Legal Industry Rules on Cusp of Sea Change as Tech Forces Gather

Erin Levine is on a mission to provide affordable divorce services to expand access to justice. She told me she first looked to scale up her family law practice using technology, but quickly realized ABA’s Rule 5.4 on lawyer independence would prohibit her from raising capital from non-lawyers. That meant she’d have to run a technology company and a law firm simultaneously.

Having set up the tech company, Hello Divorce, she encountered unauthorized practice of law rules requiring that all legal work be routed to the law firm.

Levine said even the experienced paralegals and lawyers employed by the tech company were prohibited from using their legal knowledge. Parallel operating entities were required in 11 states Hello Divorce entered, driving up costs for customers and making it hard to attract legal talent.

The legal industry stands out with its rigid restrictions complicating innovation. But the power of new technology stakeholders stemming from the hype and reality of artificial intelligence is likely to shift Rule 5.4 and unauthorized practice of law, or UPL, once and for all.

Poised For Change

Hello Divorce’s experience in one state, Utah, presages the future. There, a regulatory sandbox permits waivers for UPL and allows for alternative business structures that enable law firms to raise money from non-lawyers. This means technology companies can run as a single integrated business, creating incomparable efficiencies.

Arizona, too, has changed its rules to allow for non-lawyer ownership of law firms, which enables legal services companies to raise capital and deliver legal advice in novel ways.

Utah and Arizona may seem like outliers today, particularly as states such as California have shied away from launching their own regulatory sandbox. But actually they presage the future regulatory structure for legal services.

The politics of US legal service regulation is about to change. Even as the UK and Australia liberalized their rules years ago—and as China rolled out humanoid robots in its legal system—most of the US hasn’t followed suit.

Jeff Franke, CEO of LegalOps.com, told me that “the US legal ecosystem has many key players, including state legislatures and bar associations, protecting vested interests all in the name of protecting the consumer from bad legal advice.”

As a result, incumbent stakeholders—those law firms that wouldn’t benefit from changes—have beat back regulatory reform at every turn. But new technology stakeholders will upend the politics of the legal profession.

AI Factor

The stakes of legal practice regulation are growing. Goldman Sachs estimates $200 billion will be spent per year on AI investment by 2025. OpenAI’s GPT4 program now does better than the average law student on the bar exam. Generative AI can draft documents, do legal research, and provide advice faster and cheaper than humans.

The legal industry, at roughly $800 billion in global annual revenue, is a big prize and technology is poised to disrupt it in previously unthinkable ways.

With the hype and reality of generative AI, a confluence of the largest technology companies in the world and the largest venture capital and private equity firms are now setting their sights on the legal market. This provides a vector for regulatory change that didn’t previously exist.

Uber provides a good analogy for what’s ahead. Penn State’s Grace Canfield documents how Uber launched in cities “in conflict with local officials’ interpretation of local regulations” and then waged “a take-no-prisoners battle against city after city and taxi union after taxi union, eventually gaining a consumer base that it leveraged against governments to change” regulations and rules.

Investor Interest

A wave of money is about to propel the legal industry in the same direction.

DoNotPay, backed by top VC firm Andreessen Horowitz, provides a good case study. The company offered $1 million to anyone willing to use their AI-powered headphones—which would generate responses for lawyers to parrot—in front of the US Supreme Court, and also offered similar headphones for individual use in traffic court.

It was met with threats from state bar associations and more than one lawsuit. But at a valuation of hundreds of millions of dollars, it can afford to provoke—and then fight.

On Nov. 17, DoNotPay defeated an attempt at a class action suit in Illinois brought by a small law firm. Among other elements, the plaintiff failed to establish that the tech company injured every law firm in the US by lessening the goodwill associated with the services of those firms.

The defeated argument, in essence, was that the mere existence of an AI-powered alternative to law firms injures incumbents.

This is the beginning rather than the end of the story. Soon, the biggest companies in the US will be coming for the legal market—and they will write the rules of the game rather than accept them.

The established Big Tech companies that have wagered their future on large language models and AI for enterprise will want reforms so they can unleash the power of their technology on the legal market. And venture capitalists and private equity investors are increasingly interested in legal services, which was once a backwater of innovation.

This means Utah and Arizona’s experiments aren’t isolated events. These are proving grounds for new tech companies to acquire massive investments to scale nationally—bringing with them new stakeholders that play politics and shift the regulatory landscape.

As consumers get their hands on subscription-based and tech-driven legal services, demand for such services will grow, with investor backing. Access to justice advocates will correctly highlight such services as filling an important gap.

Private equity firms will want to roll up law firms that are disrupted by technology—unable to compete on their own because only firms of a certain scale can self-fund the technology upgrades that will define the future of the sector.

Large technology companies will see legal as one of the ripest areas for application of AI-powered tools. And some struggling law firms may ultimately beg for reform so they are better able to acquire tech talent to compete in an increasingly tech-powered market.

All of this together means it’s no longer a debate about whether companies such as Hello Divorce and DoNotPay should be able to deliver technologically advanced legal services across the US via new and efficient business models. It’s a question of when.

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