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LAW 2050 – Round III (with kudos to law firm Bryan Cave for thinking creatively)

One sure way to put a damper on blog posting is to spend a month in Venice, Italy, which I had the pleasure of doing this June and never thought once about Law 2050. But now it’s back to reality and a top priority is planning and scheduling the third offering of my Law 2050 class this fall semester here at Vanderbilt Law School.  We already have great speakers lined up with more to be scheduled.

As I was putting the schedule together today and thinking about new ideas for the class, serendipity struck in the form of an email from Perry Brandt, a Vandy Law alum and managing partner of the Kansas City office of Bryan Cave (and a speaker in this fall’s class). He sent a link to a Chicago Lawyer story about one of the most innovative initiatives I have seen any major law firm take to embrace the Post-Normal times: They flew 100 associates from around their offices to a two-day boot camp in which they tasked their pool of future partners to redesign the firm for the future. I encourage you to read the full story so won’t try to summarize it here other than to offer this snippet to give you the gist:

The firm’s message was clear: These young associates are entering a business on the brink of profound change brought on by technology and shifting economics. The future depends on their ability to adapt. And partners need to learn to listen and empower them. Toward that end, the firm held a “hack-a-thon” in which associate groups presented ideas for technologies that would aid their practice. The firm promised to spend $10,000 developing the winning idea.

Hack-a-thon

Against a backdrop of illustrations from the two-day conference, associates applaud a group’s hack-a-thon pitch. One illustration reads: “Rise of the MACHINE. ” Nearby, an associate daydreams at his desk: “What business are we actually in?” Photo by Karen Elshout.

There was much more than that to the event, including a presentation by Bruce MacEwen, the New York-based law firm consultant who writes the blog Adam Smith, Esq., titled “The Rise of the Machine,” and what appears to have been meaningful interaction between firm leaders and the assembled associates.

Kudos to Bryan Cave for not just “getting it,” but doing something meaningful about it by investing in and empowering their young attorneys. I’m planning on adapting the idea to my Law 2050 class.

And with that, Round III of Law 2050 is off and running. More posts to follow!

How Big Is NewLaw?

When asked to give examples of new business models of legal practice in the US, Axiom is likely to be near the top of anyone’s list. But how long is the list–how big is NewLaw? A recent paper exploring that question suggests the answer is, not very long, but long enough to take note.

The paper summarizes research by Hastings Law School Professor and WorkLife Law Center Director Joan Williams with Center Fellow Jessica Lee and Berkeley Sociology PhD student Aaron Platt. They describe the project as

the first attempt at a comprehensive review of a wide variety of new business organizations that have arisen in recent years to remedy the market’s failure to deliver business organizations responsive to the complaints of either lawyers or of clients.
The “New Models of Legal Practice” described here typically offer a new value proposition for lawyers and clients. For lawyers, New Models offer better work-life balance and more control over other aspects of their work lives—in exchange for which lawyers typically (though not invariably) shoulder more risk, giving up a guaranteed salary, to be paid instead only for the hours they work. For clients, New Models typically drive down legal fees by sharply diminishing overhead through elimination of expensive real estate and the high cost of training new lawyers, and (again) dispensing with guaranteed salaries.

They break the New Models universe into five categories:

