Site icon Truth on the Market

Gillian Hadfield on Evidence-based Regulation for Law

There is a Missouri statute that makes it a misdemeanor, punishable by $100 fine, for anyone who is not licensed by the Missouri bar to “engage in the practice of law or do law business.”  If convicted, violators can be sued by anyone that paid them for their services or by the state of Missouri; successful plaintiffs can recover three times the fees paid to the violator for their services.

In February 2010, three individuals used this statute to file a class action against LegalZoom.com Inc., an online provider of legal documents.  (Disclosure: I joined the Legal Advisory Board for LegalZoom two months ago.)  Last December, the federal district court where the case was transferred certified a class of Missourians who had “paid fees to LegalZoom for the preparation of legal documents.”

LegalZoom recently settled the case, after losing last month on summary judgment.  Summary judgment was appropriate, the court held, because there was no dispute about the facts of LegalZoom’s business model.  People or small businesses come to the site for help preparing documents to incorporate a business, form a partnership, create a trust, file an uncontested divorce, and so on.  They can download the blank forms from LegalZoom and fill them in themselves or they can answer some questions and have LegalZoom enter the information in the correct form, review it for completeness, spelling, consistency etc., and then send the completed document to the purchaser to sign and use.  The plaintiffs in the Missouri case had used the system to generate wills and articles of organization for a business. None of the plaintiffs alleged they were unhappy with the documents they received or that they had understood themselves to be purchasing legal advice.

The court held that the only question in the case was the legal one of whether LegalZoom’s business model constituted the unauthorized practice of law.  The Missouri statute offers a definition of “the practice of law” and the “law business.”  The LegalZoom court quoted those definitions, but also made it very clear that the legislature’s definitions don’t matter much.  For the General Assembly of Missouri “may only assist the judiciary by providing penalties for the unauthorized practice of law, the ultimate definition of which is always within the province of this [Missouri Supreme] Court.”  And, as the Court saw it, “it is impossible to lay down an exhaustive definition of ‘the practice of law.’”  So whether LegalZoom’s business is a “law business” and constitutes unauthorized practice law is ultimately something for the state’s Supreme Court to judge in its regulatory capacity, not a matter of statutory interpretation.

This means that even if the Missouri General Assembly decided that the availability of low-cost online services like LegalZoom would be a great boon to boost the Missouri economy by reducing the cost of starting and operating a small business, it can’t make that happen.  It’s up to the judiciary, “exclusively,” to decide what the “law business” is and who can participate in that business.

Here’s how it went with LegalZoom.  The Court held that LegalZoom’s business model constituted the unauthorized practice of law because it went beyond providing people with blank forms and transcribing what they wrote in the blanks. LegalZoom’s software instead converted questionnaire answers into document entries.  To do this, they required human beings:  to program the computer and to review the final documents for things like spelling errors and inconsistencies (but not for poor choices about what answer to give, what form to request, or what alternatives to consider.)   Because those human beings providing the LegalZoom service “are not authorized to practice law in Missouri,” the court decreed, “there is a clear risk of the public being served in legal matters by incompetent or unreliable persons.”

Remember:  this was on summary judgment, so the question before the court was supposed to be a purely legal one, not requiring evidentiary hearing.  But the court is basing its decision on a whopper of a factual finding.  Does LegalZoom’s business present a risk of incompetence or unreliability?  Does the Missouri bar’s licensing regime present a lower risk?   Does the court, by making this decision, reasonably carry out its “duty to strike a workable balance between the public’s protection and the public’s convenience?” We don’t know the quality of those findings because there is no evidence presented.  LegalZoom wasn’t given any opportunity to challenge those factual assertions.  And given the strange way in which Courts make this regulatory policy, it’s hard to see when these factual assertions might ever be challenged, by anyone.

What’s wrong with that?  Well think about how this policy would be made if it were up to a legislature or administrative agency.  The drafting of legislation and regulations would be informed by some policy analysis and data, as well as the input of various industry participants, consumers and other experts, on questions such as: What is the current average cost of obtaining document services?  How much of the demand for services is being met?  How often are these documents not completed and filed, or completed or filed incorrectly, because of cost or supply constraints?  How likely is it that an online service—provided by a corporation located in another state and serving a national market—generates documents that have higher error rates?  How much of the demand could these services reach and at what price?  Is a lower price and broader accessibility worth any increase, if it can be shown, in error rates or other quality effects?

None of this standard policy process take place in this important regulatory area.  Courts don’t put out their definition of the practice of law for public notice and comment; they don’t conduct public hearings; they don’t commission studies, collect data, or consult experts.  And they don’t subject their regulation to the kind of judicial review to which regulation is usually subject.  Instead, they rely on an empirical assertion that is treated as unassailable:  that by not allowing people or businesses other than state-licensed attorneys to do anything that constitutes the “impossible to define” practice of law, the court’s regulation will “protect the public from being advised or represented in legal matters by incompetent or unreliable persons.”

Those are empirical claims that should be the subject of empirical testing and reasoned policy analysis.  Other advanced market economies—like the U.K.—don’t find these empirical claims to be true and they don’t restrict the supply of legal advice to bar-licensed lawyers, all to good effect.  It’s time the U.S. started treating its legal system as deserving of sound evidence-based policymaking, and not leaving it up to lawyers and judges alone.