LegalZoom.com, Inc. v. McIllwain

Citations: 2013 Ark. 370; 429 S.W.3d 261; 2013 WL 5497717; 2013 Ark. LEXIS 454Docket: CV-12-1043

Court: Supreme Court of Arkansas; October 3, 2013; Arkansas; State Supreme Court

Original Court Document: View Document

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LegalZoom.com, Inc. appealed a decision from the Pope County Circuit Court that denied its motion to compel arbitration in a case brought by Jonathan McIllwain. The appellant argued that Arkansas law does not prohibit arbitration agreements in disputes involving allegations of unauthorized practice of law, and that any such prohibitive rule would be preempted by the Federal Arbitration Act (FAA). The Arkansas Supreme Court reversed the lower court's decision and remanded the case. LegalZoom, a Delaware corporation, operates an internet-based service allowing users to create legal documents. McIllwain used LegalZoom to create a Last Will and Testament, agreeing to its terms of service, which included a provision for binding arbitration of disputes. McIllwain later initiated a class-action lawsuit alleging that LegalZoom engaged in unauthorized legal practice, violating the Arkansas Deceptive Trade Practices Act and seeking damages and an injunction. LegalZoom's motion to compel arbitration cited the FAA and relevant case law, asserting that McIllwain's claims should be arbitrated due to his acceptance of the terms. McIllwain opposed the motion, arguing that the arbitration agreement lacked mutuality of obligation, rendering it invalid and inapplicable under the FAA. The Supreme Court reviewed the circuit court's denial of arbitration de novo, affirming that such orders are immediately appealable under Arkansas appellate rules.

McIllwain contended that the arbitration agreement was unconscionable due to LegalZoom.com’s advertising and provision of services typically rendered by licensed attorneys, which he claimed constituted unauthorized practice of law. He argued that LegalZoom.com violated the Arkansas Rules of Professional Conduct and acted in bad faith by limiting its liability for legal services, prioritizing its interests over those of clients. McIllwain maintained that the arbitration provision was unenforceable under the Federal Arbitration Act (FAA) because it sought to remove the determination of unauthorized practice of law from state court jurisdiction, citing NISHA, LLC v. TriBuilt Construction Group, LLC to support his position. He acknowledged the U.S. Supreme Court's stance that the illegality of a contract does not invalidate the entire contract under the FAA but insisted that any arbitration clause attempting to sidestep state court authority regarding unauthorized legal practice was inherently unconscionable. While he conceded the arbitration clause was not one-sided and appeared fair, he argued this fairness stemmed from LegalZoom.com’s desire to mitigate state court challenges due to its potential unauthorized legal services. The trial court denied LegalZoom.com’s motion to compel arbitration, emphasizing that state courts have exclusive jurisdiction to address unauthorized practice of law issues. The court found the arbitration agreement unconscionable and noted federal law respects state court jurisdiction. LegalZoom.com later appealed, claiming the circuit court erred in denying the arbitration agreement concerning unauthorized practice allegations.

LegalZoom.com argues that it is not bound by the Arkansas Rules of Professional Conduct as it is not a law firm and contends that McIllwain's claim is a private matter that does not restrict Arkansas's regulatory authority regarding unauthorized practice of law. The company asserts that any state law prohibiting arbitration of such claims is preempted by the Federal Arbitration Act (FAA), referencing Marmet Health Care Center, Inc. v. Brown, which affirms the FAA's dominance over state law. LegalZoom.com acknowledges that the FAA allows for arbitration agreements to be invalidated under applicable legal grounds but emphasizes that challenges must target the arbitration agreement itself, not the underlying contract, citing Buckeye Check Cashing, Inc. v. Cardegna. It insists that the issue of unauthorized practice of law should be resolved by an arbitrator.

The circuit court's ruling, which deemed the entire contract unconscionable due to allegations of unauthorized practice of law, is contested. The concept of unconscionability, defined as a contract that is oppressively one-sided, involves both procedural and substantive elements. LegalZoom.com maintains that even if the contract involved unauthorized legal practice—a claim it disputes—the focus should solely be on the arbitration clause's validity. The circuit court's broader examination of the contract is deemed inconsistent with precedent established in The Money Place, LLC v. Barnes, which emphasizes assessing the arbitration clause's validity first. The Supreme Court has ruled that any determination of unenforceability based on contract defenses like unconscionability is a judicial matter, not one for the arbitrator, highlighting that the circuit court's approach misapplies this principle.

A group of borrowers sued a lender in Florida, alleging usurious interest disguised as check-cashing fees, claiming the arbitration clause in their contracts was invalid due to the contracts' illegality. The Supreme Court determined that defenses must target the arbitration clause specifically rather than the overall contract, with questions of state law violations reserved for arbitrators. In Nitro-Lift, the Court reaffirmed this stance, vacating an Oklahoma Supreme Court ruling that misapplied the Federal Arbitration Act (FAA) by addressing contract validity rather than the arbitration clause. Allegations against LegalZoom.com for unauthorized legal practice in Arkansas did not invalidate the arbitration clause, which remains intact under FAA principles. Courts are limited to two inquiries when compelling arbitration: the existence of a valid arbitration agreement and whether the dispute falls within its scope. The Supreme Court's position is that state law cannot impede the FAA's objectives. Despite Arkansas's constitutional authority to regulate legal practice, federal law takes precedence, as established by the Supremacy Clause. The arbitration clause was not deemed unconscionable for not complying with Arkansas Rules of Professional Conduct, nor did it infringe upon regulatory authority over unauthorized legal practice. The comparison to Campbell v. Asbury Automotive, Inc. illustrates that nonlawyer entities like LegalZoom.com do not violate the state's constitutional authority over legal practice, especially since there were no claims that LegalZoom.com acted as a lawyer.

The Supreme Court has determined that when parties consent to arbitrate all disputes under a contract governed by the Federal Arbitration Act (FAA), the FAA takes precedence over any conflicting state law that seeks to assign primary jurisdiction elsewhere. The court reversed and remanded the case, instructing the circuit court to grant LegalZoom.com’s motion to compel arbitration. The opinion noted the case involves allegations of unauthorized practice of law, prompting a directive for the Clerk to notify the Arkansas Supreme Court Committee on the Unauthorized Practice of Law. 

Chief Justice Hannah dissented, arguing the circuit court correctly denied the motion to compel arbitration, asserting that the allegations pertain to the judicial branch and are governed by the Arkansas Constitution and historical common law. He emphasized that the regulation of legal practice falls under the jurisdiction of the Arkansas Supreme Court, and criticized the majority for misapplying the precedent set in AT&T Mobility LLC v. Concepcion. Hannah contended that Arkansas law does not outright prohibit arbitration of certain claims, and that the question of whether LegalZoom engaged in unauthorized practice of law stands independent of any contract terms. He concluded that the circuit court's ruling did not contravene the FAA, nor does the FAA prevent courts from fulfilling their regulatory responsibilities regarding legal practice. Justice Corbin joined in this dissent.