In May, LegalZoom, the provider of online legal services, declared that it intends to raise $120 million in an initial public offering.
LegalZoom allows consumers to create wills and trusts, real-estate documents, the paperwork for divorces, and such. And it allows users to create a broad range of contracts and other documents required to start and operate a business. For anyone contemplating investing in LegalZoom’s IPO or becoming a LegalZoom customer, or anyone wondering what effect services such as LegalZoom will have on the legal profession, a basic question would be the quality of LegalZoom’s products.
What LegalZoom has to offer consumers has received a measure of scrutiny. For example, go here for what Consumer Reports had to say about its service for preparing a will.
But I don’t think LegalZoom’s products for businesses have been looked at closely. That prompted me to purchase, for $14.95, one of LegalZoom’s model contracts, a three-and-a-half-page “unilateral” nondisclosure agreement (NDA), in Word, stating the terms under which one party is prepared to disclose confidential information to the other party.
It’s fair to assess LegalZoom’s business offerings based on that one document—to be viable, LegalZoom’s business documentation would have to be consistent. And it makes sense to use an NDA as the test case—NDAs are ubiquitous in business, and any new contract-drafting initiative invariably starts out with an NDA.
So here’s what I think of LegalZoom’s unilateral NDA, in terms of its substance, the language it uses, and the customization and guidance it offers.
LegalZoom’s NDA addresses a basic set of standard issues, but in a way that doesn’t inspire confidence.
Consider just the following provision: “The obligations herein shall be binding upon Recipient for five (5) years from the date Owner last discloses any Confidential Information to Recipient pursuant to this Agreement.”
Leaving aside the question of whether five years makes sense for a given user, putting a time limit on restrictions on disclosing or using confidential information wouldn’t make sense for purposes of any confidential information that the disclosing party regards as a trade secret, as doing so could jeopardize its status as a trade secret.
Furthermore, the NDA doesn’t provide for a disclosure period, and it doesn’t provide for termination of the NDA. So at any time, it won’t necessarily be clear whether the disclosing party has made its last disclosure of confidential information. The result could well be confusion as to when the restrictions on disclosure or use lapse.
The NDA features other glitches of this sort.
The language used in LegalZoom’s NDA is a slurry of archaisms (for example, “IN WITNESS WHEREOF”), redundancy (for example, “granting or conferring”), stodgy lawyerisms (for example, “pursuant to”), random verb structures (for example, stating as an obligation what should be a condition), misbegotten drafting ticks (for example, using words and digits to state numbers), and general ham-fistedness.
In LegalZoom’s defense, the language used in its NDA is unexceptional. Indeed, the major law firms churn out comparable stuff, and deep-pocket clients accept it without a peep. (Go here for my analysis of drafting shortcomings in a representative example of BigLaw contract drafting, the Google–Motorola Mobility merger agreement.)
But as a defense, “Most others are doing it!” isn’t compelling.
Some of LegalZoom’s business products, including its entity-formation documents, use a rudimentary form of document assembly, with the user being provided a document adjusted to reflect how the user answered some questions. But LegalZoom’s NDA is a static Word document. As a result, what’s in the NDA is dwarfed by what could be in it.
Here are just a few of the questions that I’d want to ask anyone proposing to use LegalZoom’s NDA: Do you want the NDA to cover information disclosed before the date of the NDA? Do you want to state data-security measures that the recipient must take? Do you want to prohibit the recipient from hiring or soliciting employees of the disclosing party? Do you want to preclude the recipient from reverse engineering any technology included in the confidential information? Do you want any disputes to be subject to arbitration rather than litigation?
If you were to answer “yes” in response to these and other such questions, you’d be on your own, because LegalZoom’s NDA comes in one size—extra small.
Not offering customization limits the guidance that LegalZoom could be called on to provide. But even so, the three pages of guidance that users are sent along with the NDA is rudimentary. For the most part, it provides a boiled-down version of what’s in the NDA and doesn’t attempt to explain its limitations.
The best you can say about LegalZoom’s NDA that it’s no worse than what its competitors offer. (Go here for my critique of Rocket Lawyer’s NDA.) And it’s no worse than the innumerable free NDAs you can find online. But considered on its merits, LegalZoom’s NDA leaves a lot to be desired. And I think it’s safe to assume that the same goes for other LegalZoom model contracts.
Might that have any regulatory implications? LegalZoom has been subject to claims that it is engaged in the unauthorized practice of law. But as I explain here, it doesn’t make much sense to apply traditional unauthorized-practice-of-law analysis to what LegalZoom does.
Nevertheless, there’s something disconcerting about LegalZoom’s commoditized mediocrity. Although state bar authorities don’t subject print forms or do-it-yourself kits to any sort of quality control, perhaps the scale of LegalZoom’s operations warrants their taking a closer look.
Of course, individual users might have a remedy if they feel they’ve lost out as a result of using one of LegalZoom’s contracts. Presumably LegalZoom would point to its craven disclaimer, which says that it isn’t providing legal advice, that you should consult an attorney, that its materials are provided “as is,” and that it won’t be liable for any damages. As such, the disclaimer ignores the reality that LegalZoom’s customers are relying on its products as an alternative to retaining a lawyer.
It’s clear why business customers might want to try LegalZoom. Lawyers cost more than LegalZoom. Choosing a lawyer can be a crapshoot. And there’s a fair chance that an NDA produced by a lawyer you retain wouldn’t be any better than LegalZoom’s.
But drawbacks to traditional legal representation can’t plausibly justify using slapdash materials in commoditized contract creation.
Furthermore, any transaction, even entering into an NDA, can be complex, with the size of the deal not necessarily have any bearing on the level of complexity. If LegalZoom were to produce a comprehensive, customizable, clear, and fully annotated template NDA, it would serve to underscore that unless you have deal experience, you’d likely benefit from the advice of legal counsel when answering the questions accompanying that template.
But by giving little thought to the contracts it offers business users, LegalZoom has avoided having to address that awkward reality.
Explanatory Note: [Updated December 17, 2014: The NDA template mentioned below is now located here.] I submitted this to some business publications, but they declined it. The explanation I received was that it’s frowned on to publish a critique of a company by one of its competitors. In case any of my readers are squeamish about that, here are my thoughts:
- First, unlike LegalZoom’s NDA, Koncision’s document-assembly NDA template is intended for sophisticated users. I doubt there’s any overlap between Koncision subscribers and purchasers of LegalZoom’s NDA.
- Second, Koncision is giving away its NDA template for free. That renders even more theoretical the notion that Koncision competes with LegalZoom.
- And third, I suspect that only someone with skin in the game is going to care enough, and have sufficient expertise, to bother looking closely at what LegalZoom has to offer. That helps explain why the discussion of LegalZoom that I’ve seen has been limited to musings on what effect LegalZoom might have on the legal profession, with no examination of LegalZoom’s products.