorney Kathryn Stebner of Stebner and Associates, the co-lead counsel in the case. "The way the information is placed on the LegalZoom website is deceptive because, we believe, all the disclaimers are buried." Still, LegalZoom hasn't yet heard from either the California State Bar or its Office of Chief Trial Counsel about any complaints. But John Russell, a Danville trademark attorney, says he hears sole and small-firm practitioners griping about LegalZoom all the time. Moreover, he himself is thinking of lodging a formal complaint. "LegalZoom creates an inference that they are lawyers, except for a tiny disclaimer at the bottom of the website," he says. "And they're making tons of money. Tons of money. I doubt if the big firms are really concerned about it, which may be why it hasn't gotten much traction from the bar." For its part, LegalZoom is quick to deny any wrongdoing, maintaining that both the Missouri and California class actions are without merit. "LegalZoom is an automated self-help tool," says co-founder Brian Liu, a graduate of the UCLA School of Law who worked for three years as an attorney with Sullivan & Cromwell in Los Angeles, where he handled mergers, acquisitions, initial public offerings, and general corporate law. "It's an online version of software and self-help books that have been around for decades," he adds. "People have been making these types of documents and writing their own wills for years. LegalZoom is no different." To be sure, legal self-help in this country does go a long way back - at least as far back as the late 1860s, when an American author named John G. Wells wrote Every Man His Own Lawyer, which was billed as "a complete guide in all matters of law and business negotiations for every state in the Union." The book, published in San Francisco by H. H. Bancroft & Co., contained both sample legal forms and full instructions for tackling legal issues without the aid of a lawyer. These forms helped nonlawyers deal with everything from deeds and mortgages to such Wild West problems as lost or stolen cattle. In the mid-20th century How to Avoid Probate! became a best seller, as did How to Do Your Own Divorce in California, which launched a Berkeley-based company called Nolo Press. Like LegalZoom, these efforts drew sharp criticism (and the occasional lawsuit) from the legal establishment. But unlike past ventures, LegalZoom is very much a product of the Internet, and as such it may be a more serious threat to the status quo. "Change is hard," Liu acknowledges, "whether it comes from LegalZoom or somebody else. Information used to be inaccessible. And now with the Internet, that information has become public." Financed with two multimillion dollar rounds of venture capital after a short startup period, the company says it has served more than a million customers since its founding in 2001. It currently has a staff of more than 300 working in Los Angeles, and a recently opened regional center in Texas may eventually employ twice that number. To the general public, though, LegalZoom is undoubtedly known best for its ubiquitous TV commercials. These ads feature satisfied customers talking about their wills and provisional patents. They've also given celebrity attorney Robert Shapiro a new claim to fame. (This is the same Robert Shapiro who, back in 1995, led the "dream team" that successfully defended O. J. Simpson in the murder trial of the century.) Shapiro joined the venture in 2000, about a year after Liu and another UCLA law graduate, Brian Lee, put together a business plan. (Also joining the company early on was a Yale University?trained computer scientist named Eddie Hartman, who now serves as chief strategy officer.) In the commercials, Shapiro is identified as LegalZoom's "founder." But he's not involved in the company's day-to-day operations, and in fact remains a partner at Glaser, Weil, Fink, Jacobs, Howard & Shapiro in Century City. "At LegalZoom.com, we put the law on your side," Shapiro intones at the end of every ad. On the ground floor of LegalZoom's L.A. headquarters, dozens of workers sit at computer terminals to process the orders that pour in from across the country, while FedEx boxes stuffed with completed documents pile up on a back table. Although the office employees work standard business hours, the website can process customer orders 24/7. To use the service, customers log on to the site and answer a series of questions relating to the particular legal document they wish to create. LegalZoom offers dozens of documents, but by far the most popular are those establishing a Limited Liability Company (LLC), and wills. The basic rate for setting up an LLC through LegalZoom is $149; wills start at $69, and a provisional patent application starts at $199. These, of course, are prices that most lawyers can't even begin to compete with, and LegalZoom makes no bones about it. A message on its LLC page proclaims: "You save $1,491.00 with LegalZoom!" For its standard divorce document package, the website claims that users pay $1,781 less than they would to hire an attorney to do the same work. (LegalZoom's estimates are based on a 2006 survey of law firm economics by Altman Weil Pensa Publications that pegged the average hourly rate of lawyers nationwide at $266.) Once customers pay up front for a legal document, their responses to the online questions enter the company's FileNet system, an automated