Oliver Wendell Holmes insisted that the future of the legal profession lay in economics and statistics. In doing so, he presaged the disruption of law practice through activities as seemingly diverse as legal process outsourcing (LPO), artificial intelligence (AI), and even litigation finance. Consistent with his vision, the process of litigation is hurtling to an economics-driven future over which lawyers may have little control, unless they embrace numbers.
Economics and Law
Over 120 years ago the august American jurist, Oliver Wendell Holmes, made a stark prediction about the litigator of the future: “the black-letter man may be the man of the present, but the man of the future is the man of statistics and master of economics.” (The Path of the Law, Harvard Law Review, 1897). Why did he presage this at the end of the Nineteenth Century, and is he being proved correct?
The Path of the Law was published the same year the U.S. Supreme Court decided Plessy v. Ferguson, the landmark opinion upholding the constitutionality of racial segregation under the doctrine of “separate but equal.” The Alaskan gold rush began that same year as did The Dow Jones Industrial Average, which was published for the first time in the Wall Street Journal. The sun was setting on the Nineteenth Century, life in the law was simple, and commerce of the dawning century was dreamy. But the future of economics and law was on Holmes’ mind. Why?
A clue lies earlier in The Path of the Law where Holmes likens doing the law to confronting a dragon:
When you get the dragon out of his cave on to the plain and in the daylight, you can count his teeth and claws, and see just what is his strength. But to get him out is only the first step. The next is either to kill him, or to tame him and make him a useful animal.
In other words, extracting the law—luring it out of the books so to speak—is just the first step in the legal process, and hardly an end itself. Having lured the law out, the legal forensic exercise quickly turns to logic, statistics, measuring, and counting. Together, they permit the estimation and prediction and accomplishment of outcomes.
To Holmes, this admixture of art and science was especially evident in the litigation process, where an understanding of scientific techniques, demonstration, proof, and presentation methods are stress-tested in the mise en scène of a courtroom. Prediction, measurement, proof, validation, certainty—these are words of the law but equally of economics. Hence, Holmes insisted, “every lawyer ought to seek an understanding of economics.”
Setting the Dragon Trap
Holmes also makes clear that the legal process, like the empirical method, lends itself to a series of steps, each with a different process and goal, but all aiming toward the common end of solving a legal dispute or problem. The legal process, like scientific empiricism, naturally can be disaggregated, or broken into steps, processes, stages, and elements. In the litigation process, these steps come together in the trial, the laboratory of the law.
Disaggregation is surprisingly fundamental to the English legal system. Solicitors and barristers have their well understood roles and tasks, all designed to “control” the outcome of litigation. This view is not so evident in fused systems like that in the United States, where a single lawyer or firm does everything; but the functional steps are still there. Even if he never actively promoted disruption of the legal process, Holmes certainly suggested it was natural and inevitable. But it was another fifty years before the legal profession began to prove him right.
Pulling the Dragon’s Teeth
In the early part of the Twentieth Century, applying basic principles of economics, larger businesses realized there were substantial benefits in bringing certain elements of legal process in-house while outsourcing specialized legal needs to private practitioners. Alas, the creation of the general counsel and law department was the first real legal process disruptor. The drivers were financial (cost) and efficiency, not intellectual purity. The disruption has proved permanent, and the evolution it began has accelerated ever since.
To protect their remaining turf, private practitioners fortified their remaining monopoly over law practice through laws prohibiting the unauthorized practice of law. Then they engaged in their own disruption of that monopoly. “Legal process outsourcing” (LPO) emerged as a fledgling industry. It was galvanized by financial and economic reactions like those giving rise to in-house law departments. Business clients demanded that tasks of marginal value were more efficiently performed by lower-cost specialized worker bees performing routine functions like document management and reproduction. Forced to confront what businesses were willing to compensate law firms to do based on efficiency, cost, and time, private practitioners began to reinvent their monopoly. Of course, things got interesting with the advent of modern technology and global communication.
Taming the Dragon
With telecommunication and computer technology, skilled lawyers in the Philippines and Hyderabad could write routine legal memoranda, scan documents for key words, curate and organize files, and process evidence. Technology then enabled non-lawyers to sort and electronically read documents, cutting out human labor altogether. The largest consumers of legal services, big businesses, were delighted at the efficiencies they forced. As the vertical monopoly of law practice was dismantled, law firms grew horizontally into complementary sectors.
Not yet satiated by the disaggregation they drove, large legal services consumers insisted on changes in the shape of law firms (and increasing servitude by private practitioners) by demanding flexible and competitive pricing, measurable project efficiency, and no charges for routine activities. Private practice bent to the will of the markets. To some extent, even law schools pivoted toward more practical, trade-school approaches to training.
Still, law firms leaned into the challenge, creating new horizontal spaces to explore. They began to incubate financial services businesses, launch and manage LPOs and innovate law services operations that could sell services to their clients and even their competitors. They became more business-like and technologically savvy. Lawyers experimented with more and more “scientific” process in their craft. They learned to search big data for trends and axioms that were fundamental to the litigation process (average damages awarded in a locale; jury verdict trends; judicial behavior), and they organized themselves along project management axes to resemble their clients. Real disruption was underway. The dragon had been tamed.
Putting the Dragon to Work
At the dawn of the Twentieth Century, two phenomena began almost simultaneously: artificial intelligence (AI) and the industry of alternative litigation finance (“third party funding” in England). They were not connected in any logical or technical way but were sisters from different mothers; they both entered the legal industry from the outside rather than growing from within.
AI promises to not simply move parts of the legal process to different economies, but to replace certain processes, like basic case research. Likewise, litigation finance, where outside capital funds firms and litigation projects, moved parts of the litigation financing function out of the hands of lawyers and clients alike, placing it in the hands of the capital markets. Just as AI will displace and replace traditional lawyer functions, litigation finance will displace the way litigation is financed and change the way litigation lawyers make money.
AI and litigation finance are also simpatico because they engender an entirely new paradigm for the resolution of disputes through the litigation process, one that rewards based on financial and economic principles like time-to-return; investment ratios; and risk. These are not inherently legal principles, but economic ones. They are counter-intuitive to many lawyers, who still think time is the best measure of compensation.
Because litigation finance naturally embraces economic and financial approaches to litigation, it will drive the use of AI for its inherent efficiencies and predictive abilities. AI will, in turn, reward outside litigation financiers with more predictive capabilities, more efficient returns, fewer losses, and higher yields. We are entering what appears to be a final episode in the dismantling of the commercial litigation process, and the current pandemic has accelerated it in ways to soon to tell.
The Litigator of the Future
The litigators of the future will not be in the image of St. George, who lured the dragon out of his lair to slay him. Rather they will be orators cum economists, as facile in the scientific processes as they are in storytelling.
Perhaps what will remain of the legal profession is headed full circle to their past, when raconteurs (the earliest barrister storytellers) were the courtroom advocates and other parts of the litigation process were conducted by ordinary men—now, machines.
I have said before that litigation finance is changing more than how litigation is funded: it is introducing an entirely new perspective on legal disputes and how they should be resolved. It is accelerating the evolution of the lawyer to proto-legioeconomist. Their perspective will be grounded in economics and science. Their process will crave algorithms, Bayesian analysis and Stochastic modeling. The litigation process they will administer will be as susceptible to economic theory and efficiency adjustment and correction as any other market.
After all, commercial litigation is a business/financial project whose function and purpose are to compensate wrongs. It is not a mystery that can only be solved by arcane incantations recited by those with a law license, but a market transaction conducted under the supervision of a tribunal that seeks the most cost-effective outcome.