As a billion-dollar franchise and one of the most recognisable entertainment brands in the world, the chief legal officer of The Pokémon Company International may be one of the more coveted in-house roles on the market. For the past 11 years, Don McGowan has occupied that position and has taken the brand through a plethora of groundbreaking international deals across a broad range of industries. From spearheading the legal negotiations surrounding the launch of the hugely successful Pokémon GO mobile gaming app to playing an integral part in the licensing agreements of the upcoming live-action Pokémon film, McGowan has enjoyed a diverse portfolio not always typical of the general counsel.
But these feats are only the beginning for McGowan, who, unlike most GCs, can add ‘Hollywood movie producer’ to his already impressive résumé. Between juggling his legal duties as GC for The Pokémon Company International, he is also a producer for the highly anticipated Pokémon: Detective Pikachu movie set be released in May. A modern-day renaissance man, McGowan is redefining the traditional role of GCs, showing legal expertise can be just as useful in an office as on a Hollywood movie set.
Despite it all, McGowan still manages to find time to advocate for children’s rights as a board member for the National Center for Missing & Exploited Children and teach entertainment law at the University of Washington. Heading into an eventful 2019, McGowan is showing little sign of slowing down.
I Choose You
Before moving to the bright lights of Hollywood and becoming a gaming and entertainment law luminary, McGowan began his legal career as a litigator in Quebéc, Canada. In his journey toward the multi-dimensional position he now enjoys, McGowan admits he stumbled upon more than a few lucky breaks.
‘To a certain degree my career path has been like Forrest Gump,’ McGowan admits. ‘I’ve sort of fallen repeatedly into opportunities – and you know, I’m not so blind to the idea to say the harder I work the better luck I have, but certainly there has been a fair amount of luck.’
As of the start of 2019, the app had brought in a total of $2.2bn of revenue since launching in 2016.
McGowan’s career trajectory has included a few once-in-a-lifetime opportunities. This good fortune paired with a strong work ethic has been fundamental to his sustained success.
‘You pick up the skills that life requires you to have,’ he says. ‘I got to Pokémon in August 2008. Prior to that I was the lead lawyer for Xbox games, but at the time we called it Microsoft Game Studios. So, I have worked in the gaming industry and the media industry for about 15 years. Prior to that I actually worked in security and cryptography at Microsoft.’
While at Microsoft Game Studios, McGowan worked on a range of video games, handling everything from franchising to advertising to compliance issues. He also negotiated one of the first video game-based movie deals for Halo, Xbox’s flagship gaming title. While that project didn’t eventually come to fruition, the experience put him at the forefront of gaming and entertainment law, so when McGowan heard of an opening on the in-house team at The Pokémon Company International, he knew his work experience would make him the perfect fit.
Gotta Catch ‘em All
The Pokémon portfolio covers games, movies, television shows, trading cards and a staggering amount of other merchandise across a multitude of mediums. In recent times, the most well-known Pokémon export has been the runaway success of Pokémon GO – a mobile game. Employing location-based augmented reality, the app allows users to capture, battle and train Pokémon in real-world locations, in conjunction with other real-life players. To date, Pokémon GO has been downloaded over 650 million times and has established itself as a global cultural phenomenon. The success the app would become took the world by surprise, including McGowan.
‘I promise you no one gets up in the morning thinking today is the day we launch a cultural phenomenon. You don’t get up in the morning to say: “Today the world changes”.’
McGowan might be accused of hyperbole, but it’s easy to make the case that he’s being realistic: users spent $75m on the app via the Google Play store in December 2018 alone, and a staggering $262m across the year. As of the start of 2019, the app had brought in a total of $2.2bn of revenue since launching in 2016.
McGowan was instrumental in coordinating the deal between The Pokémon Company International and Pokémon GO’s development company, Niantic. Niantic was a start-up spin-off of Google, and comprised of a team of people who played key roles in the development of Google Earth and Google Maps. Transforming this technology into a safe, fun gaming experience looked like a gigantic legal risk at the time.
‘I had people coming up to me saying, “I cannot believe you are going to do a game like this – good luck, man!” Not exactly the vote of confidence you’d hope for,’ says McGowan.
‘I don’t think it is a question of being risk averse, I think it is a question of being attuned to the risks, being cognitive of them, developing your product with them in mind and figuring out the way to address them. And I think that is something that any good legal department does.’
Putting Pikachu First
For as ambitious as the project was, Pokémon GO’s life to date has been a surprisingly smooth one.