content manager. A LegalZoom document assistant reviews the answers for grammar, consistency, and common mistakes, contacting the user if there's a need for clarification or more information. On the website, the company provides what it calls "general explanations" about its offerings and the questionnaires. It also explicitly states that its customer service specialists "do not provide legal advice or specifically tell customers to choose one answer over another." If, however, a customer poses a legal question over the phone, these specialists are under instructions to refer the user to the site's online Education Center, which contains information on nearly two dozen legal topics. The site also has an Attorney Connect section that provides referrals to licensed lawyers, categorized by location and practice area. After the purchased documents are completed, LegalZoom prints them out on archival quality, acid-free bond paper and delivers them with final instructions. Standard LLC packages include an official company seal for the newly formed company and a handsome binder embossed with its name. Of course, it would be easier and cheaper to just send them as email attachments. But the company has found that customers appreciate the flourishes. Many of these documents, after all, mark major life events, such as the dissolution of a marriage or the creation of a dream invention, and thus carry emotional weight. As Liu observes: "Customers feel that they're getting something special." Nobody at LegalZoom actually boasts about putting small firms or sole practitioners out of business. Instead, the talk is about how they're expanding the market for legal services. Says Shapiro: "The type of [customers] we attract are people who generally don't go to lawyers or can't afford lawyers. If LegalZoom wasn't available, they'd simply go without legal documentation." LegalZoom's founders also say they didn't anticipate much push-back from other lawyers over their service. After all, the legal forms they offer were already widely available in booklet form or from state agencies; LegalZoom simply makes them more accessible. Shapiro says he even thought that some lawyers would welcome the chance to offload some of the work that's often done as a favor, like drawing up a will for a client's friend or housekeeper. "If you have a big client, you have to say yes to requests like that," Shapiro observes. "But lawyers are really not happy to do this kind of stuff, or equipped to do it. And quite frankly, they don't want to do it." Of course, that may be true of a nationally known lawyer like Shapiro. But to many sole or small-firm practi-tioners, that's the kind of work that keeps the lights on. "Obviously this is a financial issue for me," says Danville attorney Russell, "but it's just not fair. I had to go to law school, I had to pass the bar, I have to pay for malpractice insurance. I have to do all of this stuff, and then to be undercut by these guys who are, in my opinion, practicing law without a license, it's just infuriating." In California as in many states, the modern era of attorney licensing did not begin until the 1920s when, after intensive lobbying by the bar, the Legislature made State Bar membership a prerequisite for practicing law. At the same time, the legal establishment tried very hard to discourage legal self-help, often with the pithy warning that anyone who would act as his own lawyer has a fool for a client. That adage, however, was directly challenged in 1965 when a plucky estate planner in Connecticut named Norman Dacey published How to Avoid Probate!, a book of advice and do-it-yourself legal forms that quickly became a national best seller. It also prompted a lawsuit from the New York County Lawyers' Association, which argued that by recommending what legal forms to use and how to fill them out, Dacey had run afoul of that state's statute forbidding the unauthorized practice of law (UPL). The trial court agreed, and Dacey was briefly prohibited from selling any more copies in New York until an appellate court reversed the decision (New York County Lawyers' Association v. Dacey, 21 N.Y. 2d 694 (1967)). Four years later, the legal self-help phenomenon got an even bigger boost when two maverick attorneys from Northern California, Ralph "Jake" Warner and Charles "Ed" Sherman, teamed up to launch Nolo Press. Warner had graduated from UC Berkeley's Boalt Hall law school in 1966, clerked for the chief judge of the Ninth Circuit, and then worked at the Contra Costa Legal Services Foundation, where he met Sherman, a fellow Boalt alum who had previously been an assistant DA in both Los Angeles and Contra Costa counties. At Legal Services both men were frustrated by what they saw. Many of the would-be clients were too poor to afford a lawyer but not poor enough to qualify for free legal help. After quitting the organization, Sherman set up shop in the living room of an old brown-shingle farmhouse in Berkeley, where he mostly practiced family law. Warner says he did pretty much the same thing from the backyard of a "hippie house" to avoid getting a real job. When Sherman decided to put together a set of detailed instructions on how Californians could handle their own divorces, Warner helped edit it. They hoped to get it published with Doubleday. But when Doubleday rejected it, Sherman decided to publish the book himself. "We were angry when we started