Five myths about legal tech

Besides hope, the term also triggers fears and perplexity. Reason enough to clear up five major misconceptions about "law from a vending machine" (M. Fries)!

Many people would struggle to explain what legal tech actually means. Yet today's legal market would hardly be imaginable without legal tech. Be it legal databases that enable you to find the right judgment in minutes, or contract automation tools that assemble contracts quickly and easily.

"The capacity to innovate decides our fate" (Roman Herzog, former president of the German Federal Constitutional Court (Bundesverfassungsgericht) and retired federal president).

Nor could this increasing significance escape the notice of German law makers, which in summer 2021 passed the German Legal Tech Act (Legal Tech-Gesetz). In addition, the Coalition Agreement not only promised modernisation and digitalisation in the area of civil procedure, but also to "expand the legal framework for legal tech companies" (see Coalition Agreement of 24 November 2021, p. 112). Meanwhile, the German Federal Court of Justice (BGH) also gave legal tech providers a further boost with its ruling on the "Smartlaw" contract generator. This makes it all the more important to understand the legal tech market and dispel false myths.

1. Unlike fintech, proptech and the like, legal tech is still in its infancy. It is a largely unregulated market

Wrong. Legal tech may still be in the early stages of its development, but it has long since outgrown its humble beginnings. The numbers speak for themselves: for instance, the total value of deals in the global legal tech market by the end of the third quarter of 2021 was USD 1.47 billion, well above the USD 607 million from the whole of 2020 (PitchBook). Market revenues are expected to reach nearly USD 25 billion by 2025. This is hardly surprising, given that legal tech is a byword for the digital transformation of law. If anything, this dynamic would appear to be gathering pace rather than slowing down anytime soon.

But does that mean, by implication, that the market cannot be regulated? Granted: Both law makers and case law are still grappling with this. But gone are the days when one could seriously speak of an unregulated market. First of all, the same legal rules and regulations apply to the use of legal tech products as to analogue legal advice. Legal services can only be provided in compliance with the strict rules of the German Act on Out-of-Court Legal Services (RDG), which serves in particular to protect consumers from unqualified legal advice and to protect the independence of lawyers' professional practice.

The German Federal Court of Justice (BGH) has now had ample opportunity to address the interpretation of the German Act on Out-of-Court Legal Services (RDG) and the relationship between legal advice and competing legal tech services. Two points in particular are apparent from its rulings:

• A debt collection licence may allow legal tech providers to offer "comprehensive and full, substantive legal advice" (wenigermiete.de judgment). Providers such as wenigermiete.de use this method to collect consumer claims that have undergone an initial check.
• Digital contract generators are not legal services requiring a licence (section 2 (1) German Act on Out-of-Court Legal Services (RDG)) and are therefore permissible, provided it is clear to the user that the tool does not carry out a case-by-case examination. This was affirmed in the Smartlaw judgement for the (Wolters Kluwer-run) contract generator of the same name; users can use Smartlaw to generate legal documents and contracts by feeding in yes/no answers. This was a rejection of the demand by the President of the Federal Bar Association (BRAK), Wessels, that where it says legal tech on the label, there must always be a lawyer involved.

However, both landmark decisions show that the legal tech market has a future, and a regulated one at that. In addition, the "Act to Promote Consumer-Oriented Offers in the Legal Services Market" – the German Legal Tech Act for short – was passed in 2021. Among other things, this includes amendments to the German Lawyers' Code (BRAO), the German Act on Out-of-Court Legal Services (RDG) and the German Lawyers' Fees Act (RVG) and came into force on 1 October 2021.

2. With the Legal Tech Act, German law makers have created a level playing field between the legal profession and legal tech companies that work on the basis of a debt collection licence

Wrong. It is true that the German Legal Tech Act's objective is to create a level playing field. After all, the German Federal Court of Justice (BGH) decisions cited above mean that legal tech companies are allowed to compete with lawyers under certain circumstances. Unlike lawyers and their firms, however, they are not subject to such strict professional rules; this greater professional freedom gives them legal tech companies a competitive advantage. Thus, law firms in Germany are generally not permitted to agree contingency fees (section 49b (2) sentence 1 German Federal Lawyers' Act (BRAO), section 4a German Legal Fees Act (RVG)), to bring in outside investors to expand their business model (section 27 sentence 1 German Rules of Professional Practice (BORA), section 43a (1) German Federal Lawyers' Act (BRAO)), to enter into interdisciplinary collaboration with certain other professions (see section 59a German Federal Lawyers' Act (BRAO)), or to offer their clients litigation funding (section 49b (2) sentence 2 German Federal Lawyers' Act (BRAO)).

However, the German Legal Tech Act only partially eliminates these competitive disadvantages for law firms: The new Legal Tech Act now offers German lawyers the option to agree contingency fees. However, this only applies without restriction where lawyers offer debt collection services. In the case of (attachable) monetary claims, contingency fees may only be agreed if they do not exceed EUR 2,000 (section 4a (1) no. 1 German Lawyers' Fees Act (RVG).