‘We launched a worldwide geolocation game with no regulatory issues,’ he says flatly.
A large part of the regulatory success of Pokémon Go can be credited towards McGowan’s focus on brand preservation. This meant ensuring issues of data privacy and child protection were at the top of the list of potential legal concerns. Pokémon has existed for over 20 years and has developed a reputation as a globally trusted children’s brand, so this was a North Star of sorts when navigating potential legal risks. This approach was founded from the position that parents identify the Pokémon brand with products created with children’s safety in mind.
‘That is a really powerful responsibility for us to have and it is something that permeates the company’s DNA,’ says McGowan.
Most of the work in this area was undertaken by himself, but supported by a small team of eight people at the time.
McGowan’s team had to solve adaptation issues that arose from turning a video game into a movie.
‘My work in these areas was particularly important, because at that time Niantic had no legal staff and so, functionally, that meant all of the legal work on clearance and all the work on the game was done through me,’ he says.
‘There is a thing I do in every sort of meeting I am having with people to discuss a new idea or a new situation – I run through a list in my mind: what are the kids’ privacy issues, what’s the advertising issue etc, and at the end of it I look at my team and I say okay – last question: what have I forgotten to think about?’
The practicalities of the app are such that the cost of getting it wrong is high. The game encourages its users – many of whom are children – to roam their neighbourhoods and cities looking for Pokémon to catch. The fact that the app’s bread and butter are the location tracking adds another complexity to the ethical considerations that must be taken into account.
‘We are obviously looked to as people who have sort of leading expertise on privacy and children’s issues and we are happy to help, and we are happy to share,’ says McGowan.
Expanding from a legal team of eight to a legal team of 19 over the past three years, McGowan acknowledges that Pokémon GO has given The Pokémon Company International the opportunity to grow. With the 2019 release of the live action motion picture, further expansion brings its own host of legal hurdles.
Time to Evolve
It was a cold evening in January when filming began for the Detective Pikachu movie. McGowan was on set and watched as Ryan Reynolds came in to voice Pikachu. He says he knew from that moment on this movie could become a really big hit.
‘That was the moment that everything became real. This is actually happening, we’re making a movie! I never thought it would happen in a million years,’ he says.
‘But sitting there, as Ryan Reynolds – who didn’t even need to be there because he was doing a voiceover part which is shot from the booth – came in, in the middle of the global promotional tour for Deadpool 2, to shoot the scenes. That’s when everything we’d all worked for really crystallised and became real.’
It was through the relationships McGowan built within Legendary Entertainment and Pokémon International, that he was able to secure the once-in-a-lifetime opportunity to work as both in-house counsel and movie producer on the same project.
As a producer, McGowan was involved in everything from advising on casting, directing and script and, while cautious to maintain a separation of ‘church and state’, McGowan was able find the perfect blend between the two skills.
From a legal standpoint, McGowan and his team did almost everything from papering up the agreement to negotiating and ironing out details of the deal between American-owned Legendary Entertainment and his Japanese parent The Pokémon Company, with movie distribution rights going to Warner Bros. McGowan had the task of bringing companies operating in two different jurisdictions – with two different cultures – together.
‘A lot of what I describe in that movie project is, you know, you have two parallel lines and every now and then somebody has to pull them together and make them meet.’ In a lot of ways, McGowan says that was his legal team’s job. Along with putting together the paperwork, McGowan’s team had to also solve adaptation issues that arose from turning a video game into a movie.
The practicalities of the app are such that the cost of getting it wrong is high.
‘Detective Pikachu launched as a video game, so we had the pre-existing video game we were working with and there were all the adaptation issues that go into that as well,’ he says.
‘There were a couple of things in the first trailer, where people quite rightly pointed out that music was a rework of something from the video game or a rework from the TV show. We have to make sure the rights were cleared on all of that stuff. There is the IP protection issue, there is the marketing campaign stuff and all sorts of things. There is stuff that you will never even think of. I rely heavily on the teams at Legendary and Warner.’
The day-to-day work of putting a movie deal together is very standard. McGowan describes it as ‘usual lawyer work, it’s the same work day-in-day-out, it’s the stuff that a lawyer does, just transferred onto something that’s got a little bigger canvas.’
His team is currently handling everything from marketing campaigns to the last-minute tasks required in the context of releasing a movie.
Back to Victory Road
After rubbing shoulders with Hollywood’s elite on the red carpet for the release of the much-anticipated Detective Pikachu movie, it will be back to business as usual. Aside from the major projects, there is a surplus of daily issues that McGowan and his team work on to keep the Pokémon franchise running.
