Court Opinion

ID: 1043058
Source: CourtListenerOpinion
Date Created: 2013-10-03 15:13:17.995043+00
Date Added: 2024-06-11T12:05:10.670443
License: Public Domain

Cite as 2013 Ark. 370

               SUPREME COURT OF ARKANSAS
                                      No.   CV-12-1043

LEGALZOOM.COM, INC.                              Opinion Delivered   October 3, 2013
                              APPELLANT
                                                 APPEAL FROM THE POPE
V.                                               COUNTY CIRCUIT COURT
                                                 [NO. CV-2012-35]
JONATHAN McILLWAIN
                                                 HONORABLE DENNIS C.
                                 APPELLEE        SUTTERFIELD, JUDGE

                                                 REVERSED AND REMANDED.

                      JOSEPHINE LINKER HART, Associate 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

arbitration of 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, ___ S.W.3d ____.
                                    Cite as 2013 Ark. 370

       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

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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 (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.

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       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

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                                   Cite as 2013 Ark. 370

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 (2012), it

contends that any state-law rule prohibiting arbitration of a particular type of claim is

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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 (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 (2012). The merit of

LegalZoom.com’s argument rests on clear precedent from the Supreme Court of the United

States. See id.; Cartegna, supra.

       We note first that the cornerstone of the circuit court’s ruling is its conclusion that

because McIllwain’s complaint alleged that LegalZoom.com was involved in the

unauthorized practice of law, the whole contract was “unconscionable.”                   While

“unconscionability” is not precisely defined in the law, one of the earliest applications of the

doctrine described an unconscionable contract as one that “no man in his senses and not

under delusion would make on the one hand, and . . . no honest and fair man would accept

on the other.”     James J. White & Robert S. Summers, Handbook of the Law Under the

Uniform Commercial Code § 4-1 (3d ed. 1988) (quoting Earl of Chesterfield v. Janssen (1750)

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28 Eng. Rep. 82, 100 (K.B.). In essence, to be unconscionable, a contract must oppress one

party and actuate the sharp practices of the other.

       In White & Summers, the concept of unconscionability is analyzed in terms of

“procedural unconscionability” and “substantive unconscionability.”               Procedural

unconscionability encompasses contracts where there is an absence of meaningful choice on

the part of one of the parties together with contract terms that are unreasonably favorable

to the other party. Id. § 4-3. Substantive unconscionability generally involves excessive

price or restriction of remedies. Id. §§ 4-4 - 4-6. Accordingly, even assuming that the

subject of the contract that McIllwain concluded with LegalZoom.com involved the

unauthorized practice of law, which LegalZoom.com has not conceded and the issue has yet

to be decided, the actual question presented is whether the arbitration agreement is

“unconscionable.”

       We note as well that the circuit court looked to the entire contract—particularly its

subject matter—to deny LegalZoom.com’s motion to compel arbitration. However, in The

Money Place, LLC v. Barnes, 349 Ark. 411, 78 S.W.3d 714 (2002), we stated unequivocally

that the threshold issue is whether there is a valid arbitration clause to enforce. The

Supreme Court has acknowledged that whether the arbitration clause itself is unenforceable

based on a generally applicable contract defense, such as unconscionability, is a decision for

the court (not the arbitrator) to make, and in doing so, it must apply state contract law. See

Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967). However, because it

is apparent that the circuit court looked to the overall allegation concerning the

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                                     Cite as 2013 Ark. 370

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

Cardegna, supra.

       In Cardegna, a class of borrowers brought suit against a lender who they claimed

charged usurious interest disguised as check-cashing fees, in violation of Florida statutory

law. 546 U.S. at 443. The borrowers asserted that the arbitration clause was invalid because

their contracts with the lender were invalid due to illegality. Id. However, the 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. Whether the conduct that was the

subject of the contract violated state law was a question reserved for the arbitrator. Id. In

Nitro-Lift, supra, the Supreme Court reaffirmed its holding in Cardegna. In a per curium

opinion, the Supreme Court vacated an Oklahoma Supreme Court opinion, stating that the

Oklahoma high court had “ignored the basic tenet of the [FAA’s] substantive arbitration law

. . . [that] attacks on the validity of the contract, as distinct from attacks on the arbitration

clause itself, are to be resolved by the arbitrator in the first instance, not by a federal or state

court.” Id. at 501, 503 (citations omitted). Accordingly, 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.

       As we stated in TETRA Technologies, Inc., supra, when a court is asked to compel

arbitration, it is limited to deciding two threshold questions: 1) Is there a valid agreement

to arbitrate between the parties? and 2) If such an agreement exists, does the dispute fall

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                                   Cite as 2013 Ark. 370

within its scope? Id. We further noted that we are bound by the federal policy that favors

arbitration. Id. (citing Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991)).

