By Ana Amodaj, J.D. Candidate 2014, UC Berkeley School of Law
LegalZoom, the leading provider of non-lawyer online legal services to consumers, filed an S-1 form last month for an IPO seeking to raise as much as $120 million. Recent success and expansion of companies like LegalZoom into the market for affordable legal services has stirred up debate. The main points of disagreement relate to the sustainability of their business model, and whether such ventures should be allowed to operate outside of the bar regulations imposed on formal legal service providers.
LegalZoom has secured a very large consumer base (totaling over 2 million consumers in the past 10 years) thanks to its unorthodox business model that combines market-driven venture capital with the idea of providing limited, low-cost non-lawyer legal solutions. In essence, this model is a market-generated response to the troubling reality that many residents do not have access to the U.S. civil legal system. In fact, many modest-means and middle-class Americans fall into this “justice gap” because they do not qualify for free legal assistance, but at the same time cannot afford the high cost of retaining legal counsel.
Moreover, the combination of the recent economic downturn with the increasing cost of full-service legal representation has resulted in a surge in pro se litigants, which has slowed down courtrooms and caused procedural delays due to self-representing individuals’ unfamiliarity with the court system. While traditionally opposed to limited representation and quasi-legal services, courts and bar associations are now increasingly supportive of the self-help movement and are encouraging attorneys to perform unbundled services as a way to alleviate the justice gap and provide alternatives for pro se litigants. Several states, including California, even provide user-friendly limited representation forms and guides, rather than requiring filing of a more time-consuming formal pleading.
This change in policy has created an opportunity for companies like LegalZoom to enter the high-volume and high-demand market of consumers seeking any kind of legal assistance they can afford. In theory, these conditions make commoditization of legal services a very lucrative enterprise and even ensure high consumer satisfaction since the market is largely composed of individuals who would have little or no assistance at all, but for this low-cost alternative.
But there is a catch. Because LegalZoom is not exclusively owned by licensed attorneys, it cannot get a license to practice law in the U.S., or employ licensed attorneys to provide legal advice to its customers. Rule 5.4 of the U.S. Rules of Professional Responsibility (“USPR”) explicitly prohibits ownership and investment in U.S. law firms by non-lawyer entities in order to ensure professional independence of lawyers. Under the current regulatory scheme, non-lawyer entities can only distribute self-help materials and cannot provide any form of legal service.
LegalZoom self-identifies as an online service that helps consumers make their own legal documents. However, LegalZoom not only sells software but also employs 400 professional document reviewers. This blurs the line between a limited representation document preparation service and self-help software. Furthermore, whether this business model constitutes the practice of law is a controversial question because subjecting LegalZoom to strict bar regulations would severely limit access to legal services for those unable to afford full or limited representation by legal counsel. On the other hand, allowing investors to dictate the business of a high-volume legal service provider could damage credibility of the legal profession.
LegalZoom has recently settled several class action lawsuits alleging that its business amounts to an unauthorized practice of law, in violation of Rule 5.5 of USPR. The company has stated that losses from such lawsuits are expected to reach $16 million this year and are likely to continue in the future, causing many scholars and practitioners to doubt the practical sustainability of this business model.
Overall, venture capital has entered the high-demand market for affordable legal solutions and the question of whether it is there to stay or will eventually be pushed out by regulation or ethical challenges will have very significant consequences for the market and the legal profession in general.
The ABA ethics 20/20 Commission has decided not to take on the issue of non- lawyer ownership of llaw firms, so don’t expect any change on that front soon. Nevertheless, LegalZoom is demonstrating that there is a work around these rules.