Legalzoom.Com, Inc. v. McIllwain

• Decision Date: 14 November 2013
• Docket Number: No. CV–12–1043.,CV–12–1043.
• Citation: 2013 Ark. 370,429 S.W.3d 261
• Parties: LEGALZOOM.COM, INC., Appellant v. Jonathan McILLWAIN, Appellee.
• Court: Arkansas Supreme Court

2013 Ark. 370

429 S.W.3d 261

LEGALZOOM.COM, INC., Appellant

v.Jonathan McILLWAIN, Appellee.

No. CV–12–1043.

Supreme Court of Arkansas.

Oct. 3, 2013.

Rehearing Denied Nov. 14, 2013.

Rose Law Firm, a Professional Association, Little Rock, by: Richard T. Donovan and Amanda K. Wofford, for appellant.

The Streett Law Firm, P.A., by: Alex G. Streett and James A. Streett, Russellville; and Price Waicukauski & Riley, LLC, by: William N. Riley and Joseph N. Williams, pro hac vice, for appellee.

JOSEPHINE LINKER HART, Justice.

LegalZoom.com, Inc., appeals from an order of the Pope County Circuit Court denying its motion to compel arbitration. On appeal, appellant makes two arguments: (1) that the circuit court erred because Arkansas law does not prohibit the enforcement of arbitration agreements requiring resolution through arbitration of private claims when a dispute concerns allegations of the unauthorized practice of law, and (2) any rule prohibiting arbitrationof unauthorized-practice-of-law claims would be preempted by the Federal Arbitration Act (FAA). We reverse and remand.

Our jurisdiction is pursuant to Arkansas Rule of Appellate Procedure—Civ. 2(a)(12), which provides that a circuit court order denying arbitration is immediately appealable. We review a circuit court's order denying a motion to compel arbitration de novo on the record. HPD, LLC v. TETRA Techs., Inc., 2012 Ark. 408, 424 S.W.3d 304

LegalZoom.com, Inc., a Delaware corporation, with its headquarters located in Glendale, California, is an Internet-based company. It offers customers, via its website, access to its Internet-based software that allows them to create legal documents that include a last will and testament as was done by McIllwain in this case. It advertises nationwide as a low-cost alternative to hiring a lawyer.

From his home in Russellville, McIllwain visited the LegalZoom.com web site for the purpose of obtaining a Last Will and Testament. He completed an on-line questionnaire, agreed to LegalZoom.com's terms of service, and paid the requisite fee of $98.95. Included in LegalZoom.com's terms of service is a requirement that “all disputes and claims ... rising out of or relating to any aspect of the relationship between us, whether based in contract, tort, statute, fraud, misrepresentation, or any other legal theory,” be resolved by binding arbitration. The agreement further provided that the FAA governed the interpretation and enforcement of the provisions, and that “arbitration under these terms will take place on an individual basis, class arbitration and class actions are not permitted.” LegalZoom.com provided McIllwain with a custom-made document in the form of a Last Will and Testament.

On January 25, 2012, McIllwain filed a class-action lawsuit. He alleged that LegalZoom.com's document preparation was engaging in the unauthorized practice of law in Arkansas. In so doing, he asserted that LegalZoom.com violated the Arkansas Deceptive Trade Practices Act, codified at Arkansas Code Annotated sections 4–88–101 et seq. (Repl.2011), and was unjustly enriched by charging clients for “per se illegal conduct.” McIllwain sought reimbursement of the fees he had paid LegalZoom.com, punitive damages, and attorney's fees, as well as an injunction prohibiting LegalZoom.com from continuing to do business in Arkansas.

LegalZoom.com responded with a motion to compel arbitration. Citing the FAA, 9 U.S.C. §§ 1 et seq., and AT&T Mobility LLC v. Concepcion, –––U.S. ––––, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011), it asserted that because the transaction involved interstate commerce and McIllwain had agreed to arbitration when he accepted the terms of service, his claims must be arbitrated by the American Arbitration Association. McIllwain opposed the motion by challenging the validity of the arbitration agreement. Citing Tyson Foods, Inc. v. Archer, 356 Ark. 136, 147 S.W.3d 681 (2004), he asserted that the Arkansas rules of contract construction are applicable to determining the validity of the arbitration provision. Further, he contended that because the agreement to arbitrate was not valid due to lack of mutuality of obligation, the agreement to arbitrate was invalid and thus the FAA would not apply. Further, McIllwain argued that the arbitration agreement was unconscionable because LegalZoom.com advertised and performed services normally provided by attorneys and that it was engaging in the practice of law without benefit of a license. McIllwain asserted that LegalZoom.com's terms of service violated the Arkansas Rules of Professional Conduct and breached its duty of good faith by blatantly attempting to limit its liability for the legal services provided in the contract, and thus place its interest—as an attorney—ahead of its client. As a result, he contended that, due to the unconscionability of the agreement, the arbitration provision was unenforceable under the FAA.