One of the major legal issues is the vast number of knock-off products that look to capitalise upon the Pikachu brand – in particular, the swathes of online retailers selling counterfeit Pokémon products.
There is also the TV show, which runs in 196 countries, although most of those licence agreements are handled through the Japan office. Still, McGowan’s team deals with shows that air in the US and EMEA. Add to that the manufacturing deals for trading cards, product testing and safety, as well as the management of the direct-to-retail business, called Pokémon Centre, which is based in the United States – and it’s not hard to see why McGowan says he never sleeps.
‘We have so many things going on, this company has so many activities: to the video game guys – we are a video game company, to the toy people – we are a toy company, to the movie people – we are a movie company, there are not a lot of other companies that can say that. But for us here in legal, we’re all of that. And some more!’
To say that disruptive technologies will be a catalyst of great change – not just in the legal profession, but wider business – is redundant. While that may sound somewhat controversial, in Silicon Valley – the heart of technological innovation – it’s perhaps more accurately an understated perspective.
But how do the in-house legal departments working closest to the action – those employed by emerging, new-era tech companies – manage to stay ahead of the curve in a way that allows them to credibly advise on legal issues at the cutting edge? How do traditional law firms ensure they are keeping in lockstep with industries undergoing technology-inspired change?
Discussion point: Is there adequate regulatory infrastructure in place for AI and disruptive technology more generally?
Often, government regulation is reactive rather than proactive. This is nearly universally true when it comes to technology at the cutting edge. The implications of new, disruptive technology are unpredictable; only once it has been released into the market can the wider implications even begin to be understood, not just by the users, but oftentimes the creators.
This can put in-house legal teams and their external firms alike in a purgatory of sorts, where they must advise on legal positions that are likely to be made obsolete by inevitable regulation. Uber, and the effect it has had on the employee/contractor demarcation, is a good example of this.
With several high-profile technology revelations promised on the horizon (AI and blockchain in particular), do regulations exist into which they might fit? Or must legal advisers adopt a ‘wait and see’ attitude, knowing that future overzealous regulators might leave a company’s product dead in the water?
THE EXTERNAL PERSPECTIVE
Kathi Vidal, managing partner – Silicon Valley, Winston & Strawn: ‘I gave a talk a few months ago at Berkeley with people who had worked for the previous White House administration and they were concerned not only that we lack the infrastructure, but that we lack an infrastructure to build the infrastructure. The current power regime is all about deregulating as opposed to regulating, so we don’t really have adequate structures in place.
We have infrastructure around unpredictable technologies. In IP we tend to divide technology into predictable and unpredictable. Unpredictable is things like pharmaceuticals – and on that side you have the FDA – you know you have to get certain things approved. On the other hand, for the predictable sciences, we don’t have that.
With AI there is increasingly a merging of the two sides. With software entering into all sorts of “things”, you move away from those things being predictable. I wonder whether we need something like the FDA, where you have to get these algorithms approved or whether something needs to be done before they can go to market. I certainly think that the blurring of the lines between predictable and unpredictable technology is a big change.’
Basil Godellas, partner and co-chair, financial services practice, Winston & Strawn: ‘With distributed ledger technology in particular, there are interesting developments at the state level that could impact the practice of corporate law. In the United States, essentially we are seeing individual states looking at how to position themselves favourably with disruptive technology. About a year ago, Delaware and Wyoming both began exploring the use of distributed ledger technology for storing corporate records, but there’s a number of large players in the industry that already provide corporate franchise and similar services that could be impacted by this technology. Will there be a bit of a push back or will the technology be embraced?
Two key examples have been cited over the last six or eight months as problems or mistakes that distributed ledger technology could have avoided. In the case of Dole Foods, the company’s corporate records did not accurately reflect the total number of shares of its outstanding stock. The judge in that case made a statement to the effect that distributed ledger technology could have prevented this mistake. The other example involved the bankruptcy of a major company. In that case, someone made a mistake and terminated the financing statement securing a billion-dollar-plus loan right before the company went into bankruptcy. So there’s been a lot of talk about using smart contracts to prevent mistakes like this. These are just some examples of where state governments are looking to use blockchain technology, specifically to facilitate corporate record keeping and secured financings. ’
THE IN-HOUSE PERSPECTIVE
Bruce Byrd, chief legal officer, AT&T Communications: ‘When it comes to the question of whether we need new regulations, I should qualify any statement I make by pointing out I work in the second-most regulated industry in America after banking. Our lawyers don’t wake up in the morning thinking we need more regulations. On the other hand, you do wonder what direction some of this might go and whether it could be a wise decision to get ahead of it, or suggest that policymakers should do something. I spend a fair bit of my time talking to the intelligence community about the security of our network, and most of that focuses on big threats to its core elements.
