Disruption in the Legal Field

Authored by: Miles Pringle

September 2018

On July 31, 2018, LegalZoom.com Inc. announced that it received a $500 million investment from a group of investment firms. According to several reports, the deal valued LegalZoom at $2 billion, “indicating that the company is worth nearly five times what it was when European private equity company, Permira, paid $200 million for a controlling stake in 2014…. LegalZoom’s revenue from subscription services has grown from 30 percent of revenue to 50 percent since Permira’s involvement.”[i] The reports of LegalZoom’s growth are impressive; however, the transaction also shows LegalZoom’s need for cash. According to its CEO John Suh, the primary purpose of the deal was to give existing investors some liquidity and bring in longer term investors.[ii] Suh also mentioned the possibility of taking the company public at some point in the future.

In its announcement, LegalZoom touted many of its accomplishments. For example, LegalZoom has expanded into the U.K. where it now makes $20 million in revenue annually. The company is next looking to push into Australia and other parts of Europe. The LegalZoom transaction follows investment in other on-demand legal services providers. In January of this year, it was publicized that Internet Brands (which already owns interests in several other legal service companies) had acquired Avvo, an online legal referral and attorney rating service.[iii] Avvo boasts that its website experiences over 100 million annual visits, and that over 300,000 lawyers actively use its services.

So, what do some of these legal tech companies do? In general, LegalZoom offers its customers interactive legal documents through its automated process, and provides attorney referral services including prepaid legal services plans.[iv] Attorneys may join LegalZoom’s network to provide legal advice to LegalZoom customers, or join LegalZoom’s “Local Attorney Directory” to receive referrals from plan attorneys. LegalZoom is quick to point out that while it provides access to independent attorneys and self-help services, it is not a law firm or a substitute for an attorney or law firm and “cannot provide any kind of advice, explanation, opinion, or recommendation about possible legal rights, remedies, defenses, options, selection of forms or strategies.”

LegalZoom’s largest competitor appears to be Internet Brands’ Martindale Legal Marketing Network, which includes: Martindale-Hubbell, Lawyers.com, Avvo, Nolo and Ngage. Martindale-Hubbell offers online products and services such as professional profiles, law firm website development, marketing and Martindale-Hubbell Ratings & Reviews. Avvo and Lawyers.com provide attorney and law firm profiles targeted at consumers, and Avvo allows for ratings from prior clients and other attorneys. Nolo, along with its affiliates Divorcenet.com and AllLaw.com, is Internet Brands’ provider of form legal documents. Ngage is a chat box service that law firms can implement on their websites (a chat box is the pop up on a website asking you if you have any questions).

According to Thomson Reuters’ “2018 Report on the State of the Legal Market”,[v] demand growth for law firm services is mostly flat. Nationally, there has been slight growth in demand for tax, corporate and patent litigation services, but a decline in bankruptcy, real estate, labor/employment and general litigation. The most alarming statistic is the decline in attorney productivity, which the report claims “is costing firms about $74,100 per lawyer per year.” Since 2008 the overall trend for law firm services demand is essentially flat or negative. The Report noted that this is especially concerning given the national economic strength in recent years and despite an overall increase in legal spending by corporate clients. What this suggests, the Report states, “is that law firms have been losing market share”.

Law tech firms like LegalZoom and Nolo are not the only competition law firms. According to a 2017 Thomson Reuters report, “ALTERNATIVE LEGAL SERVICE PROVIDERS: Understanding the Growth and Benefits of These New Legal Providers”,[vi] companies providing ancillary legal services, such as e-discovery and document review services, accounted for $6.2 billion. Accounting firms and contract lawyer services were also notable sources of competition for traditional law firms.