1) Secondment Firms place lawyers in house, typically to work at a client site either on a temporary basis or part-time (typically a few days a week). Some consist exclusively of senior lawyers who can function either as general counsel or as regional heads of legal departments in very large companies, while others place more junior lawyers to help with overflow work from in-house departments.
2) Law & Business Advice Companies combine legal advice with general business advice of the type traditionally provided by management consulting firms, and/or help clients with investment banking as well as legal needs.
3) Law Firm Accordion Companies assemble networks of curated lawyers available to enable law firms to accordion up to meet short-term staffing needs. Typically these networks are women lawyers who work short part-time hours (10-20 hours a week.) Attorneys are paid only for the hours they work.
4) Virtual Law Firms and Companies typically drive down overhead by having attorneys work from their own homes—and again dispense with a guaranteed salary, allowing attorneys to work as little or as much as they wish. These organizations vary a lot: some are very similar to traditional law firms, while others are companies in which many of the functions traditionally performed by lawyers, notably rainmaking, are the province of the company owners.
5) Innovative Law Firms and Companies include the widest variety of different business models. The single most innovative is a company with a new monetization model—providing legal services in return for a monthly subscription fee—which allows attorneys to work in a sophisticated legal practice on an 8:30 a.m. – 5:30 p.m. schedule, little or no weekend work, and three weeks’ unplugged vacation per year. Other innovative law firms change key elements of the traditional law firm model in ways that allow for better work-life balance and also have one or more of the following elements: alternative fee arrangements, team scheduling, elimination of the partner/associate distinction and “rainmaking” requirements.

After scouring the industry for these new models, the authors found only eight Secondment Firms, two Law & Business firms, five Law Firm Accordion Companies, eleven Virtual Law Firms, and eighteen Innovative Law Firms. That’s 44 total entities out there providing legal talent under a business model substantially different from the traditional law firm model. As the authors’ detailed summaries of each model reveal, some of these operations are quite large, like Axiom, and some are small.

So what’s the take home message? On the one hand, it’s unlikely that the Am Law 100, with combined revenues in 2014 of over $80 billion, are looking over their shoulders in fear of the NewLaw disruption. On the other hand, that’s 44 more entities in the NewLaw space than existed a decade ago. Also bear in mind that the lawyers in these entities are truly practicing law, or close to it (Axiom insists in tiny print it is not a law practice) rather than operating exclusively as consultancies, outsourcing firms, or online legal document providers (all of which are growing sectors of the legal industry as well). Given the practice model constraints imposed by US bar regulation, it’s impressive to see this many entities pushing the envelope. How far this trend can go without UK-like regulatory acceptance of alternative law practice business models remains to be seen, by my guess is that the drivers that led to these 44 firms forging the NewLaw universe are not going away, ever, which suggests the number will continue to grow regardless.

Vanderbilt Law Students Build Apps for Access to Justice

Yesterday afternoon five groups of Vanderbilt Law students compellingly demonstrated the power of legal technology to deliver access to justice. The students were part of an innovative class Adjunct Professor Marc Jenkins developed to  bring technology directly into the law school classroom.  In addition to receiving a sweeping overview of the law+tech scene through guest speakers and class discussion, over the course of the semester the students teamed up with Neota Logic to develop legal expert applications designed to assist five different public interest legal services organizations in their work. The student groups worked closely with their paired organizations to identify a need and design solutions using the Neota Logic platform. Each of the applications focused on providing efficiency to free up more time for lawyers to provide legal advice. The student groups presented their applications at yesterday’s event to a panel of four judges representing a broad swath of the legal industry (legal tech, in-house, law firm, law faculty) and an audience of over 30 interested students, faculty, and community members.  The presentations were fabulous, and the judges and audience offered sound advice and probing questions.

The five organizations and the student-designed apps:

  • Tennessee Justice Center – App to assist pro bono lawyers in navigating the TennCare medical denial appeals process. Features include a decision tree to walk the lawyer through the appeals process, links to guidance, sample pleadings, and cross-examination questions, and provides tips for investigating the fact background.
  • Tennessee Justice for Our Neighbors – App to help users determine their DACA immigration eligibility. With only two staff attorneys serving a population of tens of thousands of potentially eligible people, this app reduces intake time and helps filter out those who are clearly ineligible. The app interviews the user, alerts the user to necessary documentation, and produces a report for the user and the organization to facilitate the initial client meeting.
  • Legal Aid Society of Middle Tennessee and the Cumberlands – App to help users determine their foreclosure relief status based on timing of events and other relevant factors. The app interviews the user to help the organization determine where the user is on the foreclosure timeline and what information the user has received.
  • Tennessee Alliance for Legal Services – App to help TALS match low-income users not eligible for legal aid with appropriate legal service lawyers and organizations in the state. The app interviews the user to determine the nature of their legal problem and assists them in taking steps to secure initial legal advice.
  • Nashville Arts and Business Council – App to help artists of all kinds in the Nashville area identify the appropriate business entity form for their ventures. The app produces a report that the user and NABC staff can use to start the process.

