A recent decision from three New Jersey Supreme Court committees raised concerns over legal service plans from Avvo, LegalZoom and Rocket Lawyer.

Online legal service providers are no strangers to controversy . Renewing debate around the ethics of these plans, three committees of the New Jersey Supreme Court issued a joint opinion barring the state’s attorneys from participating in legal service programs offered by Avvo Inc., LegalZoom.com Inc. and Rocket Lawyer Inc.

The opinion, issued by the New Jersey Supreme Court’s Advisory Committee on Professional Ethics, Committee on Attorney Advertising and the Committee on the Unauthorized Practice of Law, determined that two Avvo services constituted improper fee-splitting. LegalZoom and Rocket Lawyer offered permissible service plans, the opinion found, but were not properly registered with the court in keeping with the state’s rules of professional conduct. Both companies have since registered their legal service plans with the Administrative Office of the Courts and resumed operation of their plans.

The Lawyer’s Place

The June 21 opinion was in response to a request from the New Jersey State Bar Association (NJSBA) for a formal opinion on the ethics of lawyer participation in services offered specifically by the three companies. Robert Hille, president of the NJSBA, said that the bar was prompted to request a formal opinion by members’ questions about whether they could ethically participate in the programs.

“We sought guidance on behalf of our members, those who would have perhaps been interested in participating or were considering participating, or were concerned about the introduction of these models in New Jersey,” Hille said.

Hille noted that while the NJSBA is charged with examining how new technologies can benefit members, it also ensures that technology doesn’t unduly draw resources away from the state’s legal ecosystem.

“Our mission is really to make sure that our members and the practice of law play a role that benefits the citizens of this state and also maintains the best system of justice we can have for this state,” he said. “Anything that would offshore those benefits, or extract resources of those benefits, or those things that we need to make sure don’t harm the citizens, we need to be involved in making sure that doesn’t happen.”

Though the joint opinion is the first such ruling out of New Jersey, it’s not the first time state regulations have challenged online legal service providers’ business models. The joint opinion cited advisory opinions from bar associations in Ohio, South Carolina and Pennsylvania, each of which took issue with “marketing fees” taken by online referral services. LegalZoom specifically has faced similar challenges over practices thought to constitute an unauthorized practice of law (UPL) in North Carolina, Missouri and other states.

Regardless, both Avvo and LegalZoom found the joint opinion and the initial inquiry from the bar association fairly baffling, especially in its more technical components. Avvo CEO Mark Britton said that the company believes its legal service offering to be in compliance with New Jersey’s rules of professional conduct.

“We’re actually quite confident that when you look at it from a technical perspective, we believe we comply, which is where some of the confusion comes in,” Britton said.

The company has not yet determined how it will respond to the opinion, but Britton said that the company may suspend its operation of Avvo Legal Services in New Jersey, as it has in South Carolina, following a similar opinion issued by the state’s bar association.

Ken Friedman, vice president of legal and government affairs at LegalZoom, said that the company looked into registering their legal service plans with the New Jersey Administrative Office of the Courts, but did not believe the nature of its service plans required them to do so.

“Our interpretation was that this was a registration process for legal insurance plans. Our plans in the alternative are noninsurance legal access plans,” he said, adding that the company has remained transparent about the content of its plans.

However, Rocket Lawyer general counsel Eunice Burns found the opinion clear and considerate of both state regulation and new technology development. “New Jersey is an example, in our opinion, of reasonable and thoughtful oversight that does not get in the way of innovation,” she said.

The joint opinion also looked at the question of whether each of the three company’s business models interfere with attorneys’ professional judgment, finding that none did.

A Question of Ethics

Britton took issue with the notion that Avvo’s business model poses any sort of threat to ethics values held by attorneys and bar associations in New Jersey and elsewhere. He compared Avvo’s level of involvement in an attorney-client relationship to using a credit card or a Google search. “We bring in the customer and we deliver them to the lawyer, so there’s nothing that we do practically or structurally that can influence or somehow impact that lawyer’s ability to act ethically, no more than Google,” he added.

