How long before IBM moves into the legal services industry?

IBM is applying the technology underlying the Watson supercomputer to new industries and is making a startling amount of progress. A recent New York Times article discusses the tremendous potential of Watson. Below is a video demonstrating how Watson can help doctors diagnose their patients’ illnesses.

If Watson is already capable of providing medical advice then it is reasonable to believe that it is also capable of providing legal advice.

The market potential for such a product/service is gigantic. This is especially true if IBM is not subject to the ethical rules that constrain individual lawyers and law firms. For example, imagine if a single law firm could sell its services to every single company in the Fortune 500 (indeed, every single company and/or person in the world) without having to worry about conflict of interest rules such as Model Rule 1.7. Would you want some equity in that law firm? If the law firm is capable of doing high quality work then the answer should be a resounding yes!  The sky is the limit. “I.B.M. forecasts that its revenue from Big Data work will reach $16 billion by 2015.” (See article)

If IBM enters the legal services industry then it will be the equivalent of the law firm I just described. It will be able to sell legal services but not have to comply with the ethics rules that limit law firms’ ability to grow past a certain point. I assume IBM would argue that Watson (like Legal Zoom’s forms) is not providing legal advice because it is only a tool that provides customers with information (albeit highly relevant and probative information). All its customers will remain free to and will most likely be encouraged to seek the advice of a licensed attorney or law firm. Indeed, IBM may even sell this product to law firms. But if the “information” produced by Watson is sufficiently enlightening then the need for any given customer to consult a traditional law firm will be greatly diminished.

I am not suggesting that we should forgo valuable innovations just to protect the economic interests of licensed lawyers. I hope Watson-law becomes widely available. However, if I have to compete against IBM, Axiom Law, United Lex and the myriad of other non-lawyer owned legal service providers then I want the fight to be fair. What does “fair” mean? I can sum it up in one simple phrase: “if they can do it, we can do it.” Law firms, like other non-lawyer owned legal service providers such as LPOs, should be able (1) to have non-lawyer owners, (2) to go public and (3) to sell certain legal services without being subject to the conflict of interest rules or other ethical obligations.

The legal profession is currently in the worst of all worlds for two reasons. First, we created rules that prevent us from successfully entering lucrative lines of business. Prohibiting non-lawyer ownership forces us to rely on current cash flow or debt to finance expansion. This means that law firms cannot grow rapidly unless they merge with other law firms or take out loans. It also means that we are perennially focused on the short term. Banks want their interest payments on time, every time. Additionally, a bank would never give a mutli-million dollar loan to a start-up law firm that has no physical assets to secure the principal. A venture capital firm may be very interested in giving a firm that provides legal advice in an innovative way capital but Model Rule 5.4 largely prevents law firms from entering business relationships with them. This rule also makes recruiting top talent impossible. How many top tier software engineers are also licensed lawyers? Assume that you are a talented non-lawyer. Would you work for a legal services start-up if only the licensed lawyers got to have equity and you had to take a salary? Second, we are allowing non-lawyer owned firms to cannibalize our business! “The American Bar Association (ABA) recently issued an ethics opinion blessing and endorsing the outsourcing of legal services.” (See Article on Pangea3’s website). In 2012 the estimated total spend on LPO services was 3 billion dollars. Many analysts believe that number will grow at a rate of 30% to 40% per year going forward. Where is all that growth coming from? Some of it is new demand for a new type of service. But I guarantee that a significant percentage is coming directly out of law firms’ bank accounts. Dollars clients would have paid to law firms are going to LPOs or other alternative service providers.

Think about this for a moment. We are intentionally preventing law firms from altering how they are structured so that they can better serve clients while simultaneously endorsing the use of a service that threatens their very existence. As I said before, I have no qualms with LPO. I am just troubled by the fact that the ethics rules are stifling innovation within the legal profession and putting us at a competitive disadvantage. The rules of professional responsibility should be relaxed but made applicable to lawyer owned and non-lawyer owned businesses that provide legal services. It is illogical for innovative non-lawyer owned firms that provide legal services to continue pretending that they are not practicing law. And it is equally illogical for law firms and lawyers to continue pretending that these new entrants will not dramatically change how legal services are delivered and consumed.

Therefore, we should all be asking ourselves several important questions:

How can we (i.e. lawyers) improve the delivery of legal services?

What investments should we make now so that we will be well positioned in the future?

Do we need to change the way law firms are regulated? Do we need to change the way they are structured?

Do we need to change the way non-lawyer owned firms that provide legal services are regulated?

Why can’t we treat them both the same? Why can’t we liberalize the market and adopt rules similar to those in the UK and Australia?

It will only be a matter of time (5 to 10 years) before IBM or some other large tech company with deep “Big Data” expertise moves into the market for legal services. I do not want to be caught flat footed. But right now, I feel as though I am a 350 lbs defensive lineman that is about to challenge LaMichael James to a foot race.
Disruptive Legal

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