Many thanks to Marc Jenkins for designing and delivering this truly exciting new course, and hats off to the students for rising to the law+tech challenge so successfully! More of this to come at the Vanderbilt Program on Law & Innovation!

Will the Next Generation of Lawyers Embrace or Resist Innovation?

Today I appeared on a forum Vanderbilt Law School holds each spring for 1L students to familiarize them with the various curricular programs we have here, of which there are many (see list here).  I had the pleasure of introducing our new Program on Law & Innovation for the first time at this forum, giving the students an overview of our themes, faculty, courses, and activities. They seemed to get it, and showed genuine interest.

When I returned to my office I thumbed through the new 2015 Report on the State of the Legal Market published by the Georgetown Law Center for the Study of the Legal Profession and Peer Monitor. One startling passage (though it’s not news) reports that although very high percentages of surveyed law firm leaders agree that they are likely to continue to see demand for efficiency, price competition, commoditized legal work, and competition from non-traditional legal service providers (well above 80% in each case), only 40 percent of their firms have done anything strategic to achieve greater efficiency and only 30 percent have significantly changed pricing strategy. The report goes on later to examine different explanations for the resistance of law firms to change notwithstanding that most law firm leaders get it: lawyers are conservation; law firms are not designed to invest in innovation; why should a senior partner change rather than maximize his or her final years of profits; etc. The bottom line is that it is largely due to people and human nature, not law firms per se.

I am reminded of Max Plank’s famous observation: A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather its opponents eventually die, and a new generation grows up that is familiar with it. Of course I am not hoping for any senior equity partners to die. Rather, I am hoping that our Program and others like it popping up at other law schools will equip our graduates to “be familiar with it” when it comes to initiating and navigating necessary change in their law firms as leadership shifts to them. If we can accomplish even just that, I will feel this was a worthwhile investment of the Law School’s and my resources.

Vanderbilt Program on Law & Innovation – Spring Events

Vanderbilt Law School’s Program on Law & Innovation is up and running this spring with several planned events:

Music City Legal Hackers: Program Coordinator and Adjunct Professor Larry Bridgesmith organized and led the first meeting of the Music City Legal Hackers on February 25th.  Sponsored by the Program on Law & Innovation, MCLH exists to bring professionals of many disciplines together to help improve the delivery of legal services in our community. Our first meeting with Owen Byrd of Lex Machina in February was well attended and equally well received.  Owen discussed the power of data analytics tools and technology applied to the protection and litigation of patented intellectual property. Additional meetings are in planning.

SeyfarthLean: On April 7th, we will be joined by Kim Craig and Andrew Baker of the Seyfarth Shaw law firm and SeyfarthLean Consulting.  Kim and Andrew have been instrumental in assisting Seyfarth become a leading provider of legal services fashioned through a dedicated application of process improvement and project management methodologies. They will meet with the Music City Legal Hackers in the morning and then discuss their work at a public forum at the lunch hour in the Law School.

Legal Tech Event: This Spring semester in Vanderbilt Law School’s class on Technology in Legal Practice, twenty law students led by Adjunct Professor Marc Jenkins have delved into technology in the practice of law.  The students have worked collaboratively in groups and with software to enhance access to justice in Tennessee. On April 14th, the students will present their applications to the Vanderbilt community and a panel of judges consisting of a general counsel, a law firm managing partner, a legal technology software founder, a Vanderbilt faculty member and a venture capitalist. The proceedings will take place from 3:30 – 5:00 in the Hyatt room on the first floor of the Vanderbilt Law School building. All are cordially invited to see the students’ designs and stay for a short reception to follow sponsored by the Law School’s Program on Law & Innovation.