At the hearing on LegalZoom.com's motion, McIllwain relied heavily on NISHA, LLC v. TriBuilt Construction Group, LLC., 2012 Ark. 130, 388 S.W.3d 444, for the proposition that “under Arkansas law only the courts of this state can hear a question of what constitutes the unauthorized practice of law.” Based on this holding, he asserted that “an arbitration clause that attempts to take that question out of the courts of this state is unconscionable.” While conceding that the Supreme Court of the United States has held that one cannot use the illegality of a contract to “bootstrap” an argument that the whole contract—arbitration clause included—was outside the purview of the FAA, McIllwain nonetheless asserted that an arbitration clause “which attempts to take [the question of what constitutes the unauthorized practice of law], regardless of outcome, out of the purview of the courts in this state has to be unconscionable because the results are absurd.” He claimed that this arbitration clause attempts to usurp the regulatory authority of the Arkansas Supreme Court's Committee on the Unauthorized Practice of Law.

McIllwain essentially conceded that the arbitration clause was far from one-sided—he asserted that LegalZoom.com had attempted to create an arbitration clause that was “eminently fair.” However, he ascribed the fairness of the arbitration clause to a desire by LegalZoom.com to be able to deal with state court challenges because its business was the unauthorized practice of law. Thus, he maintains that the arbitration agreement is unenforceable because it was unconscionable under state law as only the courts had jurisdiction to oversee claims about the unauthorized practice of law, and further, the FAA does not contain a clear, manifest purpose to displace the court's historical police power to regulate attorneys within its borders.

After the hearing, the trial court denied LegalZoom.com's motion to compel arbitration. The written order expressly referenced the trial court's oral findings, which were as follows:

I'm going to deny the motion to compel arbitration. My reason for doing so is based upon the allegations concerning the unauthorized practice of law. I don't think that you can have a contract that prohibits the state court from addressing that inquiry. And I agree with the argument that that's the exclusive jurisdiction of the state courts to determine whether or not something constitutes unauthorized practice of law.

It's unique to the judicial system. It's inherently unique to it. And so I would find it's unconscionable for that reason. And I think there's even, you know, federal law [that] gives respect to the state courts as having their own exclusive jurisdiction that shows deference to the state courts in allowing them to operate. And so that would be the basis of my decision. It's a unique case. It is case of first impression and it's well argued, but that's my conclusion on the matter.

On appeal, LegalZoom.com argues that the circuit court erred because Arkansas law does not prohibit the enforcement of an arbitration agreement when a dispute concerns allegations of the unauthorized practice of law. It discounts the rationale that McIllwain offered to the trial court because, not being a law firm, it was not bound by the Arkansas Rules of Professional Conduct. Further, LegalZoom.com asserts that the instant action only involves a private claim brought by McIllwain himself as a LegalZoom.com customer, and in no way affects the other ways that the State of Arkansas could address LegalZoom.com's alleged unauthorized practice of law, or limits the state's regulatory authority. Further, citing Marmet Health Care Center, Inc. v. Brown, ––– U.S. ––––, 132 S.Ct. 1201, 182 L.Ed.2d 42 (2012), it contends that any state-law rule prohibiting arbitration of a particular type of claim is contrary to the terms and coverage of the FAA. Accordingly, even if Arkansas law specifically prohibited the arbitration of McIllwain's claim, it would be preempted by the FAA.

LegalZoom.com acknowledges that the FAA expressly provides for invalidation of an arbitration agreement “upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2. However, it cites Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006), for the proposition that contract defenses must go to the arbitration agreement itself, not merely to the validity of the contract that contains the clause. Thus, the question of whether it engaged in the unauthorized practice of law must be submitted to the arbitrator. LegalZoom.com asserts that these provisions were reaffirmed in Nitro–Lift Technologies, LLC v. Howard, ––– U.S. ––––, 133 S.Ct. 500, 184 L.Ed.2d 328 (2012). The merit of LegalZoom.com's argument rests on clear precedent from the Supreme Court of the United States. See id.;Cardegna, supra.

We note first that the cornerstone of the circuit court's ruling is its conclusion that because McIllwain's complaint alleged that...