It should be noted that the American Bar Association has rendered its judgment on whether non-lawyer professionals, like accountants, should provide legal services. In 1998, the ABA established the Commission on Multidisciplinary Practice, which issued a report favoring the multi-purpose professional firms.[vii] The ABA House of Delegates rejected the Commission’s recommendations, instead adopting a resolution that “Jurisdictions should retain and enforce laws that generally bar the practice of law by entities other than law firms.”[viii]

In order to maintain profitability, firms have employed various cost cutting methods such as “reductions in headcount, tightening of their equity partner ranks, reductions in expenses, and continuing (albeit modest) rate increases.”[ix] The 2018 Report concluded that more successful law firms had fewer pre-bill write downs or discounted rates, suggesting that they had better initial client communications concerning bills. Additionally, the Report also concluded that successful law firms tended to invest in marketing/business development and technology.

The practice of law has always changed with the times. Word processors did away with typewriters and often typists. Online databases did away with physical law firm libraries. Emails efficiently replaced most facsimiles. What remained the same during prior disruptions is that it was lawyers providing legal services.

This is not a totally negative observation regarding on-demand and alternative legal service providers. In many ways they are necessary because many citizens cannot afford an attorney to help them set up their small business or draft a will. It should also come as no surprise that as attorneys raise their hourly rates, companies will seek to cut costs. Nevertheless, there are two big concerns with the current disruptions to the legal field, the quality of services and the effect on lawyers.

Generally, you get what you pay for. When a client engages an attorney, the attorney owes fiduciary duties to the client and usually has malpractice insurance. Big box legal form providers typically do not owe fiduciary duties to their customers, which is spelled out in their disclaimers. Recovery is generally limited to nominal amounts specified in a website’s terms of use.

Like previous evolutions, lawyers may need to adopt better technologies into their practices or find new ways of connecting with current and potential clients. That could mean joining one of the networks listed above, but it does not mean abandoning proven methods of client. Alternative legal service providers are not going away anytime soon, and lawyers need to adapt in order to compete.

©PRINGLE® 2018

This Article was originally published in Oklahoma County Bar Association’s Briefcase Vol. 51 No. 9 in September 2018.

[i] Tashea, Jason, “LegalZoom announces $500M secondary investment”, ABA Journal, published July 31, 2018, available at http://www.abajournal.com/news/article/legalzoom_announces_500_m_secondary_investment/.

[ii] De Vunck, Gerrit, “LegalZoom Gains $2 Billion Valuation in Funding Round”, Bloomberg, published July 31, 2018, available at https://www.bloomberg.com/news/articles/2018-07-31/legalzoom-gains-2-billion-valuation-in-latest-funding-round

[iii] Tashea, Jason, “Avvo acquired by Internet Brands”, ABA Journal, published January 11, 2018, a available at http://www.abajournal.com/news/article/avvo_acquired_by_internet_brands/.

[iv] See e.g. LegalZoom.com, Inc. v. N.C. State Bar, 2014 NCBC 9 *, 2014 NCBC LEXIS 9, 2014 WL 1213242; see also Medlock v. LegalZoom.Com, Inc, No. 2012-208067, 2013 S.C. LEXIS 362, at *4-5 (Oct. 18, 2013).

[v] Center for the Study of the Legal Profession at Georgetown Law and Thomson Reuters Legal Executive Institute, “2018 Report on the State of the Legal Market”, published January 10, 2018, available for download at http://www.legalexecutiveinstitute.com/2018-legal-market-report/.

[vi] A Thomson Reuters Legal Executive Institute, Georgetown University Law Center, and Oxford Säid Business School, “Alternative Legal Service Providers: Understanding the Growth and Benefits of These New Legal Providers”, published Feb. 19, 2017, available at https://www.2civility.org/wp-content/uploads/Georgetown-Law-Alternative-Legal-Service-Providers.pdf

[vii] Commission On Multidisciplinary Practice, “Report To The House Of Delegates”, issued July 2000, available at https://www.americanbar.org/groups/professional_responsibility/commission_multidisciplinary_practice/mdpfinalrep2000.html.

[viii] See ABA The House adopted Revised Recommendation 10F, adopted July 11, 200, available at https://www.americanbar.org/groups/professional_responsibility/commission_multidisciplinary_practice/mdprecom10f.html.

[ix] See endnote v, at p. 11.