State Supreme Court Enforces Arbitration in Unauthorized Practice of Law Claim

In a recent 5-2 decision, the Arkansas Supreme Court required customers of LegalZoom.com, an online legal document services company, to arbitrate their claims pursuant to LegalZoom.com’s terms of service, even when their allegations included the unauthorized practice of law.

The Arkansas Supreme Court ruled that, “[…] the allegation that LegalZoom.com engaged in the unauthorized practice of law in Arkansas did not directly affect the validity of the arbitration clause and, consequently, did not invalidate the arbitration clause.” LegalZoom.com, Inc. v. McIllwain, 2013 Ark. 370, at 8 (Ark. 2013)(Hannah, C.J., and Corbin, J., dissenting).

In 2012, Jonathan McIllwain filed a class action suit against LegalZoom.com, alleging that it was engaging in the unauthorized practice of law, gaining unjust enrichment for charging customers for “per se illegal conduct,” and violating the Arkansas Deceptive Trade Practices Act. LegalZoom responded to McIllwain by filing a motion to compel arbitration under the Federal Arbitration Act (FAA).

The circuit court denied LegalZoom.com’s motion to compel arbitration; however, the Arkansas Supreme Court reversed that ruling, remanded the case to the lower court to enter an order compelling arbitration, and further directed the clerk to forward the decision to the Arkansas Supreme Court Committee on the Unauthorized Practice of Law. The court reasoned that because the trial court “looked to the overall allegation concerning the . . . unauthorized practice of law and not to any specific aspect of how it affected the arbitration clause, the circuit court's ruling is clearly contrary to the Supreme Court's holding in [Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006)] […].” LegalZoom.com, Inc., 2013 Ark. 370, at 7-8.

 In Cardegna, “[t]he borrowers asserted that the arbitration clause was invalid because their contracts with the lender were invalid due to illegality. Id. However, the [U.S.] Supreme Court held that the contract defenses must be directed to the arbitration clause, not the subject matter of the overall contract. 546 U.S. at 444.” LegalZoom.com, Inc., 2013 Ark. 370, at 8.

Chief Justice Hannah and Justice Corbin dissent, reasoning that the circuit court correctly denied LegalZoom.com’s motion to compel arbitration, as the allegations of the unauthorized practice of law were restricted to the determinations of the judicial branch under the Arkansas Constitution and centuries of common law. Additionally, Chief Justice Hannah notes, “[h]ad LegalZoom's conduct come to the attention of this court, this court would have been bound to act on its own regardless of whether there was a contract or whether any person had filed a complaint.” Id., at 12.

- Libbie Richards, CPR Legal Intern