For more than a decade, Glendale’s LegalZoom.com Inc. has enjoyed big growth with little competition.
Suddenly, major new players are threatening the company that singlehandedly popularized online legal documents.
Late last month, LegalZoom filed a lawsuit alleging trademark infringement and unfair competition against San Francisco’s Rocket Lawyer Inc., an online legal form company that includes Google Inc. among its investors.
The move came shortly after Jacoby & Meyers LLC in September became the first national law firm to offer an online legal forms service, a signal that others might soon jump in.
“We’re just the tip of the iceberg,” said Keith Givens, a partner on the executive committee of Jacoby & Meyers. “I think there’s going to be a ton of lawyers and law firms in this space and that will explode competition.”
Some say it’s been a long time coming for LegalZoom, which pioneered the business of selling online legal forms including wills, trusts, divorce filings and trademark registrations. By tapping into a market of consumers unable or unwilling to pay more expensive fees to hire an attorney for routine matters, the company has achieved rapid growth.
The company is profitable and well-known; last year, 20 percent of new California limited liability companies were formed using LegalZoom, the company said in regulatory filings.
But success is now attracting copycats, and the company’s basic product – downloadable legal forms, with options to pay more for legal advice – isn’t difficult to replicate, legal experts said. Though smaller competitors have cropped up in the past, LegalZoom now faces challengers with deeper pockets.
The growing competition comes at an already difficult time for the company. In August, LegalZoom postponed its planned initial public offering as the market softened and has yet to reschedule it. Meanwhile, the company is also facing legal challenges over its business model.
LegalZoom declined to comment for this story.
Though the company has shown a willingness to fight back against upstart competitors, some experts believe LegalZoom is vulnerable.
“It does not surprise me at all that there are new competitors because of the big potential market share,” said Gerry W. Beyer, a law professor at Texas Tech University who has reviewed online legal document providers. “I did not think there was enough differentiation in LegalZoom’s product to fend off competitors.”
Since its founding in 2000, LegalZoom has grown from a startup in a condo to a national operation with more than 500 employees in Glendale; San Francisco; and Austin, Texas. Last year, the company’s sales hit $156 million, up 29 percent from the year before, according to regulatory filings. It’s also profitable, recording net income of $12 million last year.
The company offers a variety of downloadable legal documents, ranging from wills and trusts starting at $69 to trademark registration starting at $169. It can also connect consumers to a prescreened network of attorneys at a fixed cost.
Smaller challengers have appeared over the years, but Rocket Lawyer, founded in 2008, has recently emerged as the most serious threat. The company also offers a suite of online legal documents and prepaid legal assistance, though on a monthly subscription model. Last year, it reportedly hit more than $20 million in annual revenue, and has raised $43 million in venture capital funding from investors including Google Ventures, August Capital and Investor Growth Capital. The company has grown this year from a reported 70 employees to about 180.
Some of that success has come from advertising its most basic forms as “free,” a practice that LegalZoom is fighting with its U.S. Central District of California lawsuit. The lawsuit claims the “free” tag is misleading because there are often hidden costs, and also accuses the company of purchasing websites and search term advertisements with the phrase “LegalZoom” in order to redirect web traffic to Rocket Lawyer.
“As a result of Rocket Lawyer’s wrongful acts, LegalZoom has suffered and will continue to suffer loss of income, profits and valuable business opportunities,” LegalZoom’s lawyers said in the filing.
In a press conference last week, Rocket Lawyer founder and Chief Executive Charley Moore said the legal fight was a sign that LegalZoom felt threatened by competition.
“There’s no question that LegalZoom’s lawsuit is a competitive tactic and is in response to the fact that consumers have found the Rocket Lawyer experience to be something that is beneficial to them by the millions,” he said. “In fact, LegalZoom ignored us for most of the first couple years when we started up.”
Rocket Lawyer declined an interview request with the Business Journal.
Others have moved into LegalZoom’s space as well. For instance, Nolo, a longtime publisher of legal self-help books, began selling online legal documents. It was acquired last year by El Segundo’s Internet Brands Inc. for $21 million.
But Gillian Hadfield, a USC professor who studies legal markets and is on LegalZoom’s legal advisory board, said the company could fare well against new competitors, and that there is room for multiple players.
“They’ve got scale that I don’t think anybody matches in the U.S. and pretty tremendous name recognition,” she said. “I think the market’s much bigger than is currently being served.”
Law firm challengers
Still, the company is at a disadvantage to competitors emerging from the traditional legal industry because LegalZoom is not a law firm, which limits the advice it can provide and bars it from directly hiring attorneys to aid consumers.
In fact, what activity constitutes legal practice differs by state. In some states, LegalZoom has faced claims that it has crossed the line and is wrongfully acting as a law firm.
Last year, it settled a class-action lawsuit in Missouri alleging unauthorized practice of the law. It is also in a legal fight with the North Carolina State Bar over a similar question.
That has opened the door for firms such as Jacoby & Meyers. Founded in 1972 in Van Nuys as a consumer law firm, Jacoby & Meyers pioneered affordable legal advice to low-income clients, and has since grown into a national network of around 130 offices.
About two years ago, the company sensed a growing demand for online legal documents paired with attorney advice and began looking into it, Givens said. After purchasing legal forms and technology from U.S. Legal Forms Inc. in Flowood, Miss., it launched its own legal forms website in late September. In addition to form downloads, customers can pay extra to talk to a Jacoby & Meyers attorney in person or over the phone.
“There are companies providing legal forms, but none of the other companies will be (directly) providing legal services,” he said.
However, law firms face a hurdle that corporations don’t: They aren’t allowed to raise money from outside sources. Jacoby & Meyers has filed lawsuits in New York, New Jersey and Connecticut in an attempt to change those regulations.
Givens believes a slew of regional and local law firms will begin offering online forms, but not everyone agrees.
Stephen Moeller, an attorney at downtown L.A. firm Valensi Rose PLC, said the LegalZoom approach only works with less complex legal issues, usually for lower-income individuals and smaller businesses. Though Jacoby & Meyers is ideally positioned to serve such clients, most large firms aren’t.
“If any law firm was going to begin offering online legal forms, Jacoby & Meyers is a logical place to start,” he said. “But our potential typical client is just not going to be interested in using an online form.”
What’s more, it’s a relatively low-margin business. LegalZoom’s profit margin last year was about 8 percent, but a typical large law firm enjoys about a 30 percent margin before being divvied up among partners.
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