Bloomberg Law
July 2, 2015, 1:45 PM UTC

LegalZoom Threatens Small Firms, Solos; But What About Big Law?

Ben Barton
Professor of Law

Editor’s Note: The author of this article is a professor at University of Tennessee College of Law and wrote the book, Glass Half Full: The Decline and Rebirth of the Legal Profession .

By Ben Barton, Professor of Law, University of Tennessee College of Law

In Part I of a two-part series on Clayton Christensen’s theory of disruptive innovations, I explained how disruptive innovators eat up the low end of the market first, leading the current market leaders to focus on the high end work. This allows the newcomers to work their way up the chain from the bottom to the top, eventually pushing the legacy businesses aside.

We are seeing this process in the small firm and solo practitioner market with the arrival of LegalZoom and the online dispute resolution (ODR) site Modria. Lawyers are just starting to recognize these sites as a threat. LegalZoom started in 2001 as a radically cheaper alternative to lawyers. Why did it take so long for lawyers and bar associations to notice?

The explanation is simple. At first LegalZoom was merely soaking up a portion of the market lawyers had long since unilaterally abandoned. Surveys show that the median American lawyer working in consumer law charges more than $300 an hour .

At those prices, even simple matters like a will or an incorporation quickly become expensive, so for decades many American consumers have had to do it themselves with a formsbook or go without. So the first wave of LegalZoom customers were no loss to lawyers at all - they were mostly individuals who could not afford a lawyer in the first place.

Over time, however,LegalZoomhas climbed the ladder and is now taking clients that would likely have used a lawyer fifteen years ago. For example, in 2011, 20% of LLC filings in California came through LegalZoom. Twenty percent!

Entity formation is a classic small firm job, and from LLCs to wills to powers of attorney it is now clear thatLegalZoomis crowding into the market and (although some of these lawyers are working withLegalZoomand its competitorRocket Lawyerthrough legal services programs). Predictably, bar associations have started a rear guard unauthorized practice of law attack against LegalZoom ,so far with mixed results .

A similar phenomenon is occurring in litigation. Modria is an offshoot of the ODR programs of EBay and PayPal. It uses the same computer program that has settled more than 400 million disputes for those websites. Right now Modria is focused on settling small consumer disputes and divorces .

Small consumer disputes are of little interest to lawyers because of the low stakes. Divorces are another matter. If online dispute resolution becomes a widespread alternative to divorce litigation it will hurt lawyers and human mediators alike.

What does this have to do with BigLaw? Very little for now, but maybe quite a bit in the future.

Low-end disruptors like LegalZoom and Modria rarely quit at the bottom of the market. Is it unimaginable that corporate clients might look to a LegalZoom type interactive document creation process for their more rote work like leases or franchising agreements, cutting lawyers out altogether? Will corporations that are using Modria to settle small disputes with their customers consider trying ODR for larger disputes?

Admittedly these threats are years away. But that does not mean that they are not real. Lawyers of all stripes should be watching this portion of the market carefully.

Learn more about Bloomberg Law or Log In to keep reading:

Learn About Bloomberg Law

AI-powered legal analytics, workflow tools and premium legal & business news.

Already a subscriber?

Log in to keep reading or access research tools.