Privacy – The New Plastics

The thrust of my Law 2050 class is to develop skills for navigating two forces of innovation in legal practice—innovation “within” the legal industry (technology, outsourcing, etc.) and innovation “outside” the law (new technologies, social issues, etc.). Students identify a trend in either category and write a paper on it in the form of a bar journal article. Their final papers were fantastic—a real pleasure to read. I’ve posted previously about two of the major themes represented in the papers: the sharing economy and the frontiers of new technology. The third major theme revolved around privacy.

You’d have to be a hermit not to be aware of, and subject to, the relentless erosion of personal privacy in the digital age. It is becoming increasingly difficult to participate in modern society and not feel the effects. A recent special issue of Science on The End of Privacy starts with the ominous line, “At birth, your data trail begins.” The articles highlight the technological arms race in the battle to regain control of privacy’s erosion. One set of articles covers facial recognition, drones, hacking pacemakers, and the ease with which your identity can be revealed from just a few credit card purchases. The other set of articles covers counter strategies such as apps that allow use of location-based apps without revealing your location and a browser app that injects decoy queries to throw off your true interests.

Law is no stranger to this engagement, with a string of statutory acronyms already firmly in place and more to come. Litigation is surging over issues from the effects of gargantuan hacks of financial records to control over one’s social media sites. Student papers covered an impressive span of these emerging legal issues:

  • The controversy over Apple’s new encryption software for the iPhone 6
  • Litigation against social media providers over inadequate disclosures about use of user searches, locations, and geotagging
  • The implications of “predictive policing” – using machine learning to predict where crime will occur and intervening ahead of time
  • The pushback Google Glass has experienced based on privacy concerns
  • The implications of police forces wearing body cameras
  • A new technology for detecting when drivers send text messages
  • The implications of the increasing ease with which we can pay for things (1-Click, Google Wallet, Apple Pay, Snapcash, etc.)
  • The increasing use of “connected cars” that are essentially smartphones on wheels, streaming data about your driving
  • The health data privacy concerns posed by Apple’s Health and HealthKit apps for personal health monitoring
  • HIPPA – the 800-pound gorilla of privacy law
  • Trends in industry self-regulation to control privacy leaks and concerns
  • Concerns lawyers face when using cloud-based storage of client files

These themes cover just the tip of the privacy iceberg that is coming to law. So, my advice to law students and young lawyers thinking about a niche to carve out? To paraphrase Mr. McGuire’s classic advice to Ben in The Graduate: I just want to say one word to you. Just one word. Are you listening? Privacy!

Vanderbilt Law School Launches Its New Program on Law & Innovation

I am delighted to announce that Vanderbilt Law School has launched a new Program on Law & Innovation, and that I will serve as the Program’s Director with Larry Bridgesmith serving as Program Coordinator.

From the Program’s home page:

Vanderbilt launched its Program on Law and Innovation in 2015 to train the next generation of lawyers to succeed in tomorrow’s legal environment by anticipating the opportunities created by the changes in law and legal practice. The program’s curriculum and activities focus on four related themes:

  • The Legal Industry. Legal service providers of all sizes and types are restructuring and changing the ways their lawyers practice. Traditional law firms now compete for business with new types of legal service providers, including legal project management firms and document review shops. New legal jobs, such as legal risk consultants and legal knowledge managers, are now available.
  • Legal Technologies. Computers are increasingly doing legal work, from reviewing documents for relevant information to predicting liabilities and litigation outcomes using computer algorithms. These technologies allow lawyers to deliver more efficient and reliable services and results. They also affect the demand for lawyers and the skillsets needed to deliver legal services.
  • Legal Innovation and Entrepreneurship. Fueled by rapid social, economic, and technological changes, the demand for change in law is also on the rise. Existing regulations don’t address the issues raised by new technologies such as commercial drones, and new financial products that present uncertain risks demand new strategies for public oversight. Young lawyers with an entrepreneurial eye can quickly develop expertise in an emerging or evolving area of law.
  • Access to Legal Services. Most people and businesses could not afford top-quality legal services in the past. As lawyers become more efficient and legal technologies more widely available, the availability of affordable legal services will open new markets for entrepreneurial lawyers and legal enterprises.

