Last month, I concluded my second piece on the Metaverse with a statement that law firms are enjoying high demand for services and premium rates right now. But in the long term, professionals in the legal industry will need to work through some strategic issues if they want to embrace more technology.
This month, I’d like to explore a structural issue that may limit the adoption of some technologies in law firms: specifically, lawyer independence, or the requirement that a law firm be owned by lawyers.
There are billions of dollars of venture capital flowing into legal tech, and that warrants some excitement for the prospects of how technology will advance the practice of law. Last year, Clio raised $110 million and was one of several legal technology companies to raise more than $100 million.
However, lawyer independence poses a challenge to legal tech adoption. A law firm can’t accept investment (i.e., ownership) from venture capital in the same way that a legal technology company can because lawyer independence does not allow for that. Law firms will be able to leverage advances in technology that any business can take advantage of (e.g., Microsoft Teams, CRM systems to manage clients, etc.), but cannot benefit from direct investment to build systems that could support the core service of providing legal advice. And since legal technology companies are not lawyers, they can’t build systems that provide legal advice (except for experiments underway in Arizona and Utah).
Hypothetically, if a software company were owned by billionaire lawyers, then investments of hundreds of millions of dollars in legal technology might be possible — but law firms themselves wouldn’t have the same advantage. The prohibitions of lawyer independence keep law firms from being able to develop applications at the scale and investment level of other industries that can accept venture capital investment — all because those applications could be viewed as practicing law.
With all of this in mind, let’s take a look at how we can expect to see legal technology evolve in the next few years.
Repeatable Work Continues To Move In-house To The Law Department
Law departments are under increasing pressure to be more productive, and as technology innovation progresses, law departments are more likely to adopt technology in order to bring certain tasks in-house. Higher volume transactional or highly repeatable tasks, such as contract negotiation and contract review, are good candidates for this. There are also other tasks like e-discovery that operate on a company’s data, such as documents, emails, and chat sessions exist, so it makes sense that corporations would own at least the first steps in the process.
Keeping the lasting impacts of the pandemic in mind, I think we can also expect that law firms will continue to get pulled back into this work to augment law department staff, given the talent shortage and staffing challenges that law departments will continue face.
Law Firms Continue To Provide High-value, Bespoke Legal Services
With a long-term trend for higher volume or highly repeatable work to move in-house, what does that leave for law firms?
High-value, bespoke work will continue to provide healthy profits for partners. Law departments will also continue to reach out to trusted firms for work that is highly specialized and is less common for the law department. Examples include M&A, semi-annual labor negotiations, and other events. In those situations, a law firm partner with a practice dedicated full-time to these “horizontal” legal services will have far greater knowledge across the market than a law department dealing with an issue for the first time.
It is these “horizontal” legal services that could lend themselves to automation and codification in software — and those are the areas where venture capital could help solve at scale with larger investments than an individual firm trying to self-fund and build a solution for their firm only. Think about a Turbo Tax-style product that makes legal decisions or provides advice. Think of a bot that operates on behalf of an attorney. Is it more effective for individual law firms to build solutions like this for their own use? Or is it more effective for a few well-funded legal tech firms with attorneys on staff to build these kinds of solutions?
Fragmented Investment By Law Firms Won’t Scale To Build Applications That Can Provide Legal Advice
A law firm could certainly develop applications with their own IT department, leverage AI to encode legal logic and a law firm’s “secret sauce” into their systems.
But partnership structures (like a law firm) that are focused on annual partner profits are based upon the billable hour, and therefore don’t lend themselves to large capital investments, and each law firm in the AMLAW 200 going it alone to build their own solution further dilutes the effectiveness of investments in applications that can benefit all law firms.
So what should the American Bar Association and law firms do?
In August 2020, Arizona approved nonlawyer ownership or investment in law firms, and in May of last year LawGeex, an AI software company, was granted a license to practice law in Utah, which has made similar changes to those in Arizona. It is yet to be determined how effective LawGeex or other nonlawyer-owned organizations will be in advancing technology adoption and advancing legal services. These experiments with nonlawyer ownership should be watched closely.
To be fair, Australia and the U.K. have already liberalized independence rules, and we haven’t seen seismic changes yet. ALSPs continue to make inroads and they play a role. And there could be some interim approaches where software encodes the law and spots issues, but an attorney reviews the output and has the final say in legal advice.
There is more to learn here and any changes may be incremental. This is why the learnings from Arizona and Utah will be interesting to watch.
Lawyer independence is a significant issue with serious implications to the legal industry and society in general. There will be benefits and possible downsides to any steps taken to the make changes to current ABA Rules regarding lawyer independence. Consideration of how access to capital and adoption of technology should be a part of the discussion.
Ken Crutchfield is Vice President and General Manager of Legal Markets at Wolters Kluwer Legal & Regulatory U.S., a leading provider of information, business intelligence, regulatory and legal workflow solutions. Ken has more than three decades of experience as a leader in information and software solutions across industries. He can be reached at firstname.lastname@example.org.