Friedman similarly felt that nothing in the LegalZoom business structure stands to threaten ethical legal practice. “LegalZoom put in safeguards the moment we launched our legal plans, there really is a strict wall there,” he said. “The attorney-client relationship is really between the attorney and the client, we really can’t invade that.”

While each approached the issue differently, both the NJSBA and the companies were fiercely protective of the consumer. From Hille’s vantage point, introducing nationally operating technology corporations into localities to provide legal services should invite ethical scrutiny. “Any time [there is] a new business model, which involves a middle man or a broker, and that model is for profit, then one has to question why an additional cost run would be imposed on an existing market, and how that would ultimately benefit the consumer,” he said.

Britton countered that the bar association is assuming risks to consumers that aren’t necessarily there, and thus impeding Avvo’s work to meet consumer needs. “When we attempt to do something here to help the disadvantaged, to help the entry level, it is met with advisory and hypothetical wrong that doesn’t help consumers and it doesn’t help lawyers,” he said.

Yet Hille raised questions around the transparency of these startups, noting that questions of dispute venue, pricing, community investment, permissions, investor backing and public good may all be obscured by their corporate status. “There are a lot of questions I think these models create, but because they’re private and not subject to the same regulatory environment that lawyers are, it’s difficult to obtain that kind of information,” he said.

“I don’t think we can be any more transparent about what is happening,” Britton said of Avvo’s legal services plans, noting that users can see all potential attorneys offering a given service. “I don’t think we’re dealing with transparency, I think we’re dealing with consumer harm,” he added.

Friedman said that LegalZoom tries to go above and beyond what state-level regulations require for consumers, noting that the company’s internal satisfaction guarantees, minimum recovery and dispute resolution well serve their customer base. “We have every intention of doing right by our customers,” he said.

Bright Horizon for Online Legal Services

The three companies included in the New Jersey Supreme Court committees’ opinion have been some of the most successful in legal technology’s venture capital scene. Market research group CB Insights found that Avvo was the most well-funded legal technology startup between 2011 and 2016, raising $132 million over the course of those five years. Rocket Lawyer, the third best-funded legal technology startup in the same time frame, pulled in $53 million. The two companies alone took 35 percent of the top legal technology investments. LegalZoom, meanwhile, has received $111 million in venture capital funding .

Britton said that he doesn’t expect that the joint opinion will raise any red flags from Avvo’s investor community, who he believes stand firmly behind the company’s work to disrupt legal services delivery for the better.

“We have always been an agent of change in the legal industry, and not just for change’s sake, but really for the betterment of consumers and lawyers. Our investors understand that. While you can always have small bumps in the road, they trust in our mission to broaden the delivery of legal services,” he added.

Likewise, Friedman said he didn’t anticipate any concern over the decision. “I don’t see this as even a bump in the road. We’ll be right back to serving our customers.”

Ron Dolin, a regular angel investor and senior research fellow at Harvard Law School’s Center on the Legal Profession, explained that those who invest in companies facing regulatory challenges are usually both aware of potential issues and eager to challenge them.

“People in it are already aware of the road blocks. I think it’s not that different of investing in Uber or Lyft, where you’re aware of the regulatory environment. We take it up to the edge and find out where the limits are. We make a good business of this by fighting the limits that are really holding you back that shouldn’t be there,” Dolin noted.

Due to the success of companies like Avvo, LegalZoom and Rocket Lawyer, it’s likely that emerging legal technology startups will look to emulate some components of their model. However, as state regulation around online legal marketplaces continue being worked out, new entrants to the market may need to take heed of how fee-splitting and UPL regulations could impact their business strategy.

Hille said that the New Jersey Supreme Court committees’ decision is likely to extend beyond the three companies named in its opinion. “In the context of these models, I don’t think that the opinion is limited to only these three. I think anyone operating a similar model in the future is subject to [the opinion],” he said.

But while regulatory issues and litigation risks can certainly dissuade investors from staking money into new startups, Dolin finds it fairly unlikely that the regulatory scrutiny from the New Jersey joint opinion or elsewhere will slow the growth or investment in online legal service models overall.

“A lot of these startups have models that are potent or likely profitable within the existing regulatory framework, that’s why they’re getting funded for the most part,” he said.

Contact Gabrielle Orum Hernández at ghernandez@alm.com.