The program’s curriculum and activities expose Vanderbilt Law students to these and other changes in the legal industry that will have profound influence on the way they practice law. Our program faculty is committed to training savvy lawyers who will be innovators in law and legal practice.

Many more news items to follow!

Inventing the Next Shipwreck (and Shipwreck Law)

There is a saying that whoever invented the ship also invented the shipwreck. The point is that new technologies can have their pros and cons, and some of both can be entirely unexpected. Technological innovations thus have always been a challenge for law—how can we facilitate the good while regulating away the bad, especially when we don’t have a full grasp on all of the goods and bads?  But that also means technological innovation leads to legal innovation, and opportunity for lawyers to open up new fields of expertise. So, whoever invented the ship also opened the door for lawyers to invent shipwreck law!

The second major category of my student bar journal articles in the Law 2050 class was all about inventing the next shipwrecks with new technology and how law might respond.  Like the topic of the first category of articles I covered—the sharing economy—student papers covered varied topics in thoughtful and insightful ways.

I could have used “dronewrecks” for my title, because a healthy number of papers looked at how we are going to take advantage of drones in various commercial applications without running into obvious problems like them crashing into homes and each other (and people). There is interest in applying drones for newsgathering, television and film production, law surveillance, and commercial delivery. A brewery in Minnesota used drones to deliver cases of beer to people ice fishing, until the FAA shut that down.  Ah yes, the FAA—the agency is working on regulations for drones, which they refer to as “unmanned aircraft systems,” which the industry fears will be quite constraining of the new technology.  States are entering the field as well. My students predicted a slow, incremental approach to easing in of drones under aviation regulation.

The same is true for the close cousins of drones—driverless cars and crewless cargo ships. Driverless cars, which some students covered last year, seem to be moving slowly toward market with regulation moving cautiously to let that happen. But crewless cargo ships? Well, why not? The EU and Rolls Royce are developing the technology, which raises all sorts of pros (lower labor costs, less environmental waste, no crew safety concerns) as well as interesting questions (job losses, cyber-piracy, runaway ships). Both the International Marine Organization and the insurance industry will have plenty of interest in how this develops.

Other topics covered in student papers, from tame to most out there, included:

  • Bitcoins and other digital payments
  • Regulation of 3D handguns
  • Smartphone apps that allow the user to upload series of pictures to 3D printers, thus eliminating the need for CAD programs and allowing easy copying of sculptures and other forms
  • 3D bioprinting of organs
  • Organs on chips
  • Commercial spaceflight
  • Asteroid mining and other space property claims
  • Neural implants
  • My personal favorite—personal invisibility devices (don’t think they’re not working on them!)

The point of the assignment, of course, is to push students to think about law’s development in an entrepreneurial way. Although many of these technologies have a home in an established field (e.g., drones in aviation law; 3D printing in IP law), the established field isn’t a perfect fit and no lawyer is more of an expert on what doesn’t fit than anyone else. There’s no reason a recent law school graduate can’t bust into an established field on the crest of a new technology, outlining the challenges and proposing thoughtful legal innovation, to make his or her brand valued. Kudos to my students for taking that objective to heart and producing many excellent papers I’m sure bar journals would be happy to publish!

Impact Scores for Disruptive Legal Technologies

This will date me, but I remember a day when law was practiced without computer-based Westlaw or Lexis, when legal technology consisted of the five essentials: a land line telephone, Dictaphone, IBM Selectric, light switch, and thermostat. Westlaw and Lexis were, from the late 1970s until 1986, accessed only via phone modem. I recall using the modem in law school, and then at my firm in the mid-1980s experienced the miracle of using a computer to run simple searches. Life after that was not the same.