Nolo," Warner admits. "We were mad at our own profession because we felt that attorneys were kind of hiding the law from people. Lawyers in the seventies felt that legal information belonged to them. You couldn't even get a pamphlet on how to do a name change." Interestingly, when Sherman's divorce book first came out in 1971, it sold poorly. But after the president of the Sacramento Bar Association called a press conference to urge people not to buy it - he called the book "dangerous" - sales promptly went through the roof. (How to Do Your Own Divorce in California is now in its thirty-third edition.) But Nolo's success hardly silenced its critics. In fact, Nolo faced what was perhaps its most serious challenge in the late nineties when the Texas Supreme Court's Unauthorized Practice of Law Committee began investigating Nolo and other legal self-help publishers. Nolo sued, seeking a declaratory judgment that its publications were legal, and then it mounted a public relations campaign that portrayed its adversaries as self-interested protectionists. Nolo's campaign proved so effective that by 1999 the Texas legislature felt obliged to alter the state's UPL law to exclude books, printed forms, and Internet sites "as long as the items clearly indicate that they are not prepared by a person licensed to practice law." (Nolo's materials already did.) Since then, Nolo's contentious posture toward the legal profession - for a time its unofficial mascot was a shark wearing a necktie and carrying a briefcase - has softened a bit. And its website now prominently displays an extensive directory of nearly 2,000 lawyers, including more than 700 from California, to take on legal matters that customers can't handle themselves. Of course, the emergence of LegalZoom presented Nolo with a whole new set of challenges, since the two companies compete for some of the same customers. But they also behave like partners from time to time. In fact, LegalZoom includes Nolo's self-help books in some of its packages. And they obviously share a common interest in defeating any UPL suits that come along. (In the Missouri class action, Nolo is considering filing an amicus brief for LegalZoom's defense.) As Warner puts it, "Using UPL against legal forms and information on the Internet is nuts." The Missouri case, which the defendants removed to federal court in February, centers on two online transactions: One involves a last will and testament; the other, articles of organization. (See Janson v. LegalZoom.com, Inc. (No. 10-04018 (W.D. Mo. petition for removal filed February 5, 2010)).) The plaintiffs don't claim that the documents they received from LegalZoom are in any way deficient or caused them harm. But they do contend that the mere preparation and customization of legal documents by LegalZoom constitutes the unauthorized practice of law. According to the amended class action petition, the plaintiff who wanted to create a will received a letter from the company stating: "With LegalZoom, if you return to revise your will we will automatically create a new will for you." "I like our chances," declares plaintiffs co-counsel Tim Van Ronzelen, who won't say what motivated his clients to get behind this legal action. "The Missouri UPL statute, in my mind, is really clear on what you can and cannot do. Creating a will or another legal document and accepting money for the creation of that is something that we don't believe is permitted under the law in our state. Our assertion is that while LegalZoom may have the ability in California to prepare certain legal documents, in our state it's a different story." LegalZoom, however, is not willing to make that concession. As the company's vice president and general counsel, Chas Rampenthal, observes: "The preparation of a form document and inputting answers has never once been held to be the practice of law anywhere." And this, he adds, applies whether the will is being created or revised. So where, exactly, is the line that divides those who are practicing law from those who aren't? Missouri's UPL statute defines the practice of law as "the appearance as an advocate in a representative capacity or the drawing of papers, pleadings or documents." Another section says that "law business" is "the drawing or the processing of or assisting in the drawing for a valuable consideration of any paper, document or instrument affecting or relating to secular rights." By contrast, no single California statute comprehensively defines the practice of law, although provisions of the state's Business and Professions Code require the licensing of lawyers and the punishment of those who engage in unlawful practice. It's those provisions that are now being invoked in the class action filed in California against LegalZoom. But that suit goes further than the Missouri case by claiming LegalZoom actually caused harm amounting to negligence and elder financial abuse. As the complaint alleges, LegalZoom's practices are "intended to induce and lure elders (and their representatives) into contracting and paying for the preparation of estate planning documents based on false and misleading representations and material omissions." The complaint also notes that LegalZoom's disclaimer ("The information provided in this site is not legal advice ...") appears at the very bottom of the website in light gray 9-point type, while the rest of the text is 13 points or larger. "One