Lessons From the Rise of LegalZoom

Editor’s Note: The author of this article is a professor at University of Tennessee College of Law and wrote the book, Glass Half Full: The Decline and Rebirth of the Legal Profession . This is a second of a two-part series on innovation in the legal industry. Read the first part here .

By Ben Barton, Professor of Law, University of Tennessee College of Law

Yesterday I applied Clayton Christensen’s theory of disruptive innovation to Big Law. Basically, disruptive innovations start by eating up the low end of the market first, so high margin providers ignore the competition until it is too late. High margin providers are also often in a bad position to compete at the low end — lowering prices would cannibalize profitable business and they may lack the expertise to use the disruptive process.

LegalZoom and Rocket Lawyer are two examples of this phenomenon in the consumer market for legal services. LegalZoom started in 2001 and slowly built up name recognition, consumer confidence, and eventually revenues and profits, all with little initial resistance from bar associations or lawyers. Why? Because at first LegalZoom was not really competing with private lawyers. LegalZoom is the classic Christensen disruptive technology — it started by servicing the lowest margin part of the market and has gradually inched its way up.

Outside of plaintiff’s side tort work, American lawyers currently do very little paid work for the poor and middle class. Surveys show that the median American lawyer working in consumer lawcharges more than $300 an hour and even the low end providers charge $240 an hour. At those prices even simple matters get expensive quick. This is what Deborah Rhode calls America’s access to justice problem .

LegalZoom is the classic Christensen disruptive technology — it started by servicing the lowest margin part of the market and has gradually inched its way up.

So in 2001, when LegalZoom started out, anyone willing to incorporate their company or write their will on the Internet was very unlikely to be able to afford a lawyer anyway. LegalZoom thus was not in direct competition with lawyers, it was merely soaking up a portion of the market lawyers had long since unilaterally abandoned. LegalZoom made no attempt, nor could it because of protections against the unauthorized practice of law, to snatch any in-court litigation. This meant that large swaths of small firm practice (contested divorces, child custody, small commercial lawsuits, criminal defense, etc.) remained unreachable.

Over time, however, LegalZoom has climbed the ladder and it is now clear that LegalZoom and Rocket Lawyer are crowding into the market and hurting small firm and solo practitioners (although some of these lawyers are working with LegalZoom and Rocket Lawyer through legal services programs). Predictably bar associations have started a rear guard unauthorized practice of law attack against LegalZoom , so far with mixed results .

One other reason why bar associations took so long to respond is that corporate lawyers do not consider Legal Zoom or Rocket Lawyer any competition at all. But, is it unimaginable that LegalZoom could use its experience in drafting LLC and incorporation documents to begin stealing higher end work? Many Big Law deals work off of templates. Mitu Gulati and Robert E. Scott have written a book called The 3½ Minute Transaction that details exactly how much boilerplate goes into some Big Law work. Given the relative standardization of much transactional and litigation work, Big Law should certainly look beyond their near term competitors (in house counsel, alternative law firms, outsourcing, and computerized discovery services) and consider the disruptive possibilities of interactive forms.

Is it unimaginable that LegalZoom could use its experience... to begin stealing higher end work?

The same is true of replacements for litigation. Arbitration has already grown tremendously in popularity, but most arbitration is really court-lite, and still involves lawyers. Computerized mediation should be of greater concern to Big Law. Modria is an online dispute resolution site that is focused, for now, on settling small consumer disputes. As Modria masters the process at the low end it will be natural to drift upscale, and in the near future corporations may choose to eschew expensive litigation or arbitration in favor of computerized dispute resolution.

Technological changes often come more slowly than we think. Some technological innovations that seem likely to succeed now will never get off the ground. Conversely though, successful innovations bring unforeseen, profound, and transformative changes. Competition from machines has finally arrived for lawyers.

As LegalZoom and others begin to perfect their services, they will expand into other areas of legal work, until lawyers offer only true bespoke services: cases where the work is complicated, relatively unusual, and has important consequences. Humans will also remain unchallenged for in court work, because while judges may hate dealing with some lawyers, I promise that they hate dealing with computers more.

The amount and value of this “lawyer’s only” work should not be underestimated: it is the backbone of both Big Law and small firm practice and will not disappear any time soon. Nor should this work be taken for granted! All around us competitors are seeking to turn bespoke work into repetitive and commoditized work, so lawyers of all stripes should be vigilant.