So this is not the first time legal practice has faced “disruptive technology.” But what exactly does that mean—disruptive technology? And how do we apply a metric to “disruptiveness”?

As many readers will know, the origins of the term stem from Harvard Business School Professor Clayton Christensen’s theory of disruptive and sustaining innovations. A disruptive innovation helps create a new market or industry and eventually disrupts an existing market or industry. In contrast, a sustaining innovation does not create new markets or industries but rather evolves existing ones to achieve better value.

Much of the commentary on new legal technologies has focused on the disruptive side of the equation, whereas many have a sustaining quality as well. Overall, however, I don’t find that dichotomy very useful for purposes of understanding and teaching how the new wave of legal technology will affect the practice of law and thereby affect the demand for lawyers. So this fall in my Law 2050 class my students and I disaggregated “disruptive” and “sustaining” to get more under the hood of how new technology platforms like Lex Machina, Legal Zoom, Ravel Law, and Neota Logic will change the way law is practiced. (We did so purely intuitively without dipping deeply into Christensen’s detailed theory or other business theory and commentary on the topic—so he and my colleagues at Vanderbilt’s Owen Graduate School of Business Management might cringe at what follows.) Modifying somewhat the typology we developed in class, below I use the introduction of Westlaw and the current play of Lex Machina to explain our typology and impact scoring system.

What is disruptive (and sustaining) about disruptive legal technology?

One way of thinking about how new technologies change the world is to ask a “technology native”—a person who has only known life with the technology—what his or her world would be like if the technology disappeared. For example, while I actually was able to get by years ago without Google (I am a Google “technology immigrant”), I can’t imagine my world without Google now, but I can remember one. So just think about a Google native—someone who has never seen life without Google! Ironically, with Westlaw and Lexis this is becoming increasingly less scary, as Google alone has supplanted them as the first search engine of choice for many legal searches. But let’s envision Westlaw and Lexis coming on line in the 1980s or disappearing in the 2010s and ask, so what, who cares, and why? In what ways is the world of lawyering different with or without them? I come up with five effects, each of which has a 20-point impact scale:

Quality enhancing impact: In the do it better, faster, and cheaper trilogy dominating the legal industry today, quality enhancing technology works on the delivery of better service. For example, Westlaw and Lexis vastly improved the accuracy of search results, such as “find cases from the federal courts in the Fifth Circuit that say X and Y but not Z.” Sure, a lawyer could have run key number headings in the books and read through legal encyclopedias, but the miss rate simply went down when Westlaw and Lexis came on line. So to, with its deep database of IP cases and filings and assessable research design, does Lex Machina improve accuracy of searches about IP litigation, though at present it does not run broad substantive research searches. Scores: Westlaw and Lexis 18 (like Russian skating judge, leaving room for some later contenders); Lex Machina 12

Efficiency enhancing impact: Anyone who has ever run key numbers in hard copy digests or Shepardized a case using the books will appreciate the efficiency enhancement Westlaw and Lexis provided—the “do it faster” component of today’s client demands. Similarly, although one could use the brute force of Westlaw or Lexis searches to assemble the results of a Lex Machina search about the IP litigation profile of a judge or patent, it’s a heck of a lot faster using Lex Machina. Scores: Westlaw and Lexis 18; Lex Machina 18.

Demand displacement effect: Assume a world in which the number and scope of client driven legal searches does not change. In that case, the introduction of a new legal technology that has quality and efficiency enhancement effects is likely to displace demand for service in some sectors of the legal industry if the technology is a cost-effective competitor. For example, Westlaw and Lexis allowed better and faster legal searches, but unless priced to be cost-competitive with the old lawyer-intensive ways of doing legal searches, they won’t penetrate the market. Bottom line, there are fewer billable hours to go around. Given the success of Westlaw and Lexis in establishing their markets, one has to assign them the potential for this displacement effect. It’s much harder to tell with Lex Machina, because it’s not clear what the demand was for the information its type of searches provides prior to its availability. Scores: Westlaw and Lexis: 15; Lex Machina 8

