Lawsuit Takes Aim at UpCounsel Business Model

May 7, 2018, 3:37 PM

A newly filed lawsuit accuses venture-backed legal matchmaker UpCounsel Inc. of violating ethics rules and unfair competition laws to gain an edge over traditional legal service providers.

The lawsuit, filed in California federal court on May 2, targets a company that is often mentioned as a harbinger of the “Uberization” of legal services—and has raised $26 million from investors that include Menlo Ventures, an early Uber backer that recently sold half its stake in the ridesharing giant for close to $1 billion.

The lawsuit was filed by LegalForce RAPC Worldwide P.C., an intellectual property law firm that uses artificial intelligence software—developed by LegalForce Inc., a sister technology firm and co-plaintiff—to streamline the trademark application process.

Raj Abhyanker, an engineer-turned-attorney who founded the plaintiff entities, told Bloomberg Law that the UpCounsel lawsuit will shine a light on regulatory inequities that have allowed nontraditional legal service providers to gain a competitive edge in the marketplace.

In a written statement, UpCounsel said the suit “is a frivolous act” by “an entrepreneur who has failed to compete in the market and is lashing out in frustration.”

“UpCounsel’s goal is to create a platform that provides access for businesses to find, connect and work with independent attorneys across the nation,” the statement said. The company, it added, has “worked diligently for years, and at great expense, to ensure our business is compliant with all ethical rules.”

‘Brazenly Ignored’ Ethics Rules

UpCounsel, a San Francisco-based company founded in 2012, is a “legal marketplace” that connects businesses in need of legal work with freelance attorneys from a pre-vetted pool.

UpCounsel says it reduces the administrative tasks of lawyers in the network, achieving cost-savings that are passed on to the businesses that hire them.

But the LegalForce complaint alleges that UpCounsel and its CEO and founder, Matthew Faustman, have “brazenly ignored” ethics rules that prohibit lawyers from sharing legal fees with nonlawyers.

“Plaintiffs have chosen to lawfully abide by the regulations,” the complaint says. “As a result, Plaintiffs have been unable to fairly compete with Attorney Defendants and UpCounsel.”

The “attorney defendants” are freelance lawyers in the UpCounsel network who allow the company “to mark up” their fees and take a percentage of the total bill as a “processing fee,” the complaint says.

Two-Front War

UpCounsel is one of several industry disrupters that Abhyanker’s companies have sued in recent months.

In December, the plaintiffs filed a $60 million lawsuit that accused LegalZoom.com of unfair competition and antitrust violations, and alleged that the U.S. Patent and Trademark Office (USPTO) abetted the company’s monopolistic conduct.

Within a month of that filing, the plaintiffs brought similar lawsuits against seven other legal service providers.

Those lawsuits have since been consolidated, and the plaintiffs have been dealt setbacks in recent weeks. On April 10, the judge said LegalForce RAPC—but not LegalForce Inc.—was bound to arbitrate its claims against LegalZoom. And on April 30, the judge dismissed the plaintiffs’ claims against the USPTO.

‘Stirring the Pot’

Abhyanker said the dismissal of the claims against the USPTO was disappointing because bar regulators have refused to participate in a much-needed debate over defining the practice of law in the 21st century.

Abhyanker said regulators have turned a blind eye to the ethical violations his companies have accused LegalZoom and UpCounsel of committing. These lawsuits, he said, are a response to regulators’ abdication of their duties.

“I have no other way to affect change,” Abhyanker said.

“I would love to do it legislatively, but that’s not going to happen without somebody stirring the pot,” Abhyanker added.

“I’m suing more than 200 lawyers,” Abhyanker said. “That’s stirring the pot.”

UpCounsel: ‘Disheartening’ Tactics

In its statement to Bloomberg Law, UpCounsel said it was “disheartening to see the way LegalForce has acted here.”

The company was particularly displeased with the fact that lawyers in the UpCounsel network were named as individual defendants.

“The malicious attempt to intimidate UpCounsel’s attorney users by listing them in the suit is inexcusable,” the statement said. “We welcome the opportunity to represent ourselves and those attorneys listed against this frivolous complaint.”

UpCounsel said the suit was “consistent with the barrage of frivolous suits LegalForce has filed against other legal companies in recent months,” and that it “appears to be the latest attempt to gain attention in the market.”

‘I Feel Like I Invented Them’

In December, LegalZoom said Abhyanker’s lawsuit was an attempt to achieve through litigation what LegalForce could not achieve through competition.

Abhyanker had a surprising response, saying that he admired LegalZoom’s business model but wasn’t willing to adopt it because doing so would expose him to disciplinary action.

Abhyanker had a similar response when asked about this lawsuit. “I really don’t have a problem with UpCounsel—I feel like I invented them,” he told Bloomberg Law.

The complaint says that in 2008, Abhyanker was in talks with three prominent venture capital funds—Kleiner Perkins Caufield & Byers; Sierra Ventures; and Bertram Capital—about turning LegalForce into an online legal marketplace service.

The complaint says Abhyanker couldn’t close the deal because he wasn’t willing to adopt a fee-sharing model that would have allowed the company “to scale revenues faster” and entice investors.

The complaint says Faustman “launched his copycat website UpCounsel.com” four years later.

State Bar Warning

In September 2016, the California State Bar sent confidential letters warning lawyers who participate in UpCounsel’s network that an investigative file had been opened to determine whether they had engaged in “improper sharing of legal fees.”

A form letter, attached as an exhibit to LegalForce’s complaint, said the bar was concerned that lawyers ran afoul of the ethics rule on fee-sharing by allowing UpCounsel to collect “a percentage-based processing fee.”

The letter said the bar was closing the file after expressing its concern, but would “consider further action” if it received “complaints or other information demonstrating possible misconduct.”

The case is LegalForce RAPC Worldwide, P.C., et al v. UpCounsel, Inc. et al, N.D. Cal., No. 3:18-cv-02573, complaint filed 5/2/18.

To contact the reporter on this story: Samson Habte in Washington at shabte@bloomberglaw.com

To contact the editor responsible for this story: S. Ethan Bowers at sbowers@bloomberglaw.com

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