There’s this little thing called IoT – the Internet of Things – too. Whereas I can name on one hand the primary manufacturers of big network gear, I can’t do that with the manufacturers of IoT devices. The standards are disaggregated or nascent, and the security protocols are more questionable than they are in our core network or radio access network. So it’s hard to know the direction to go, but I’ve thought about it less in terms of what recommendations we need (although we have made some recommendations to the White House about things needing to be considered in the IoT space, but those recommendations are not around needing more regulation), but rather emphasising that we need to take advantage of AI to address a problem. In other words, whatever regulation you may come up with will pale in effectiveness in comparison to AI capabilities that can do faster threat analytics, while proving to be more malleable and flexible. That is a tough thing for policymakers to get their heads around. The real challenge is education. They don’t quite get that it’s not going to work in the usual way – they will have to allow us to use a lot of this stuff before it’s perfected if we as a nation are going to take advantage of its benefits.’
Jordan Newmark, litigation and IP counsel, Miami International Holdings: ‘The regulatory framework we have in the US isn’t technology-focused, it is fear-of-disruption-of-the-general-marketplace-focused. The result is you have areas of the world that are way ahead of us in terms of implementing things. In Bermuda, for instance, their stock exchange rules have promulgated draft rules with respect to trading tokenised products that are way ahead of where the SEC is today. We can watch experiments happen in other countries around the world.’
Scott Weber, general counsel, Lumina Networks: ‘What’s interesting when it comes to trust is there has been a shift away from traditional sources of authority and credibility. I trust Google and AT&T far more than I do the government at this point, especially right now, because they move faster – and besides, corporate social responsibility is taking heart and hold in the economics; it’s in a business’s advantage to be a good citizen. It makes sense to be a good corporate citizen and make products that don’t hurt people and protect against these liabilities, with or without regulations. Of course we still need regulations, but they are always going to be three steps behind, and even then it will be a case of putting a sticking plaster over something very large. It will be interesting to see the ways in which corporations and government can work together.’
Kathleen Jason-Moreau, general counsel, Vim: ‘I just feel like I spend all my time chasing after the sales team. Bruce, you talk about AT&T being regulated, but I’m in healthcare – $1bn to get a product to market will be considered cheap. Often sales people come to the company from a different sector and they’re just not used to the way this market works. It’s so heavily regulated. It’s an education, and you don’t want to be the lawyer who is always saying no. I’m not comfortable just being a rubber stamper, but I also don’t want to be the person who stops the deals. The most successful sales executives don’t take a no from anyone – not from a customer and certainly not from a GC. We’ve just got to figure everything out; it creates all sorts of challenges because the law changes too quickly. I study every weekend. You never want to let the CEO down.’
Discussion point: Does disruptive technology change how you expect external advisers to act?
Increasingly, firms are marketing their services on the basis of value. This is particularly so when it comes to in-house clients, for whom tightening budgets have made value a priority. With in-house teams looking to technology to streamline processes, and as businesses from every sector embrace technological innovation, questions are being asked of external partners: are you using technology to deliver more efficient services to my team? Do your lawyers have the technical knowledge required to advise my business?
THE EXTERNAL PERSPECTIVE
Kathi Vidal: ‘I had a client who invited their four top firms in and they explained what their goals were, so that the four law firms could align with that. It helped tremendously; the energy you get is great. Just to hear from the CTO about the open source issues, the cloud issues, what they’re struggling with – it energised me to think outside of the box and about which lawyers I could pull into the spectrum in terms of solving their problem. You can bring them all in at once, which is extremely empowering and makes me able to serve them better.’
THE IN-HOUSE PERSPECTIVE
Chris Ghazarian, general counsel, DreamHost: ‘I think you see a lot of firms playing catch up. You expect them to understand some of the tech behind it, but you also have firms who don’t understand that blockchain is not the same as distributed ledger, and vice versa. Last year, we had a case against the Department of Justice. Part of the reason we got into that was the automation around some of our subpoena compliance and warrant compliance. That led to discussions with GCs of big web hosting companies. It was interesting to hear about the way they incorporate these technologies into what they do in terms of legal compliance. Frankly, a lot of them don’t know what they’re talking about. Their external counsel may also not be fully aware of what’s going on, and then something bad happens. Then, and only then, they realise it is a big deal – after which, it’s often too late.’
