How Legal Process Outsourcers Are Changing The Legal Market

September 25th, 2013

The October ABA Journal offers a front-page story by Rachel Zahorsky and Bill Henderson, titled Who’s eating law firms’ lunch? I encourage you to read the entire article, which explores how Legal Process Outsourcers (LPOs), powered by big data, are siphoning work away from law firms.

Now, Legal Process Outsourcers aren’t only firms overseas, as the term suggests. There are also domestic entities. Many of these LPOs perform jobs historically reserved to law firms, including document review. But all of the outsourcers share one thing in common–they aren’t law firms, and are not bound by the rules of ethics that apply to lawyers.

These companies also share one significant trait: As opposed to U.S. law firms, they all invite nonlawyer financing.

What exactly are LPOs. The article doesn’t really explain it, and describes a number of these companies in ambiguous terms.

For example, here is how Clearspire is described:

One part law firm and one part business entity, Washington, D.C.-based Clearspire Law Co. aims to expand its nontraditional law firm model across the country with the addition of 50 to 100 BigLaw lawyers each year for the next five years, all serviced by its sister business outsourcing company, Clearspire Services Co. Together they make up the legal service business Clearspire.

The two-company model, along with the cutting-edge technology of Coral, strips away many of the overhead cost escalators of large law firms, driving efficiency, Cohen says. It also allows for nonlawyer investment and revenue-sharing in Clearspire’s business arm, which doesn’t operate under the restrictions of ABA Model Rule 5.4: Professional Independence of a Lawyer. As a result, the company plans to raise $3 million from outside investors this year.

The bolded part is the key. If an an entity is not a law firm, it is not bound by Rule 5.4, which forbids outside investment. In tech circles, this is seen as one of the largest barriers to legal innovation.

I previously blogged about an interview with Axiom, a competitor to Clearspire, that is also toeing the line between what is, and is not a law firm.

It is far from clear what these LPOs can, and cannot do, so long as they are not operating as law firms.

Dan Rodriguez raises a related issue about peeling back the wall of Rule 5.4:

One other point about the common narrative:  Let’s be clear that these LPOs are in business to make money.  No shame in that, certainly.  But framing these companies as noble warriors coming to the rescue of a fat-and-happy profession in steep decline is not really the best framing.  For every Novus there are a steady supply of would-be entrepreneurs (frequently out-of-work lawyers) who are scrambling to capture some market share of a market that is just being defined.  The larger social value question of whether and to what extent the successful of these companies will widen access to legal services and improve the performance of the legal system remains to be answered.  For now, the most accurate narrative, to me, sees this principally as a fascinating employment story (and a critically important one at that).

Update: SHG offers these comments on how Mark Harris couldn’t really answer whether Axiom was, or was not a law firm:

When asked “what is Axiom,” Mark Harris couldn’t answer.  His spin was that it’s so cutting edge was that no label has as yet been invented for it.  He explains the work that they’re “most passionate about is the work that genuinely transforms the way legal work is done, and hopefully plays a meaningful role in the transformation of the industry at large.”  He uses a slew of meaningless jargon to conceal that he’s either got no clue what he does (unlikely) or he refuses to admit that he’s running an unlicensed cut-rate law firm.

So the future is making money off unlawful conduct? If that’s not what he’s trying to say, then he really needs to come up with a more comprehensible explanation. Engaging in unlawful conduct really isn’t all that new an idea, you know.

 Update: More from DiligenceEngine: