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.
14 thoughts on “LegalZoom’s Business Contracts: Commoditizing Mediocrity”
Ken – tune in to the Colin Cowherd radios show on ESPN radio (online or web at 10A EST). He’s pumping this product with puffery for which any state bar would slam a practitioner.
Ken: I wonder if LegalZoom shies away from customization to avoid UPL statutes in most states. For example, helping someone fill in a form, like an LLC registration form, is not considered providing legal advice, but “selecting a form” is, in Oregon. One could infer that offering optional paragraphs (“select A if it fits your situation, B if it doesn’t”) is too close to the line, unless LegalZoom employs counsel in all 50 states to avoid it.
Stephanie: As a general matter, if the user chooses from among offered alternatives, that’s not UPL. If I were in LegalZoom’s shoes, I wouldn’t have any qualms about offering customization. I think it’s clear that they’re offering one-size-fits-all because their ill-informed customers don’t know what they’re missing. Ken
This is a really good and thoughtful post. I suspect those who dislike the concept of lawyer-replacing tech will read it as an indictment of lawyer-replacing tech. I think it’s more specific: just saying that LegalZoom’s implementation is poor. LegalZoom has shown that there is a good market for automated consumer/small business legal software. I understand that Koncision’s document assembly system is targeted at sophisticated lawyers. Do you think that systems like LZ, targeted at less sophisticated users, inherently have to be poor quality? Or just that LZ (or at least their NDA template) is poor quality? Personally, I think a well-implemented LZ-like system has the potential to produce much higher quality consumer legal documents: systems like this (1) can allow great quality drafters (like you or Glenn West, who you seem to respect–I was an associate at Weil for a number of years and am familiar with his obsession with getting legal drafting right) to propagate their work more broadly and (2) document automation systems can prevent mistakes a human contract drafter might make. Presumably thoughts like these motivated you to do Koncision. I think they also support consumer services like LZ. Perhaps there is a market opportunity to challenge LZ with a higher quality product?
Noah: No, a contract-automation system intended for unsophisticated users doesn’t have to be crappy: as I say in the post, “drawbacks to traditional legal representation can’t plausibly justify using slapdash materials in commoditized contract creation.”
But as I tried to say in the post, the problem with LegalZoom’s product goes beyond the poor quality. Tailoring a contract to fit the circumstances of a given deal is a tricky business, with the complexity not necessarily being a function of the deal’s value. So if in a version for unsophisticated users you limit the customization, you’ll inevitably have users who create a contract that doesn’t match the circumstances as well as it might.
Of course, there’s a place for expediency, so I could imagine perhaps doing Koncision-lite. But it’s early days, and I want to start by aiming for the best product possible.
Also, I’m working on putting together a list of lawyers willing to help non-lawyer Koncision users complete the questionnaire. That would allow unsophisticated users who want a top-notch contract to get one for free, the only requirement being that they invest a little time.
Thanks for the thoughtful reply, Ken.
Definitely agree with the strategy of trying to do a limited set of things well and expanding out from there. When you get to it, think a Koncision-lite system could really be a hit. And very useful. While I agree that unsophisticated users of a Koncision-lite system might not get as great a contract as they would with a lawyer + Koncision drafted contract, the Koncision-lite system might put them far ahead of where they otherwise would be (with, e.g., a low-end lawyer drafted contract or a LegalZoom one).
Can see how sophisticated non-lawyer users would be able to put your system to good use.
Have you looked at http://www.docracy.com? It is possible that free crowdsourced contracts might be better.
Yes, I’m familiar with Docracy. For my views on crowdsourcing contracts, see this post
Ken- I have a confusion. Should a business, if it want to protect a trade secret, require its employees to sign a confidentiality or non disclosure agreement? If yes, is it good for the business, because generally it would have a time duration and after that the obligation will cease. What I want to know is, Which is the best method to protect the trade secret?
Sorry, but I don’t know offhand, and I don’t have the time to answer such questions.