As We Embrace Future of Legaltech, Let Us Not Forget Lessons from the Past

What is your definition of cool?

If you’re a Gen X’er like me, there is a good chance that at least one point in your life, it had something to do with Seattle and maybe it still does. As individuals, we identify with the music that was around during those formative periods of our life and the Sub Pop sound of the early 1990’s was the soundtrack that floated through my flannel-wearing-red-solo-cup-keg-drinking life. Amazingly, the label has a completely different sound today, but the modern line up of indie coffee house tunes streams through his Songza fueled work life as he practices startup and Starbucks law.

Whether you admit it, and chances are you won’t, the innovation emanating from the Emerald City has never been limited to music and fashion. Other parts of the culture and the innovative beat-the-world ethos come from the business community.

The reason why you might (erroneously) belittle the innovation driven by Seattle is because of the ubiquitousness of its most famous corporate export: Microsoft. It’s not all spreadsheets, word processing, and Explorer. There was a time when Microsoft was avant garde and Bill Gates was changing the world. In fact, he didn’t just change it—he dominated it. (Today, via philanthropy, he is really changing it in a more profound way.)

Listen Apple fangirls and fanboys (okay—that’s us too): we get it. You don’t think Microsoft is cool. But it was, and increasingly, much like the beloved SubPop, is getting there once again. By the way, world domination is often considered cool (it even has a conference). 

We were treated to a mesmerizing call last week when we chatted with Marty Smith, a pioneer in the legaltech space. That is really saying something because to most people, the pioneer days are happening right now. Marty’s story, however, goes back more than two decades.

In the late 1980’s, Marty was a partner with the law firm of Preston Gates & Ellis, which included Bill Gates Sr. as one of the partners. The firm, for some pretty obvious reasons, had special status in respect of Microsoft and its early development. The firm, and Marty in particular, served as the primary external legal counsel in the early and exciting days which were filled with unprecedented and exciting challenges.

For those that are not in the know, let us roughly describe the current state play of Electronic Discovery (e-discovery). In any form of litigation or regulatory investigation, the parties typically exchange all documents which are relevant including, for example, correspondence, financial statements, reports and memorandums.  

Obviously, in the last 25 years, the format of documents has morphed from predominantly paper driven to electronically stored information (ESI). Documents including ESI are reviewed for privilege and relevance before being turned over to opposing counsel in the throes of a legal proceeding.  

Just imagine what that task involves with the explosion of ESI formats beyond email, spreadsheets, databases, social media and the like. And in the modern era, it’s not just the documents that matter, but all of the metadata that is also very telling and often equally or more relevant than the original content from an evidentiary perspective. An entire industry has exploded around e-discovery as there are numerous technology platforms being developed that allow for smart search, isolation and affinitizing of large volumes of ESI.  

The key buzz words today are predictive coding and technology assisted review (TAR). In many ways, and certainly in Canada, it is still early days for this burgeoning field. The landscape is littered with aspirants looking to be the next Apple or Microsoft of e-discovery. In fact the LegalTech tradeshow, which is held on both coasts, is the largest and arguably most important legaltech conference in the industry.  While we think there is much more innovation to be had in other unique (and cooler) areas, e-discovery tends to be the primary focus.

But hold on. Hop in Marty McFly’s DeLorean and go back to around 1985. The firm of Preston Gates & Ellis  had just brought Microsoft public and was counsel of record in its legendary disputes with Sun Microsystems. And Marty (Smith, not McFly) was a driving force as head of the IP department. He was also there when Preston Gates & Ellis got into the e-discovery business not just as lawyers, but as the providers of technology.

By the early 1990’s, Preston Gates & Ellis was incredibly adept at “staffing” large scale discovery and document review processes, but it was mostly done through the use of lawyers. A lot of lawyers. For example, the firm represented Alaska in the wake of the Exxon Valdez oil spill in  a document review process which went on for several years. Consider that at the time, most document review included paper documents stored in banker’s boxes and teams of lawyers doing mostly manual review.

But as we all know, humans don’t scale.

Throwing bodies at a project can only do so much and when the U.S. Government anti-trust case ignited, Preston Gates & Ellis found itself overwhelmed with managing enormous and unwieldy volumes of data, including emails from Microsoft executives that were quite damaging.  

At the time, it was thought that such an important task as reviewing documents could only be trusted to lawyers charging hundreds of dollars per hour. At its peak during the Federal Trade Commission process, there were hundreds of lawyers performing document review in heated tents inside the Microsoft parking lot. Emails were firstly printed, then they were reviewed.

In dealing with the massive data, and in particular, the challenges of duplicate email records, the firm knew they needed to find other solutions. Eventually, the lawyer processes were captured by software engineers to develop a marketable and effective technology platform to assist with review, or at least the primary problem associated with duplicate emails.

The lead lawyer of the document review teams had developed methodologies for effective review, but as can be imagined, much of that insight was within her own head. Eventually, a software engineer captured her thought process and started to consider how to leverage algorithms and programming to execute in a more efficient and effective manner.

Interestingly, that same lead lawyer and project manager did not think that proper document review and discovery could be completed without using teams of lawyers. This reservation may have been based on the perception that you can’t beat (legally) trained eyes for spotting issues of relevance and importance in terms of context. And this prevailing view has been shared by legal regulators until very recently. Document review is legal work best completed by lawyers.  Right?  Not so much.

