judge desk and gavel

In LegalZoom v. North Carolina State Bar Association, the innovative provider of affordable legal services has challenged the NC bar over its refusal to register its prepaid legal plans for individuals and small businesses. The case is based on the Sherman Antitrust Act, which forbids entities from attempting to monopolize any market.

This is the second time in a year that North Carolina has found itself accused of an antitrust violation.

In a case decided in February, the Court ruled in favor of the Federal Trade Commission’s antitrust suit against the North Carolina State Board of Dental Examiners. It held that the Dental Board’s activities in keeping any person not licensed to practice dentistry from offering teeth whitening services was not a state policy meant to protect consumers, but instead the work of dentists (the board consisting of dentists only) who were trying to stop competition in a field that dentists wanted all for themselves. (For more on that case, I wrote about it in this March piece.)

This case raises similar issues. The North Carolina State Bar is composed of licensed attorneys who have an interest in limiting competition in the market for legal services. Its efforts at preventing LegalZoom from offering its services to state residents is not sanctioned by any political action taken by the legislature. In fact, following the Dental Board case, the State Bar frantically tried to get the General Assembly to enact a bill under which the Attorney General would “actively supervise” the State Bar in its regulation of competition.

That bill has not been enacted, but even if it had been, it is doubtful that such legislation would satisfy the standard the Court set forth in the Dental Examiners case.

In fact, legislative history in North Carolina strongly favors LegalZoom. The complaint points out that in 1991, the legislature “removed from the State Bar any power over prior and continuing approval of prepaid legal services plans.” All the State Bar was supposed to do was to maintain a list of such plans sold in North Carolina.

That indicates a decision by the representatives of the people to maintain an openly competitive market.

But the State Bar did not want that and, the complaint avers, “unilaterally and ultra vires resumed and exercised the power the Legislature had removed.” (“Ultra vires” means an action without legal justification.) Rather than obeying state law, the bar adopted a highly restrictive definition of what qualifies as a prepaid legal plan and then refused to allow plans that didn’t meet its particular definition to be sold to residents.

The conduct of the North Carolina State Bar reminds one of Adam Smith’s observation in Book IV of the Wealth of Nations: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.”

Antitrust laws are supposed to prevent monopolies and attempts to restrain trade and stifle competition. In my view, such laws are unnecessary except where government is active – erecting barriers to entry and limiting competition through law or regulation. (For a thorough exposition of that position, see Professor Dominic Armentano’s book Antitrust: The Case for Repeal.)

Here, it is a governmental body using the apparent force to the state (even though contrary to actual policy) to stifle competition. Whereas the application of antitrust law to private market action often ends up protecting existing competitors against successful newcomers rather than protecting competition itself, in this case that isn’t the concern. LegalZoom is only seeking the same freedom to compete that it has in almost all other states.

When bar associations attempt to stop new kinds of competition in legal services, they’re acting in the same ugly tradition as the Luddites who tried to stop power looms from operating in England, and taxi drivers in France who recently used violence against Uber drivers. They are trying to hold back progress.

These delaying tactics are not going to do lawyers much good, however. That’s the argument of University of Tennessee law school professor Benjamin Barton in his new book Glass Half Full—The Decline and Rebirth of the Legal Profession. The legal profession, he shows, is already well into a gale-force storm of creative destruction and there is much more change ahead. His chapter “LegalZoom and Death from Below” is particularly relevant.

Barton writes that LegalZoom began in 2001 and at first had virtually no impact on lawyer billings since, “anyone willing to incorporate their company or write their will on the Internet was unlikely to be able to afford a lawyer anyway.” Soon afterward, the American Bar Association proposed a restrictive definition of “the practice of law” that could have nipped LegalZoom in the bud, but the Department of Justice and Federal Trade Commission objected that its definition was overly broad and anticompetitive. So the ABA backed off – and LegalZoom was free to grow.

Today, it is taking a huge chunk of business that once filled the pockets of lawyers, such as corporate filings. Barton observes, “The loss of 20 percent of that business in California is not a promising sign for traditional lawyers. LegalZoom (and its competitors) seem unlikely to stall at only 20 percent of that business.”

Perhaps the North Carolina State Bar will decide not to fight this last ditch battle against the surging forces of innovative competition. LegalZoom is asking for the usual antitrust treble damages remedy, which it calculates at over $10 million. A good lawyer knows when to settle and minimize the losses.