Transformative effect: The opposite side of the coin is the potential a new technology has to open up new markets for legal tasks not previously possible or valued. For example, other than paying for a bespoke lawyer’s judgment about the profile of a particular court for IP litigation, I find it hard to believe many clients would have paid lawyers to perform the kinds of hyper-detailed big data litigation information searches Lex Machina makes possible about lawyers, courts, and patents. Even more so, some of the search techniques Westlaw and Lexis made possible would have been virtually impossible to replicate the old fashioned way with the books. To the extent these new capacities are valued—e.g., they lead to better litigation prediction and outcomes—they will increase demand for service. Hence the transformative effect can work to offset the displacement effect, meaning a new legal technology might increase the pool of billable hours. Scores: Westlaw and Lexis 15, Lex Machina 12

Destructive effect: All of the above discussion has assumed it will be lawyers using the new technology, which clearly will not always be the case—the new technology might reduce or eliminate the need for a lawyer at the helm. Some new technologies will provide user interfaces that do not require an attorney to operate. The rise of paralegals conducting research on Westlaw and Lexis is an example. Even more destructive are technologies like predictive coding, used in e-discovery to vastly reduce the need for lawyers, and online interfaces such as Legal Zoom, which sidesteps the Main Street lawyer altogether. My sense is that Westlaw and Lexis did not have so much destructive effect outside of pushing some work down to paralegals, and the same will hold true for Lex Machina. Scores: Westlaw and Lexis: 8; Lex Machina 8.

Total Impact Scores: Westlaw and Lexis 74; Lex Machina 58.

Of course, this is all meant to be a bit provocative and poke some at the overuse and misuse of the “disruptive technology” theme in our current legal world. As I said, it is not informed by formal business theory, nor do I have any empirical evidence to back up my scores. But the categories of effects seem on point and relevant to the discourse on impacts of new legal technologies, and the scores strike me as decent ballpark estimates. At the very least, I’ll have a model the students can use to dissect the legal technologies they choose to study in next fall’s Law 2050 class!

Regulatory Innovation and the Sharing Economy

My Law 2050 energy has been devoted the past month to grading a pile of fabulous papers my students compiled on a broad variety of topics and planning some exciting new developments here at Vanderbilt. More on the latter, later. For now, some observations on several trends in law based on the student papers.

The major writing assignment in the law 2050 class requires students to identify an “inside law” or “outside law” trend and cover it in a blog post, client alert latter, and bar journal article. The purpose is twofold: (1) expose them to writing styles their future employers are likely to expect them to use for professional development and (2) encourage entrepreneurial thinking about how to “jump on” emerging themes and opportunities.

As I have mentioned before, the breadth of “outside law” topics was impressive. Three major themes dominated, however: (1) regulating the so-called sharing economy; (2) weird new technologies; and (3) personal data privacy.  Taking them one at a time, this post covers the sharing economy, a snarl of legal issues that ought to keep plenty of lawyers busy for the foreseeable future.

The engine of the sharing economy, no surprise, is the internet and its capacity to link people. Sharing economy companies leverage this capacity to match supply and demand primarily for services, the big three so far being rides (e.g., Uber), rooms (e.g., Airbnb), and odd jobs and errands (e.g., TaskRabbit).

Two opposing narratives have dominated the debate over how to receive the sharing economy. In one, sharing economy companies project themselves as innovative middlemen who merely use smart phone technology to hook up willing service providers with those in need of a ride, place to stay, or broken pipe fixed. In the other narrative, regulated companies in the traditional economy who see the sharing economy as completion accuse its participants of illegally and unfairly skirting rules and regulations running the gamut from licensing to taxes to employment. Which is it? It seems like a little of both to me, which is what has made the sharing economy a regulatory challenge.