How far has legaltech come? A Toronto-based document review law firm was sold to Deloitte last year. The first act of Deloitte was to declare that  document review is not legal work and therefore does not need to be completed by lawyers, particularly as the technology assists to large degree. What Microsoft used to pay hundreds of lawyers millions of dollars to complete is now executed by individuals who may or may not be lawyers and certainly don’t carry errors and omission insurance. In many cases, the work is completed in offshore locations to take advantage of significantly lower salaries or, as it is poetically known, labour arbitrage.

It used to be that if anyone but lawyers conducted the review, it would be grounds for malpractice. Today, using only lawyers, especially without technology, would be viewed as highly unprofessional and unethical. It would be seen as gouging the client for legal fees.

The evolution to the current day had its beginning back in Seattle when Marty got together with a former engineering client and they developed “Patterns,” a visualization platform which assisted with concept search to more effectively mine through documents to separate those that are relevant and those that are not. The difference is akin to that between a baseball diamond and the gemstone that makes for a girl’s best friend. Data visualization in the 1990’s? Tres cool.

Remember how we said lawyers are risk averse? Well, not everywhere and certainly not in Seattle. Preston Gates & Ellis commercialized its own technology, in part by acquiring $4 million in venture capital and then forming the separate company Attenex which was one of the early day e-discovery vendors. And like many legaltech aspirants of today, they had a nifty exit when they sold the company for $88 million in 2008 with a 5x return for the investors. Does that sound cool?

So what do you ask when you get the chance to speak directly with a pioneer lawyer, innovator, entrepreneur who has been at the epicentre of legaltech?  We asked why did it work so well and what would others need in order to achieve similar results.

Marty’s answer was:

culture +talent+ capital

Marty describes Seattle as being home to all kinds of innovative companies, not just in the software space. Weyerhaeuser and Boeing were traditional foundations of the economy, but over time other areas including biotechnology also started to flourish. In large part, Seattle is a massive culture of innovation where risk taking isn’t just embraced, it’s loved by many. In other cities, quitting a steady job to start a company is seen as the act of a crazy person. Whereas in Seattle, when hearing about their friends’ entrepreneurial pursuits, people ask: hey, can I quit my job and join you?

The Centres of Excellence in the US tend to flourish in culturally liberal cities and that bleeds over to an “anything is possible” mentality. Once there a few visible successes, the talent starts to congregate and cross pollinate across professional disciplines and industries which leads to a virtuous circle of more innovation. The Seattle area brought us Starbucks, Amazon, numerous software companies, the electric toothbrush and all those tunes that defined a generation.

So the culture part sort of builds and then the talent starts to self propel and grow, but what about the capital?

Marty tells of the view of Bill Sr., that the innovation that sprang through Seattle was largely unstructured and “just happened.” Even these highly successful gentlemen feel that there is always room for a more strategic approach especially if such innovation is to be perpetuated.

The phenomenal success and new millionaire status of all kinds of professionals resulted in a pool of capital at the angel level from informed and interested parties. But rather than a fractured and haphazard approach, Marty, Bill Sr. and others formed the Alliance of Angels in 1997 which has invested more than $80 million into 200 companies and celebrated more than 30 exits. Most years, they typically invest about $10 million into 20 companies across clean tech, information technology, life sciences and consumer verticals. They have also hit the legaltech space, most notably with DocuSign, which has become the industry standard in electronic signatures as a secure way to send, sign, track and store documents in the cloud.

So what about Canada? There is a palpable buzz in Canada’s startup scene and three Canadian cities are in the top 20 of the most active ecosystems in the world. And honestly, grouping Toronto and Waterloo together would likely result in a higher combined ranking which makes sense given their close proximity. Canada has all of the elements that flourished in the Seattle scene, save and except for easy capital. But in this era of world-beating Shopify’s and Hootsuite’s, the influx of international capital can propel Canada forward. Who knows why Canada remains a well kept secret from VC’s? That’s not going to last long.

The drivers for a legaltech ecosystem and the startups that pop up should include those with technical chops, but as we previously mentioned, lawyers are needed for this journey as well.  Marty and the lawyers at Preston Gates & Ellis did not have the challenge that we alluded to in our prior Techvibes piece in that they did not have to build in stealth mode.  They were encouraged, financed and otherwise supported to develop Patterns and Attenex, even while they were partners in the firm. They were able to devote as much focus and effort as required to succeed. It helped that the end product solved their own challenges.

The discussions on the “future” of legal services generally and technology in particular are at a feverish pitch, but perhaps everything old is new again. E-Discovery is only the beginning.

There are so many possibilities for legaltech startups to power the future to hit upon many different hypothesis and pain points. It’s our opinion that there are even more possibilities in legaltech far beyond servicing the needs of law firms and the business to business (B2B) space.

For every groundbreaking Nirvana, there can also be a Drake—innovators one and all.

We hope this whets your appetite for the possibilities of legaltech enough to start thinking through where you can make your contribution. No better place to launch than a Startup Weekend focussed on legaltech which we are looking forward to hosting in early 2015. Stay tuned.

This article was coauthored by Aron Solomon.