Software Provider Liable for Unauthorized Practice of Law in Ninth Circuit

Legal software vendors beware! The Ninth Circuit recently held that a seller of web-based bankruptcy software qualified as a bankruptcy petition preparer and, as such, engaged in fraud and the unauthorized practice of the law. Any provider of software that claims to "know the law" and offers automated form selection should examine this decision closely to make sure their activities are within legal boundaries.

The Facts

The suit, Frankfort Digital Services v. Kistler (In re: Reynoso), arose out of a bankruptcy proceeding, during which the petitioner paid to use browser-based software that prepared his bankruptcy petition based on information he provided. The product's website explained that the software would choose which bankruptcy exemptions to apply for and remove any need for the petitioner to individually select which schedule to use for the various pieces of information involved.

During the first meeting with the petitioner's creditors, the Chapter 7 trustee noticed mistakes, learned about the software and filed an adversary action against the software vendor alleging violations of 11 U.S.C. section 110. This action added to the list of section 110 proceedings against the software vendor, which had already run afoul of several other Chapter 7 trustees.

Lower Court Rulings

The bankruptcy court held that collateral estoppel prevented the vendor from challenging its status as a "bankruptcy petition preparer engaged in the unauthorized practice of law," since a previous case had gone against the vendor on this point. The Bankruptcy Appellate Panel of the 9th Circuit agreed with the bankruptcy court and affirmed based on issue preclusion. The regular Ninth Circuit panel decided to address the merits of the case, however, after accepting defendant's argument that the website had changed since the previous case was decided.

Ninth Circuit's Opinion

The court found that the vendor indeed qualified as a bankruptcy petition preparer, which was the first time that the Ninth Circuit had determined that a software-provider could qualify as such. Since bankruptcy petition preparers are, by definition, not attorneys, the court's next step was to examine California law to determine whether the vendor engaged in the unauthorized practice of the law.

In California, the preparation of legal instruments and contracts is one aspect of the practice of law. Baron v. City of L.A., 469 P.2d 353 (1970). When dealing with the preparation of legal forms, however, the services rendered must go beyond mere clerical preparation or impersonal instruction on how to complete the forms. People v. Landlords Prof'l Servs., 215 Cal. App. 3d 1599 (1989).

The court found that several features of the software and how it was presented to users constituted the unauthorized practice of law. First, the vendor advertised itself as offering legal expertise. The software-provider's website offered advice on loopholes in the bankruptcy code, compared its services to those of a "top-notch bankruptcy lawyer," and described the software as an "expert system."

Second, the software provided much more than mere clerical services. The software chose where to place the user's information, selected which exemptions to claim, and provided the legal citations to back everything up. The court concluded that this level of personal, although automated, guidance amounted to the unauthorized practice of law.

Takeaways

The Ninth Circuit specifically limited its holding to the facts of the case, and gave no opinion whether software alone (i.e., without the representations made on the website) or different types of programs would constitute an unauthorized legal practice.

Still, the decision should raise some eyebrows among legal services software vendors. At the very least, the decision stands for the proposition that an overly expert program, coupled with poorly chosen statements, can expose a software vendor to claims of practicing law without a license and shut down its operations in an entire state.