May 16, 2021

Legal Technology as Regulatory Arbitragea countervailing force toward specialization

I believe that over the long term, true “legal technology” and “legal technologists” will find themselves confined to small, highly specialized niches. Automation and the other large benefits of computing will accrue to law practice and law clients, but mostly through general-purpose technologies applicable to law, not legal technologies specifically built for lawyers.

Superior general-purpose document authoring and collaboration technologies will do more to improve contract drafting and negotiation than lawyer-specific plugins for Microsoft Word. General-purpose file management tools will aid contact management more than contract-specific platforms. Robust calendaring and scheduling systems will supplant law-specific docketing and deadline-tracking solutions. And so on.

That said, some countervailing forces clearly push toward legal specialization. One of the strongest happens to have very little to do with the nature of law practice, or of technology: regulatory arbitrage. Offering some legal service as software or an online service, rather than through lawyers and law firms, can dodge regulations that apply to lawyers and law firms. Doing so yields both financial and competitive advantages.

Technology companies routinely offer products and services with few if any guarantees of accuracy, faultless operation, lack of error, security, or the like. The only warranties customers get are those specifically spelled out in nonnegotiable terms or negotiated for high-value deals. Lawyers, on the other hand, do not routinely disclaim liability for errors, mistakes, or threats to confidentiality. They can’t. In most practice situations, the laws and rules governing the practice of law set a minimum level of professional responsibility. Professionals cannot lower that bar by having clients sign away their rights in engagement letters or other binding terms.

It’s far riskier, from even a young, inexperienced, not-yet-established lawyer’s point of view, to speculate on new approaches that lower cost or increase efficiency. The rough starts those technologies often endure, as theory meets practice, entail risks that can end a practice or stain a reputation indefinitely. Working the initial kinks out means signing engagement letters and thoroughly reviewing all tech-enabled output, adding costs of manual work to the costs of the technology. Alternatively, “early adopter” lawyers can concoct hypothetical clients and matters for testing. But that takes time, and hypotheticals do not pay. Tech-style disclaimers can enable technology firms to more readily treat early adopters as guinea pigs, for better and worse.

Technology companies also routinely raise capital from venture capitalists and other sources that demand representation on boards of directors. Despite some movement in particular US states and abroad to allow outside capital investment and non-lawyer roles in the management of legal services firms, the general rule in the United States remains that lawyers must be in charge of law practice and cannot share fees for legal services with non-lawyers. With few exceptions, law firms “win” by earning profits and passing through to their lawyers, not by selling themselves to bigger law firms or the public. All of these factors exclude law practices from most sources of speculative capital. So law practices often rely on interest-bearing debt. Debt in the technology sector is often a mere “bridge” to a forthcoming equity financing, where the key financial terms aren’t interest, but method of conversion to capital stock.

I tend to believe access to capital is less of a factor in the balance between general-purpose and specialized technology. After all, the same flavors of capital available to legal technology companies remain available to general-purpose technology companies, as well. All else being equal—which is ridiculous, but stick with me—a general-purpose technology competitor will have a broader addressable market, and therefore readier access to speculative capital, than a vendor of a more specialized application of that technology.

There are inherent trade-offs between specificity and generality, akin to off-the-rack shopping versus tailoring. But one of those trade-offs, when it comes to general-purpose writing, office, and collaboration technologies, turns on the fact that new law students and new lawyers will often know general-purpose technologies already, and require little if any costly training.

In general, I see two sweet spots:

general-purpose technologies whose mechanics facilitate maximum creativity and adaptation by end-users, such as end-user lawyers for law work
general-purpose technologies whose architectures facilitate markets in customizations and integrations by other technologists, such as plug-ins

Both of these approaches to legal application of general-purpose technologies are in strong evidence now. Rather than guess at how dynamics of technology and business will play out for law, we can just look around.

Your thoughts and feedback are always welcome by e-mail.