Legal Eagles

Bye-Bye to the Billable Hour? Rash of Legal Startups Offer a Dot JD

"There’s probably a hundred different lawyer-related type of shticks." Should you seek their counsel?
matthalltechcrunchdisruptnewyorkmayxu46uvypvypl Bye Bye to the Billable Hour? Rash of Legal Startups Offer a Dot JD

Matt Hall and John Watkinson of Docracy (photo by Charles Eshelman)

Question: What’s wrong with lawyer jokes?
Answer: Lawyers don’t think they’re funny and no one else thinks they’re jokes.

Of late, that punchline is less amusing than prescient. Over the past year, a new batch of startups have launched out of New York with the notion of using technology to bridge that disconnect between a client and her counsel—and perhaps inspire fewer contributions to the annals of pettifogger humor in the process.

Historically, the legal profession has been somewhat sheltered from the democratizing wave of the internet that drowned revenues in the music industry and media. Lawyers can’t claim as esoteric a skill set as, say, doctors. But the years of specialization and investment required to practice—and lawsuit-happy instincts of its practitioners—seem to have kept starry-eyed startup founders at bay. (Perhaps another reason being a lawyer makes the short list of professions your mom would be proud of.)

Economic upheaval, however, has a way of exposing inefficiencies.

Over the past six months, for example, New York Times reporter David Segal has done a brisk business in headlines like “Law School Economics: Ka-Ching!” and “What They Don’t Teach Law Students: Lawyering” that exposed the myths of a $150,000 law degree, namely that despite tuition costs growing at four times the rate of undergraduate schools (even at low-ranked law schools) and the dearth of jobs (despite inflated reports from career services), a doctor of jurisprudence may not guarantee you a job, or even teach you what to do if you get one.

“So, for decades, clients have essentially underwritten the training of new lawyers, paying as much as $300 an hour for the time of associates learning on the job,” Mr. Segal wrote in July.

Perhaps that’s why engagement letters are now being drafted with stipulations that clients won’t shell out for the time of junior associates. “During the recession, you saw this shift in leverage away from law firms and lawyers and towards consumers and clients,” David Lat, managing editor of the widely-read legal blog, Above the Law, told Betabeat. “People are not willing to pay for what they used to pay for.”

By and large, these upstart young companies trying to capitalize on that frustration can be divided into two camps: startups make it easier and cheaper to get legal documents and startups that do the same for legal advice.

Think of them as an updated version of predecessors like LegalZoom, co-founded in 2001 by Robert Shapiro—the man better known as O.J. Simpson’s non-rhyming defense attorney—and Nolo.com. Named for Nolo contendre, the Latin phrase referring to a no contest plea, the company was founded 40 years ago as a publisher of DIY law books like How to Do Your Own Divorce in California. Before surging in popularity as an online portal, the company’s old mascot, a shark with a necktie and briefcase, used to come with the motto, “Don’t feed the lawyers. Just say Nolo.”

LegalZoom and Nolo have long offered consumers a chance bypass the billable hour by purchasing customized legal documents online, such as a will or residential lease mailed to your door. Startups in that first camp take that even further. Paperlex, which launched two weeks ago out of the co-working space General Assembly, and Docracy, which launched in May at the TechCrunch Disrupt conference in New York, offer templates of those documents for free. Consumers can then tweak the terms for themselves.

“Right now the law firms have the monopoly on document generation and we are tearing that out,” Paperlex co-founder Alison Anthoine, a practicing attorney for the past thirty years. “Lawyers used to be the ones that structured deals. The banks now do that. The lawyers only have left the scribing and they milk it for everything its worth.”

The templates on Paperlex, which targets freelancers and small businesses, have been vetted by Ms. Anthoine and other attorneys. In Docracy’s case, the content is user-generated. Among the most downloaded items, for instance, is a TechStars Series AA Term Sheet, uploaded by David Cohen, one of the incubator’s co-founders.