Bruce Byrd: ‘My lawyers cover every specialty, and I expect them to be better versed than anyone we hire. So what I’m looking for in external counsel is a level of curiosity. I meet lawyers who aren’t curious about technology. Occasionally, I run into my own lawyers who joke with me about how they don’t understand tech. I don’t find it funny – if you don’t know the tech then that’s a problem. I’m not asking my lawyers to be technologists, that’s not our training, but they should know the essential elements of what we do. I have a lot of confidence in the firms we hire, but when it comes to individual lawyers, I’m seeing a slight laziness about the issue – that’s what annoys me. My outside firms need to understand this at least as well as I do. That’s my biggest challenge – making sure my outside firms are diving into the technology.’
Discussion point: What are the ethical and practical concerns with increasing reliance on AI and algorithms in business?
THE EXTERNAL PERSPECTIVE
Kathi Vidal: ‘We, as a society, don’t trust technology. Autonomous vehicles should save 20,000 lives a year, but if one person dies that’s going to make people think it isn’t safe. Then there are questions of what happens if someone hacks the software. These are very serious issues which we are going to be dealing with all the time. With software entering into all sorts of applications, you move away from those things being predictable. I certainly think that the blurring of lines between predictable and unpredictable technology is a big change.’
THE IN-HOUSE PERSPECTIVE
Jordan Newmark: ‘It’s not so much the legal dollar liability, as much as the brand liability, that’s the issue. If you’re a financial services provider and you have a robo-adviser for which the algorithm is off in a particular way, and it recommends buying something that you should have shorted, for example, that may cause a loss of a certain dollar amount for your customers – but the bigger loss is likely to come from other customers fleeing or deciding not to invest any more money with you. I tend to think that the limitations of liability for using software probably will apply the same ways they traditionally have, but I think brand liability is what will take the biggest hit.’
Robert Shives, general counsel, Shinko Electric: ‘In my view, understanding the risk to retirement plans and savings is just as important. If the AI recommends something that ruins millions of people’s lives, it is a big problem. That is not just a brand problem. It is people who have lost their life savings.’
Mary Fuller, former head of legal and chief policy officer, The Kudelski Group: ‘It won’t be long before AI invents – there is already an AI popstar in Japan. I presume AI cannot get a copyright. Likewise, unless you’re human, you cannot become an inventor on a patent. That means a lot of the regulatory and IP frameworks will ultimately be deemed inadequate. I assume that as soon as there is a clear economic interest in companies being able to own the output of AI, the laws will change, but until then we have the question of what we do. There will be no incentive to develop something that is fundamentally not patentable.’
The proliferation of blockchain technology has forced nearly every sector to re-examine traditional ways of doing business. Nowhere is the potential more apparent, or the sector more traditional, than in the negotiation, creation and execution of contracts. If the blockchain evangelists are to be believed, the manner in which parties’ contract will be changing drastically in the not-too-distant future. But while a number of high-profile success stories illustrate the transformation potential of the technology, it’s clear that there is still a way to go.
Blockchain understood
To understand blockchain technology and the potential value that it brings to business, think of how an ordinary business transaction works: there is an agreement and exchange of goods or services between parties. Each party keeps their own ledger, which records the transaction. But because the ledgers are held independently, there is scope for discrepancy between them – be it through error, disagreement or fraud. Traditionally, this was mitigated by introducing a third party to the transaction – usually a bank. But reliance on a third party introduces cost and inefficiencies that need not be there if there was a way to create and maintain a singular, shared ledger – one that is equal parts transparent and secure.
Enter blockchain
A blockchain is a series of mathematical structures, inside which individual transactions are recorded. The record of each transaction – each ‘block’ – is mathematically contingent on the block that came before it. The transaction becomes a permanent part of the history of the blockchain and, in that way, it cannot be tampered with: once it is added to the blockchain, all subsequent transactions are recorded in relation to that block and all of the blocks that came before it. Following each transaction, the updated blockchain is distributed to each participant. In this way, blockchain becomes a decentralised ledger that is impossible to tamper with effectively: any attempt to change a record in the blockchain will put it at odds with the version held by every other participant in the blockchain, as well as all of the subsequent transactions that have been recorded.
Put simply, blockchain technology allows for a distributed, decentralised and secure ledger that eliminates the need for third parties, while providing a level of validity to participants that would otherwise have been impossible. It is this technology that has made cryptocurrency like Bitcoin a viable endeavour. But the applications of blockchain are far more varied.