of the things we're going to be focused on is the people who decided what to put on the [LegalZoom] website and how it was designed," says co-lead counsel Stebner. "I'm going to be real curious why the statements that are made that are positive for them are up front, and the parts that are negative are buried in different places." In 2003, an American Bar Association task force tried to craft a national model definition of the practice of law. But the Department of Justice and the Federal Trade Commission sharply criticized early drafts as both overly broad and not in the public interest, and eventually the effort was abandoned. Meanwhile, all 50 states allow nonlawyers to sell preprinted legal forms and to provide limited assistance with them, according to LegalZoom. California, for one, licenses so-called scriveners as legal document assistants. These LDAs must carry a bond and register with the courts. (LegalZoom is registered and bonded as an LDA in California.) LDAs can perform routine tasks, such as typing and filing the paperwork for uncontested divorces, bankruptcies, wills, and other types of documents. But they cannot give legal advice, make suggestions about what a client needs to do for a particular matter, or decide what forms the client must file with the state or the other party to the action. Paralegals, on the other hand - legal assistants who work under the supervision of an attorney - need not register, but they must meet certain educational requirements. Most states also distinguish between transcription, which is permitted as a scrivener service, and making suggestions or changes to the material based on the information provided, which is forbidden. LegalZoom maintains that it takes great pains to stay on the right side of that line. But in practice, that line can get blurry. "I think the big problem that LegalZoom runs into is answering the telephone and then giving legal advice," says Gene Quinn, a patent attorney in Leesburg, Virginia, who for several years advised LegalZoom on developing its provisional patent product. "They'll follow up with customers afterwards and say, 'OK, you filed your application for a trademark six months ago, now you need to file this, and we can help you.' The mere fact of having that kind of continuing relation, I think, is the practice of law." Quinn notes further that he's called LegalZoom's customer service line several times and received instructions that could be construed as legal advice - and bad advice at that. Quinn says he asked one LegalZoom representative whether he needed to file a patent application first or if he could immediately start selling the product. He was told there was no reason he couldn't start selling the product immediately - which, he says, could have cost a customer the ability to obtain a patent outside the United States. "I found that some of the things LegalZoom's customer service people were saying would actually compromise rights, potentially to the point where no patent could be issued," says Quinn. "So that was troubling." For all the talk about the dangers of unauthor- ized practice, though, LegalZoom is clearly filling a need that until now has gone largely unmet. "The success of LegalZoom is a market response to a failure in the legal market," observes Paul Bergman, an emeritus professor at the UCLA School of Law who advised LegalZoom before the site was launched. "Most lawyers have priced themselves out of ordinary people's ability to pay. We have lots of lawyers, and yet we have so many people who have legal needs that lawyers are not addressing. Someone's bound to step in and address that market failure." Instead of waging a rearguard action against LegalZoom on UPL grounds, then, why wouldn't attorneys compete with the site by offering legal advice bundled with reasonably priced document preparation? One online service called MyLawyer.com is trying to do exactly that, helping licensed attorneys beat LegalZoom at its own game. The service offers attorneys a virtual platform from which to offer clients legal documents online, coupled with legal advice. Clients create and access their own legal documents by answering questions online, but then if necessary they can pay extra to follow up with a lawyer. Another online company that is giving tens of thousands of small-firm lawyers a new lease on life is RocketLawyer.com, which last year drew more than 10 million consumers and small-business operators to its site. "The whole goal is to level the playing field so that law firms can compete with LegalZoom," says Richard S. Granat, president of DirectLaw Inc., which runs the MyLawyer.com platform. "To me, legal forms bundled with professional advice is a superior offering to what consumers can get from LegalZoom." Still, every time Robert Shapiro appears on TV as LegalZoom's pitchman, it's hard for lawyers to retain their composure. But Shapiro doesn't let that bother him: "I was told a long time ago by friends of mine who were very successful in the Internet business that you'll know when you're successful when you start getting class action lawsuits." By that measure, LegalZoom has clearly arrived. Lawyers accuse this online company of illegally practicing law. Tom McNichol is a San Francisco-based freelance writer.
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Kari Santos
Daily Journal Staff Writer
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