Both Paperlex and Docracy vehemently insist that their services are meant to streamline the process so that you have to spend less time with your lawyer—not eliminate him entirely. However, both companies are clearly aware that that there are consequences for the unauthorized practice of law.

In the second camp are startups like Shpoonkle, which was launched in March by Robert Niznik, then a 21-year-old second year student at New York Law. Rather than merely connecting clients with lawyers online, the unfortunately-named venture uses a reverse auction format that enables potential clients to post on a task and lawyers to bid on it. The idea behind Shpoonkle, says Mr. Niznik, who lives with his mom in Sheepshead Bay, was to offer legal counsel for those who couldn’t otherwise afford it and employment opportunities to lawyers in search of work. A recent study by the consulting company Economic Modeling Specialists found that New York state had more than double the amount of unemployed lawyers as California, the next closest state, hitting 7,000 in 2009. (The response to Shpoonkle from legal blogs was a rash of posts bemoaning the inevitable “race to the bottom.”)

The reverse auction format has been tried before, on sites like LawyerQuotesFast and LawBidding, both have which have since shuttered. But in the consumer web boom, these type of world-changing (or at least industry-updating) initiatives seem to have gained more momentum. And the venture capitalists, as is their wont, are taking note with a string of investments and acquisitions.

After 40 years in business, Nolo.com was acquired for $21 million this April by the new media company Internet Brands. This spring, LegalZoom picked up a staggering $66 million in financing from powerhouse investors like Kleiner Perkins and Institutional Venture Partners. In April, Google Ventures was part of a consortium of investors that pumped $18.5 million into Rocket Lawyer, a four-year-old California-based site for online legal forms that also lets consumers pay $19.95 a month to have those forms reviewed by a real lawyer. This month, Google Ventures also led a $1 million series A round for LawPivot, another California-based site, this one for free confidential legal advice launched in 2009. Along with the funding news, LawPivot announced the launch of a new market that lets businesses post potential cases for lawyers to bid on for a fixed, discounted fee. Last month, Docracy raised $650,000 while still in beta.

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An early logo for legal startup Nolo.

Whether the startup world’s zeal for instantaneous disruption can mesh with a profession that built on precedence and hierarchy still remains to be seen. None of these companies, no matter how long their tail, are likely to make a dent in the profit margins of big law firms like Wachtell, Lipton, Rosen & Katz which, along with 17 other white shoe firms reported revenues of more than $1 billion last year, despite their dwindling ranks. “You can’t use one of these companies if you’re accused of a crime, you can’t do a merger just yet,” said Above the Law’s David Lat.

But their presence seems to signal a moment of reckoning. Where macroeconomic forces have prompted lawyers to shuttle their legal processing outsourcing (LPO) to India for more than a decade, or, more recently, replace the standard processing for document review (humans) with e-discovery algorithms, those cost-cutting measures haven’t necessarily trickled down to consumers.

“Friends of mine at Skadden have said they worked too quickly and we’re docked [pay],” Paperlex co-founder Michael Gruen explained. “They were told, ‘Wait three hours and then send it to the client. We don’t want them to think that you’re working too quickly.’ It’s a terrible model. Lawyers are incentivized to spend as much time as possible working with your legal contracts.”

Within the industry, reactions to these startups tends to vacillate between disbelief to dismissal, in some cases from the same person. On his blog, Simple Justice, Scott H. Greenfield, a criminal defense attorney, called Shpoonkle, the “next step to the de-professionalization of legal services, where the purchase of legal services is no different than buying a widget at the big box store for the lowest available price,“ It represented, “a move from excellence toward commodity. “

Over the phone to Betabeat, however, Mr. Greenfield sounded unperturbed about the rise of legal startups. “They’re not even a tiny blip on the radar,” he said. “There’s probably a hundred different lawyer-related type of shticks, not reverse auction, but any kind of variety of flavors that they offer. They all have a couple thousand people engaged in their entirety and they tend to be the same couple thousand of people.”