Smart contracts
Smart contracts are one such innovation made possible by blockchain technology – though as a concept, smart contracts have existed since the early 90s. The idea is that instead of a paper contract – one that amounts to the words on a page and the interpretation that third parties give them – one could record a contract in the form of computer code. The code not only provides for the terms of the agreement, but the execution of it as well. When the obligations of one party are satisfied, the platform behind the contract will automatically release the benefit owed by the other party.
The key to smart contracts is decentralisation – there are no banks or other third parties involved in the execution of the agreement. The idea is to allow the creation and execution of a contract between two people to be as simple and direct as possible.
The obvious question follows: where is the smart contract actually stored and how can it be possibly be trusted?
Blockchain technology is the solution. The decentralised, theoretically uncompromisable central ledger makes for a perfect arbiter for the integrity of these agreements. Once coded, the smart contract is added to the blockchain ledger, with its integrity provided for in the same way as anything else on the blockchain. If the transaction calls for it, the money at stake can be paid by each party into the smart contract using cryptocurrency, at which point the contract will hold the money in escrow until the necessary conditions are satisfied.
In theory, removing the element of trust between parties to a contract should make for more reliability.
‘What we have realised is that smart contracts are rapidly becoming an alternative way to transact, with more than $10bn raised through smart contracts in the last 18 months,’ says Olga V. Mack, vice president of strategy at Quantstamp, a company working to build security infrastructure for blockchain-based smart contracts.
‘What we have also noticed is the rapid proliferation of this technology. The widely cited figure is that, globally, there were more than 500,000 smart contracts that existed one year ago. That number has grown to about five million that exist today. The use of smart contracts has been growing exponentially and is showing no sign of slowing down.’
Smart and secure
The trepidation surrounding blockchain and smart contracts is by no means limited to those that don’t understand it. Plenty of ardent advocates for the widespread adoption of this technology acknowledge that, like most innovations, users should exercise caution against overreliance.
The execution of the agreement is where the real value of smart contracts is realised, but the process of negotiating, agreeing and coding the contracts themselves necessarily requires a human element. As such, it is subject to the same kinds of vulnerabilities as virtually anything else. There have been a number of high-profile breaches and hacks brought about by improperly coded smart contracts that have resulted in the losses of millions of dollars. Because the process is decentralised, and the money is wrapped up in the contract itself, the normal process of testing, reporting on and fixing erroneous lines of code will not suffice. Smart contracts need to be airtight from day one.
The DAO is a smart contract protocol. By June 2016, over $250m worth of cryptocurrency had been invested in the DAO by nearly 20,000 individuals. On 17 June, a vulnerability in the core code of the protocol was exploited and used to drain over $50m in virtual currency.
blockchain technology allows for a distributed, decentralised and secure ledger.
Vulnerabilities in code are nothing new – even the most diligent traditional financial institutions commissioning software intended to govern staggering numbers of monetary transactions will not expect their code to be free of bugs or vulnerabilities. The potential for catastrophe should these vulnerabilities be exploited is limited: as soon as they are identified, they can be corrected and updated. But because smart contracts rely on the ever-present and immutable blockchain ledger, once a smart contract is let loose into the world, changing it becomes difficult, if not impossible.
This question has led to a burgeoning economy of auditors whose speciality is to review smart contract protocols in order to expose vulnerabilities. This isn’t perfect for the same reasons that any piece of code isn’t completely unexploitable, but the extra step of third-party verification may go a long way in making sure that would-be investors or end-users are confident.
Taking Blockchain In-House
Before taking on her new role as vice president of strategy at Quantstamp, Mack spent nearly a decade working as an in-house counsel, putting her in the unique position of being able to consider the impact of blockchain technology for corporate legal departments.
‘I think at a high level, the opportunity is not all that dissimilar from electronic signatures. I think it will free GCs to be more creative and more impactful on the business side. Smart contracts will be another tool at the disposal of the modern GC, but we’re probably not quite there yet – the infrastructure and platforms are being built as we speak,’ she says.
‘Once we figure out the platform protocol and infrastructure challenges, I would expect at that point the proliferation of applications to take place. It’s good for lawyers to get into this now, both to understand and frankly to help build it – so they are part of building applications as opposed to suffering the results of misinformed others building it.’
