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by Randy Henrick
Plaintiffs' lawyers are always looking for new or regurgitated legal theories to use to sue auto dealers, preferably on a class action basis. One argument gaining a foothold in a number of states these days goes as follows: Since a completed retail installment sales contract or lease is a legal document, the acts of the dealer's employees who fill in the blanks on a preprinted contract or lease form constitute the "unauthorized practice of law." Practicing law without a license is a crime in many states and enough wrongful activity in any event to support an Unfair and Deceptive Trade Practices class action claim.
Don't laugh. Recently, two states held exactly that and certified class actions against an auto dealer and a mortgage company, the classes consisting of all persons who had been charged fees for document preparation in connection with their financing of a vehicle or their closing of a mortgage. In both cases, the argument was essentially the same. You write on a contract form, you're practicing law.
In Arkansas, the buyers filed a class action against an automotive group that charged customers documentary fees for preparing and filling in the blanks of published auto retail installment sales contracts like the ones you probably use in your dealership every day. The plaintiffs claimed this constituted the unauthorized practice of law, violated Arkansas's Deceptive Trade Practices Act, and resulted in unjust enrichment to the dealers. They made this claim even though a 2001 Arkansas law expressly permitted dealers to charge documentary fees for services in preparing, handling, and processing documents relating to a retail installment transaction for a new or used vehicle.
Despite the 2001 law, an Arkansas Circuit Court judge certified the class and granted summary judgment on the unjust enrichment claim for the fees charged before the date the law became effective (August 2001). The judge also issued an order that the dealership could no longer rely on the law to charge document preparation fees. He reasoned that under the Arkansas Constitution, only the judiciary, and not the legislature, can regulate what constitutes the practice of law in Arkansas and thus declared the 2001 law unconstitutional. The court certified the class as including all persons who had paid a document preparation fee from December 31, 1997 until August 2001, and at any time after November 21, 2006. That's a lot of fees.
The Missouri case involved document preparation fees charged in real estate financing transactions. The lender's employees completed preprinted forms in the proper format to enable the mortgages to be sold in the secondary markets. The pre-printed documents also included promissory notes, deeds of trust, and other collateral documents on which the employees entered the names of the buyers and sellers, property descriptions, and mortgage payment information.
Like the Arkansas court, the Missouri Supreme Court ruled that the judiciary is the sole arbiter of what constitutes the practice of law. In ruling for the plaintiffs, the court pointed out that "the charging of a separate additional charge [for preparing the documents] tends to place emphasis on conveyancing and legal drafting as a business rather than on the business of being a real estate broker." Ipso facto, the unauthorized practice of law.
Recently, another case was filed in Colorado claiming auto dealers there are practicing law without a license by filling in preprinted contract forms. Expect more of these cases as it is true in most states that the judiciary, and not the legislature, has exclusive authority over what constitutes the practice of law. So if a plaintiffs' lawyer can find a friendly judge, watch out.
Unfortunately, while federal Truth in Lending requires numerical and other disclosures to be made on the contract, state law alone determines what constitutes the unauthorized practice of law and federal law gives no protection on this issue.
This is not to suggest you need a lawyer on staff to fill in the blanks on all consumer contracts. You may be surprised to learn that this argument that filling in preprinted forms constitutes the unauthorized practice of law is not a new one. Cases on this issue go back decades. Most of the cases have come up in the real estate context, presumably because mortgage and deed documents are more complicated than auto finance contracts and state bar associations don't like real estate agents to handle property closings without lawyers in the room.
State courts in Idaho, Indiana, Illinois, Michigan, New Mexico, Ohio, and Washington have rejected these "unauthorized practice of law" arguments on different legal theories, generally because the employees filling in the forms use only common knowledge, do not exercise any legal discretion, and their doing so is only incidental to the lender's financing activity. Cases in Alabama and Kentucky may be more problematical. However, in any state, when you charge large sums for preparing documents, add or delete language from the printed forms, or provide advice to the customer as to what the contract terms mean, you are getting very close to the line.
Most states have not ruled on this issue or have not done so in many years. The plaintiffs' wins in Arkansas and Missouri may encourage plaintiffs' lawyers in other states to make the argument because, if the court buys it, a class action is almost a given (numerous people have been charged the fees over a long period of time). So check with your local attorney or state dealer association to learn what you can and cannot do in your state to comply with rules on the unauthorized practice of law. And remember that these rules relate to spoken words as well as written documents. Try to avoid explaining to customers what contract terms mean. If the customer wants to bring a copy of the contract to their lawyer before signing it, by all means let them do so.
Again, there is not a consistent standard for what constitutes the practice of law across all states, but this argument is one we may hear more of from the ever-present plaintiffs' bar in the near future.
Originally published August, 2007
thecomplianceguide.com is intended for information purposes only and does not constitute the giving of legal or compliance advice to any person or entity. Because of the general nature of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on your particular situations and circumstances.