The rhetoric of the sharing economy began with its name, because it is not at all about sharing—it’s about charging for services. When ride-share companies ramped up around the nation, for example, they took the position that it was simply about using phones and their smart software to match people who needed a ride with people who for whatever reason felt like driving people around—any exchange of money from passenger to driver was a “donation.” But now with surge pricing and capitalized values in the billions, the sharing economy looks much more like a business model. The other preposterous premise of the sharing economy was that it is quaint and benign, presenting no concerns that should catch the eye of regulation.

The sharing narrative fell apart pretty fast, however, and the rhetoric shifted to fending off the regulatory wolves.  Questions raised about the ride-room-errand trio have been so obvious, however, it’s clear the inventors of the sharing economy decided just to go forward without asking permission and wait to see what hit the fan, when, and where. After all, it’s no accident that we regulated rides, rooms, and errands for hire, and for good reason—just check into the history of taxis in major cities in the early 1900s and you’ll find plenty of horror stories. Even a short typology of legal and regulatory issues these new upstarts present is chock full of issues:

  • business licensing and taxes:  Must Uber or its drivers be licensed as a taxi; must Airbnb or its “landlords” pay hotel taxes
  • employment status: Are Uber’s drivers and TaskRabbit’s tasklers independent contractors or employees?; Who payes TaskRabbit’s tasker employment taxes?
  • health & safety regulation: Are Airbnb accommodations subject to health regulations and the ADA
  • insurance and liability: Who is liable when an Airbnb “tenant” burns down the apartment or an Uber driver assaults a passenger or drives into a building?
  • zoning: What if local zoning does not allow hotels in a particular area–can Airbnb operate there?
  • private contracts: What is homeowner association bylaws or an apartment lease restrict rentals and sublets?

On the other hand, it’s just as clear that the regulatory system has gone far beyond managing the problems presented by unrestricted ride, room, and errands providers to become part of the problem, protecting the taxis, hotels, and other services industries as much if not more than it protects consumers. Surely the regulated companies do deserve some protection in return for bearing the burden of regulation, such as the fixed rates taxis must charge regardless of demand. But if I can get an Uber driver at a busy downtown location in one minute, have him or her drive me safely back to my reasonably-priced Airbnb apartment I rented for the weekend late the prior week, and get someone over quickly to clean up the place before I turn in the key, what’s wrong with that?  It’s hard to get that from the traditional regulated economy. And if the traditional regulated economy isn’t meeting demand, it’s worth taking a step back to ask how to improve the system.

So we have a regulatory conundrum on our hands: consumers love the sharing economy, but want some acceptable level of security and protection; entrenched regulated providers in the traditional economy such as taxis and hotels hate the sharing economy, but can’t deliver its same level of convenience because of regulation; government sees licensing fee and tax revenue slipping away, and can’t please both consumers and the regulated industries.

At the two extremes, one approach would be to unflinchingly apply all the status quo rules of the traditional regulated economy to the sharing economy, which would largely eliminate it, and the other would be to simply turn a blind eye and let tort law sort out the provider-customer relations in the sharing economy, which will cut deep into the stability of the regulated ride, room, and errands providers of the traditional economy. For a while it looked as if the live and let live model was prevailing, as companies like Uber and Airbnb shot into hipster prominence. More recently, however, the sharing economy has taken serious hits, such as Uber’s complete ban in Nevada and fines in San Francisco and Airbnb’s tangles with New York, to name just a few.

A compromise would be to think hard about innovative regulation for the sharing economy. Eric Biber and I, for example, have suggested using a general permitting approach to segregate different segments of sharing economy markets in terms of level of activity and corresponding level of regulation. Or, as Shrai Shapiro has suggested, intermediate forms of regulation, fees, and licensing could be used to open markets to the sharing economy in limited ways. Nashville, for example, recently allowed Uber to operate at the City’s airport, but subjected it to registration, insurance, inspection, and background check requirements.

Either way, its clear that the sharing economy is not going away, but neither are consumer protection regulation, licensing fees, and taxes. The legal issues remain numerous and unresolved. I was glad to see several of my students take hold of this theme and delve deeply and insightfully into its future.

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