‘It’s certainly a revolution. But so far the most impressive applications I have seen are outside the legal world,’ adds Vincent Martinaud, counsel and legal manager at IBM. ‘The most advanced are in trade finance (we.trade consortium), global logistics (the cooperation with Maersk) and in the food ecosystem (Carrefour being the last eminent player joining Walmart, Nestlé and Unilever amongst others), and all these initiatives are underpinned by blockchain technology.’
The Maersk example that Martinaud refers to is TradeLens, the blockchain platform born out of a partnership between global shipping company Maersk and IBM. The aim is to bring the global supply chain into the future by using blockchain and smart contracts to enable smarter collaboration between importers, exporters, customs agencies and other governmental bodies to make international shipping a smoother process without compromising on auditability and security.
‘In the legal field, I don’t think there is anything comparable yet. I’m not saying smart contracts aren’t used or going to be used, but at this moment in time the technology is not as pervasive as in other, more mature sectors.’
It is not hard to imagine the potential uses of blockchain within the legal sphere: anything which relies on record-keeping between multiple parties could find value in the technology. Land registries, particularly in developing countries where record-keeping is beleaguered by inaccuracy and corruption, could be revolutionised, as could intellectual property registers around the world.
That blockchain technology hasn’t become a staple of the in-house toolkit makes sense: the broader business world is still working to realise its potential. It’s also a highly technical and often misunderstood area: while lawyers are used to quickly digesting and using foreign pieces of information, this is a different beast entirely.
As these innovations become increasingly common within business, lawyers will not only have to begin thinking about how they can be leveraged for use on their own in-house teams, but how they can put themselves in a position to give legal advice in a post-blockchain world.
This may not be a perfect fit for a profession that has long been accused of technological aversion.
Blockchain is a field where the two worlds of software development and legal expertise meet. As the applications of blockchain and smart contracts move towards the legal realm, the pressure is on for lawyers to grow their understanding of a field typically left to the CIO.
Gloria Sánchez Soriano, group vice president and head of transformation, legal at Santander, has considered how disruption of this kind might impact the kinds of lawyers that can thrive in in-house teams.
‘Lawyers, and the people we will be hiring in the future must be able to provide legal advice to innovative projects. If you don’t understand blockchain, it will be very difficult for you to provide advice on this. And we are also considering all this in our training programmes at the Santander Legal Academy,’ she says.
Blockchain is a field where the two worlds of software development and legal expertise meet.
‘Santander has a department which is in charge of the legal advice of our innovation areas, but there are also many other areas – for example, corporate investment banking – which have just done a blockchain project with a very technological base, so the lawyers who were traditionally advising these businesses now need to be able to advise about technological issues.’
There is an appreciation among lawyers interviewed and surveyed for this report that while this technology will be important going forward, lawyers are currently not equipped to deal with the change. Just 14% of those surveyed felt that current lawyers were adequately equipped to deal with technological changes within their profession. 61% felt that they were not.
Ready or not, change is coming, but these changes don’t spell doom for the legal profession: they simply mean that there will need to be an adaptation.
‘I do think that it will transform the expectation of competency for lawyers. In doing so, I also ultimately think it will make our jobs more exciting so that we don’t have to do all those administrative things that can be minimised and we can really drive volume- and quality- generating for our businesses,’ says Mack.
‘I think the next 10-20 years will be an exciting time to practice law. We will have an impact, we will be true partners to other business units. There is an increasing trend for legal to be a partner, to be volume and quality generating and to measure all of that. I think this is a technology that will help us to get there sooner and will help legal to become embedded and solidify the support of any business.’
Trepidation and regulation
While businesses marvel at the potential of blockchain, governments around the world are fighting their own battles with the technology. With the potential of blockchain to have a major impact on many highly regulated areas of business, it is inevitable that a regulatory response is coming.
The philosophy at the foundation of blockchain already sits uneasily alongside current regulatory and governmental structures: for instance, the EU’s General Data Protection Regulation (GDPR) dictates that individuals be able to request for their personal information to be deleted by those that hold it, yet the biggest draw of blockchain is the permanence of its record.
The anonymity that blockchain provides for cryptocurrencies also lends itself to use in more illegitimate endeavours. Tax evasion is a concern. Because cryptocurrency transactions are not easily attributable to individuals (if at all, depending on the currency being used) it makes it difficult for tax authorities to detect the lost tax revenue and punish those involved.