Maybe, but back in August, at the news of their funding, RocketLawyer claimed to create 20,000 wills and 40,000 business contracts per month. In July, LegalZoom claimed 2 million members. Even Mr. Niznik said Shpoonkle’s 2,200 lawyers have closed 600 cases since March.

Besides, not everyone shares Mr. Greenfield’s views on commoditization. “In my mind the internet does one thing amazingly well. And that is, it takes any information commodity and makes the price of that commodity go to zero,” said Mr. Gruen, one of the co-founders of Paperlex. “Taking that same mantra with legal documents, a legal document is nothing but a information commodity, it’s just a representation of words that help memorialize some sort of business deal or situation you’re trying you’re trying to transact.”

Mr. Greenfield acknowledges that it’s not necessarily a bad thing for the profession. “Some people say they love this stuff because ten years from now there’s going to be a boom in litigation when all these people find out they screwed everything up,” said Mr. Greenfield, noting how often clients don’t realize crossing out a name in a last will voids the contract. “They’re gonna have to hire lawyers up, down, and sideways and pay them through the nose to undo the damage that their $10 form created.”

If LegalZoom’s history in court is any indication, the biggest strain on these startups may come from how easy they make it to generate legal documents. In September, LegalZoom settled a class action lawsuit with clients in Missouri. According to Chas Rampenthal, the company’s general counsel, “The complaint was that we should not have been allowed to offer it anyone. They never actually said that there was any problems with the documents.” But there have also been settlements, such as with the attorney general in Washington State where LegalZoom is barred from comparison pricing its documents to attorney fees unless the company discloses that its service isn’t a substitute for a law firm.

“I think that in some ways, some of the opposition you’re seeing from state bar associations may be a little bit self-interested,” said Mr. Lat, managing editor of Above the Law. “The State Bars are thinking, okay our members are going to be threatened by companies like this, so we have to make it difficult for companies like this.”

Although the New York State Bar declined to comment, we did hear back from Eric Friedman, director of communications from the New York City Bar Association. Mr. Friedman said the agency had not issued any ethics opinions, “Except to say we caution people using forms they download off the internet that they may not be applicable to their current situation or to New York law, and may not have been properly prepared and vetted, so we believe they are better off seeking legal advice.”

When we requested comment on startups like Shpoonkle, we were likewise shut down. “We have not looked into them. Perhaps we will at some point in the future,” Mr. Friedman wrote pointedly, “if they have a major effect on the profession.”

As for those “race to the bottom” woes about reverse auction companies like Shpoonkle, “I haven’t seen that happen,” said the author of the outspoken legal blog Constitutional Daily who writes under the pseudonym “BL1Y”.  He acknowledged via email that it could affect younger attorneys more than older ones, but noted, “I’m sure clients walk away from attorneys all the time because their price is too high. If there was going to be a race to the bottom, it would have already happened.”

In fact, Betabeat spoke to Christopher Travis, a Manhattan attorney who recently left a big firm to start his own, Mangan, Ginsberg & Travis. Mr. Travis signed up with Shpoonkle early on and managed to find a medical supplies client that currently makes up ten percent of his practice’s business. Although he took a slight discount, Mr. Travis said each time he got business, it was not by being the lowest bidder. As one of the first litigators on the service, Mr. Travis says, “I didn’t want to tell anyone else about it,” for fear of the competition for business.

“You just can’t argue that the site is doing anything to the legal profession but bringing it up,” Shpoonkle founder Robert Nizik told Betabeat. “If you look at some of these billboards for lawyers, or some of these cheesy commercials, or the fact that lawyers outsource to India, but still bill these clients American attorneys rates… I think that brings down the legal profession. But a site that’s free and lets people find a lawyer for a better price. I mean, what more could you ask for?”

That reminded us a joke we once heard.

ntiku@observer.com

Follow Nitasha Tiku on Twitter or via RSS. ntiku@observer.com