Legal tech companies, by contrast, with their debt collection licence, are not bound by an upper limit. Litigation financing and outside investment also remain taboo for the German legal profession. In this respect, the law has not led to the hoped-for liberalisation of the legal profession. Instead, debt collection service providers are now confronted with new obligations, not least to improve consumer protection. For example, registration requirements for legal tech companies were increased and comprehensive duties of disclosure and information imposed on them (section 13b German Act on Out-of-Court Legal Services (RDG)). In cases of litigation financing, the legal tech provider must inform the consumer, for example, of the agreements made with the third-party litigation funder with regard to the conduct of litigation, section 13b (1) no. 2 German Act on Out-of-Court Legal Services (RDG).

So while the law has indeed brought the legal profession and legal tech providers closer together, further changes are needed to achieve a level playing field, which the new government must now address. This was clearly the intention from the outset, given that the new act includes assignments for the next German government to be implemented by 30 June 2022.

"The first thing we do, let's kill all the lawyers."

Henry VI Part 2, William Shakespeare & Christopher Marlowe

3. Legal tech replaces legal advice, so that lawyers will increasingly be forced out of the market

Wrong. Legal tech's first and foremost goal is merely to provide support. Making headlines in the press are mainly B2C providers such as wenigermiete.de (originally known as mietright, then Lexfox, now Conny), which ensure "access to justice" by offering consumers an automatic mechanism to bring their claims, be it against landlords or airlines, for example. The sheer amount of coverage these providers are getting gives rise to the understandable impression that legal tech is replacing lawyers.

However, an important use case is also supporting lawyers in their own line of work, traditionally in the corporate environment (B2B). Legal tech tools primarily take on repetitive tasks or make standardised preliminary decisions that must then be examined, adapted and weighed case by case by means of a human review. For example, CMS lawyers use contract automation software to support their work for clients on certain types of contracts. A solution with machine-learning algorithms is also used for legal data analysis. In addition, for large projects and class actions, lawyers use collaboration platforms that are highly configurable, contain their own workflow and automation engines, and also their own databases that can be tailored to individual cases.

The work of lawyers is therefore better structured, simplified, and focused on the essentials, as it were. But the core legal work, meaning the individual assessment and weighing up of each individual case, still remains the preserve for well-trained lawyers. The right technological support allows them to work more efficiently as "augmented lawyers" (Markus Hartung), and thus to deliver a higher-quality and more cost-effective work product.

4. In big law firms, there is a lot of hype about legal tech as something to watch for the future, but there has been very little structural change so far: actual client work is still largely analogue, without the use of specific legal software solutions

Wrong. Especially in big firms, we have seen a paradigm shift in recent years. Third-party technology is now used not only to facilitate lawyers' day-to-day work. More and more specific legal software solutions are also being developed and corresponding products built.

This is reflected in rising costs: whereas law firms' legal tech spend accounted for only 2.6 % of in-house budgets in 2017, by 2020 this figure had already risen to almost 4 %, with spending forecast to increase to around 12 % by 2025 (Gartner).

In addition, law firms that for decades consisted only of lawyers and their professional support have had to restructure their staffing. To illustrate: in the award-winning unit "Smart Solutions", the areas of knowledge management, smart operations (alternative sourcing) and legal tech, which are geared towards increasing efficiency, are brought together at CMS under unified management – and for the most part also literally under one roof at our EUREF future campus in Berlin. In the area of legal tech alone, dozens of lawyers, business and project lawyers, business economists, legal tech engineers and programmers are now working on tomorrow's solutions. Often specifically in relation to client work: for example, machine-learning recognition technologies were used to efficiently sift through documents as part of a due diligence process in the sale of thousands of sites. A variety of legal tech tools are used in employment law, for example in corporate transformations. But also when it comes to assessing the deployment of external personnel, we offer the online product CMS FPE, which CMS has developed in-house over many years.

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5. While the use of legal tech may play an increasingly important role for the legal market and law firms, it is only of interest "in-house" for large projects and companies

Wrong. As noted in myth number 3, legal tech mainly tackles repetitive and less complex tasks. Big companies by no means have a monopoly on such tasks, which companies of all sizes face in their day-to-day activities. Even if this requires an initial investment – which is usually smaller than expected – digital transformation and automation lead to both cost and time savings in the long run. The use of legal tech thus boosts efficiency.

But where to start with the digital transformation of your own legal department, for example? All too often, time and internal resources are a rare commodity when embarking on this process. By offering preparatory advice, workshops and training formats, CMS supports you in achieving efficiency gains in your legal department through the use of tech tools and strategic sourcing. Companies do not always have to reinvent the wheel, and costly investment in a proprietary in-house tool is not always the best solution. On the contrary, German start-ups such as Bryter, Legal OS and Lawlift (and many more) now offer a considerable range of tools on the market that are not only of interest to in-house legal departments.

CMS also offers many legal tech solutions of its own. Examples include the digital survey and data consolidation tool CMS Survey, the AGM Manager, and the data protection application ComplyDPA for the creation and analysis of GDPR-compliant DPAs and SCCs. Some apps, like the CMS Breach Assistant for data protection violations, the HR App and the CMS Corporate Tools are even offered free of charge.

By the way: if our portfolio does not have a solution to your problem, CMS has the means and resources to provide a customised legal tech landscape in the shortest possible time to help your project succeed through document automation, machine learning recognition, data rooms with complex authorisations, expert systems (logic trees), workflows, databases and visualisations, progress trackers, and much more.