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LegalZoom is pursuing an alternative business structure license in Arizona

Traditionalists and unauthorized practice of law regulators in the U.S. have long feared the possibility of a legal technology company like LegalZoom becoming a publicly traded law firm-like entity with its own attorneys serving clients. They have argued that such a business setup would result in the company’s economic interests being put before the best interests of its clients.

Whether those worries are legitimate could soon face a major test in Arizona.

On the heels of a successful initial public offering in June that produced a $7 billion valuation, LegalZoom is seeking to spread its wings further by securing an alternative business structure license in Arizona.

Obtaining an alternative business structure license would allow LegalZoom to hire attorneys as employees to provide legal advice directly to customers rather than relying on an independent network of lawyers. This is something LegalZoom has been able to do through its ABS in the U.K. that it received approval to launch in 2015, but the company has not been able to take a similar approach in the U.S. because of strict regulatory requirements around law firm ownership and attorney fee-sharing.

However, in August 2020, the Arizona Supreme Court eliminated the state’s Rule of Professional Conduct 5.4 that barred nonlawyers from having an economic interest in a law firm or participating in attorney fee-sharing. The change, which went into effect Jan. 1, permits alternative business structures to be licensed in the state as part of efforts to increase consumers’ access to justice.

Both LegalZoom and Arizona court officials recently said the company has applied for an ABS license, and its application submitted in May under the business name LZ Legal Services is going through the review process.

Nicole Miller, LegalZoom’s general counsel, told the ABA Journal that ABS licenses offered by states like Arizona “allow for greater technological innovation in the delivery of legal services and encourage investment in providing legal services at affordable prices.”

“We embrace any such reform efforts and believe that innovative products and business models benefit legal consumers and create more opportunities for attorneys as well,” Miller said in a statement. “We intend to continue advancing our mission by deeply integrating attorney expertise and support with LegalZoom’s technology, process efficiencies and commitment to providing affordable access to legal services.”

LZ Legal Services said in its application that in its first year of operation as an Arizona ABS, it intends to undertake three key action steps:

  • Launch innovative low-cost small business solutions for Arizona small businesses.
  • Fulfill attorney-led trademark needs for small businesses throughout the U.S.
  • Provide access to attorneys for small business and estate planning advice and legal services through a monthly membership plan.

LegalZoom, which has faced many unauthorized practice of law claims in the U.S. through its two decades of operations, acknowledged in an SEC filing that becoming an ABS in one state would not necessarily insulate it from UPL claims in other jurisdictions.

In addition to Arizona, Utah launched a regulatory sandbox last year for nontraditional legal services entities to test out new ownership structures and ways of serving consumers.

Miller did not answer directly when asked whether LegalZoom plans to enter Utah’s sandbox, but said the company was excited that more states are “looking at these kinds of reforms.”

Lucy Ricca, executive director of Utah’s Office of Legal Services Innovation, confirmed that LegalZoom has not applied to the sandbox. But she hopes the company will eventually apply to bolster ongoing efforts to demonstrate that services offered by nontraditional legal services providers are “good services.”

“The more entities we have joining us in Utah and Arizona, the better case we’re able to make to other states that this is worthwhile,” Ricca says.

Rocket Lawyer, which offers similar services to LegalZoom, was one of the first applicants accepted into the Utah sandbox last year. By entering the sandbox, the company said it would be able to hire Utah lawyers as staff, as it already does in the U.K. Rocket Lawyer has helped more than 1,200 sandbox customers with legal issues since September, according to CEO Charley Moore.

Rocket Lawyer also has applied to become an alternative business structure in Arizona, according to the company and an Arizona Supreme Court spokesman.

“As far as operations in Arizona, we will likely follow the same hybrid model that we established in Utah with attorneys on staff in addition to our independent network,” Moore says.

He declined to comment on whether Rocket Lawyer would pursue an IPO as LegalZoom recently did.

Bigger and Better?

On Thursday, LegalZoom announced in its first earnings call since becoming a public company that it had generated $150.4 million in revenue in the second quarter of 2021, an increase of 36% percent year over year.

Meanwhile, in its SEC filing in advance of its IPO, LegalZoom noted it launched a tax advisory service last year and has hired in-house tax advisers.

LegalZoom’s foray into the tax space through the creation of LZ Tax is notable, as there has been speculation that the Big Four accounting firms will seek to broaden their services amid loosening legal regulations in the U.S.

LegalZoom’s ABS application says it “may explore future product offerings that combine legal services with tax and/or accounting services.”

As for the services LegalZoom has long offered, the company reports that 10% of new limited liability companies and 5% of new corporations in the U.S. last year were formed through LegalZoom.

“We believe there is a tremendous opportunity to increase our penetration in the market for new business formations and service the full spectrum of needs all small business owners have, ranging from taxes to estate planning,” Miller said.

Teresa Schmid, an ethics lawyer who serves as the director of the ABA’s Center for Professional Responsibility, says she sees LegalZoom’s planned growth as a boon to the economic prospects of lawyers because it often connects consumers with attorneys. The company reports having a network of more than 1,300 independent attorneys and says lawyers in its network have provided more than 611,000 consultations to small businesses and families since 2011.

“I think the bigger it gets, the more lawyers it’s going to engage [and] the more business it’s going to generate,” says Schmid, speaking for herself and not the ABA. “It doesn’t displace lawyers; it is a portal.”

She also says she thinks LegalZoom becoming an alternative business structure in Arizona could be a positive development if there is an effective regulatory regime in place to protect members of the public.

“It will increase the public’s access to legal services and through economies of scale reduce the cost to the public,” Schmid says.

But Erin Joyce, a Pasadena, California-based ethics lawyer, says she worries that LegalZoom securing approval to operate as an ABS in Arizona will hurt consumers.

She fears this will be the case because she contends lawyers working directly for the company will likely feel pressure to put the financial interests of the company and its shareholders before the best interests of their clients.

“Now LegalZoom’s main interest is going to be to the shareholders rather than the consumers and clients that are using LegalZoom for legal services,” Joyce says. “When the financial interests take precedence, the clients are the ones that will pay the price.”

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