       Likewise, to the extent that the circuit court based its decision on its conclusion that

determining whether LegalZoom.com engaged in the unauthorized practice of law was a

unique type of claim that was not susceptible to arbitration, that rationale was also rejected

by the Supreme Court. It stated in Concepcion, supra, “When State law prohibits outright

the arbitration of a particular type of claim, the analysis is straightforward: The conflicting

rule is displaced by the Federal Arbitration Act.” 131 S. Ct. at 1747. As the Concepcion

Court further noted, “[N]othing in the FAA suggests an intent to preserve state-law rules

that stand as an obstacle to the accomplishment of the FAA’s objectives.” Id. at 1748.

       While we confess that it is tempting to say that our authority to regulate the practice

of law, granted to us by the Arkansas Constitution, empowers us to reserve questions

regarding the unauthorized practice of law for the courts of this state over which we have

superintending authority, we are chastened by the awareness of our duty to defer to the

Supreme Court of the United States on matters of federal statutory interpretation. As we

noted in Perroni v. State, 358 Ark. 17, 28, 186 S.W.3d 206, 213 (2004),

       The Supremacy Clause, found in Article 6 of the Constitution, provides that the
       Constitution, and the laws of the United States which shall be made in pursuance
       thereof ... shall be the supreme law of the land; and the judges in every state shall be
       bound thereby, anything in the Constitution or laws of any state to the contrary
       notwithstanding.

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                                  Cite as 2013 Ark. 370

While most of the Supreme Court’s jurisprudence regarding the FAA is relatively new, our

duty to defer to federal law was decided nearly two centuries ago in Gibbons v. Ogden, 22

U.S. (9 Wheat.) 1 (1824).

       We further note that the arbitration clause is not unconscionable because it failed to

satisfy certain provisions in the Arkansas Rules of Professional Conduct that apply to

practicing attorneys. The arbitration clause does not usurp the regulatory authority of our

Committee on the Unauthorized Practice of Law. In Campbell v. Asbury Automotive, Inc.,

2011 Ark. 157, 381 S.W.3d 21, we held that maintaining a cause of action under the

Arkansas Deceptive Trade Practices Act, which is the primary basis for McIllwain’s

complaint, did not offend our constitutional authority to regulate the practice of law when

it involved nonlawyers. The situation in Campbell is precisely the situation before us—there

is not even an assertion in McIllwain’s pleadings that LegalZoom.com was a lawyer. In fact,

to the extent that any information was placed before the circuit court regarding this

question, LegalZoom.com’s trial counsel asserted that McIllwain’s will document was

generated by a computer program. Moreover, the Supreme Court has held that when

parties agree to arbitrate all questions arising under a contract covered by the FAA, the FAA

supersedes state law “whether judicial or administrative” that seeks to lodge primary

jurisdiction in another forum. Preston v. Ferrer, 552 U.S. 346 (2008).

       Having reversed and remanded this case for the reasons stated above, we find it

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unnecessary to address that balance of LegalZoom.com’s arguments as they were not the

basis of the trial court’s ruling. Accordingly, we reverse and remand to the circuit court to

enter an order granting LegalZoom.com’s motion to compel arbitration.

       Given that the circumstances of this case involve allegations of the unauthorized

practice of law, we hereby direct the Clerk to forward a copy of this opinion to the Arkansas

Supreme Court Committee on the Unauthorized Practice of Law.

       Reversed and remanded.

       HANNAH, C.J., and CORBIN, J., dissent.

       JIM HANNAH, Chief Justice, dissenting. I respectfully dissent. The circuit court

judge correctly denied the motion to compel arbitration, “based upon the allegations

concerning the unauthorized practice of law,” finding that these allegations restricted the

issue to the judicial branch of government. This finding is supported by the Arkansas

Constitution and several hundred years of the common law. Regulation of the lower courts

and jurisdiction over the practice of law lie with the court of last resort, in this case the

Arkansas Supreme Court.

       The majority relies on AT&T Mobility LLC v. Concepcion, ___ U.S. ___, 131 S. Ct.

1740 (2011) for the proposition that this court may not rely upon its exclusive jurisdiction

over the practice of law, quoting Concepcion as follows: “When state law prohibits outright

the arbitration of a particular type of claim, the analysis is straightforward: The conflicting

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                                    Cite as 2013 Ark. 370

rule is displaced by the FAA.” Id. at ____, 131 S. Ct. at 1747. The majority errs. Arkansas

law does not prohibit outright the arbitration of a particular type of claim. It is not the claim

that is precluded from arbitration. The analysis does not reach that far. Had 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.

Whether the contract mentioned in the underlying case contains only one, or even a dozen

arbitration clauses, is irrelevant to the issue presented because the contract is wholly

irrelevant to the question of whether LegalZoom has engaged in the unauthorized practice

of law. Nothing in the circuit court’s decision violated the FAA, and nothing in the FAA

preempts the courts from carrying out their duties to regulate the practice of law.

       CORBIN, J., joins.

       Rose Law Firm, a Professional Association, by: Richard T. Donovan and Amanda K.

Wofford, for appellant.

       The Streett Law Firm, P.A., by: Alex G. Streett and James A. Streett; and

       Price Waicukauski & Riley, LLC, by: William N. Riley and Joseph N. Williams, pro hac

vice, for appellee.

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