Then there’s the hard kind of criminality – money laundering, terrorist financing and drug dealing. For these, the EU has already taken steps to include cryptocurrency in the existing regulatory framework. The latest iteration of the EU’s Anti-Money Laundering Directive (AMLD5) brought cryptocurrency exchanges and certain e-wallet providers within the scope of the regulation. It would put these entities in the same position as traditional firms when it comes to their obligations to implement preventative measures and report suspicious activity relating to money laundering. The new directive entered into force in July 2018, meaning that EU member states will be required to comply by 10 January 2020.
The AMLD5 is not comprehensive, and certain corners of the cryptocurrency world are not covered, including certain wallet providers and independent trading platforms. Also, being an EU creation, it is only applicable to EU member states. As adoption of this technology grows, the need for global collaboration will increase, given its borderless nature.
Other jurisdictions have taken a more suspicious view of the technology. China banned cryptocurrency entirely in 2017. In the same year, South Korea banned initial coin offerings and interested parties are now eagerly waiting to see how the government proceeds from here. Japan was one of the first countries to recognise Bitcoin as a currency, though regulators have been silent on other blockchain-backed innovations.
The tension at the heart of proposed cryptocurrency regulation is an old one. With convenience and efficiency at the core of the blockchain and smart contract value proposition, the inevitable attempt by world tax authorities to take their cut of these transactions may hinder the core draw of the technology. On the other side of the coin, is there really any need for complete anonymity when it comes to financial transactions? This tension will inevitably shape the approaches to regulation of blockchain technology and, ultimately, play a major role in uptake – both for in-house purposes and beyond.
The pressure on general counsel to innovate could be having a trickle-down effect on the external legal advisers they instruct.
The overwhelming majority – 91% – of in-house counsel surveyed for this report felt that it was important that their external advisers kept abreast of new technologies.
‘It is absolutely essential,’ says Gábor Kukovecz, head of legal and operations at Diageo. ‘The baseline is that we must be able to communicate very effectively with our external law firms. This requires that they use state-of-the-art communication and cloud-based collaboration software. In the near future, we will implement a collaboration software in which we work together with our external law firms that they must also fully implement.’
How important is it that your external law firms keep abreast of new technologies?
Despite there being a common recognition that it is an important factor, nearly as many in-house counsel reported that they didn’t know if their external providers were implementing technology to deliver their legal solutions (36%) as those that answered that they were (40%). Just 37% felt satisfied with the use of technology by external firms; 25% were not satisfied, and 38% were unsure.
As the conversation around alternative fee structures and the traditional firm-client relationship continues, many in-house counsel made the point that there is no reason that their efforts to reduce costs and increase efficiency via technology shouldn’t be replicated by their external counterparts. After all, in a number of ways, the GC is to the law firm as the business is to the GC – which is to say, the GC is the client and it should be incumbent on the firm to provide the best value for money.
‘Clients are no longer willing to pay for high numbers of billable hours when they are aware that many tasks can be done faster and cheaper,’ opined Tobiasz Adam Kowalczyk, head of legal at Volkswagen Poznan.
Are you satisfied with the use of technology by your external law firms?
‘Paralegals and associates who once devoted hours for document review can be now easily replaced by e-discovery processes. In a constant pursuit for efficiency and optimisation, clients expect more for less, which has made the legal market even more competitive. Fresh players have entered the market, providing clients with automated and cost-cutting solutions. I see automation as the way forward, making projects smarter and more efficient. Legal automation won’t be un-invented, and – eagerly or not – more and more firms will need to adopt it out of necessity.’
There are also rewards to be reaped in terms of collaboration. The initiatives taken by external firms can serve as a useful model for in-house teams trying to create efficiencies of their own.
‘External firms must have technological systems updated in order to provide us with the most modern solution and to share it with our internal legal team,’ said Ana Soriano, head legal counsel at Inveravante.
Not everyone is as bullish on technology, however. To some, the use of technology is mostly smoke compared to other, softer competencies.
‘The improvement I actually want from law firms is not based in technology,’ said Ruth Pearson, general counsel of LendInvest. ‘I’d be far more inclined to instruct a firm that could demonstrate an investment in understanding their clients – for example, by hiring non-lawyers to improve their commercial acumen and understanding of what drives their clients, moving away from billable hours to a client-focused incentive structure, understanding risk appetite and being able to advise within those parameters, than a firm that thinks it can demonstrate technological innovation.’
‘I prefer a good lawyer not using tech to a bad lawyer using tech,’ stated the general counsel of one large French manufacturing company.
When asked if the question of technology arises when undertaking a panel review of external advisers, just 35% said that it was a factor, while the majority (41%) said it wasn’t a factor at all. With panels becoming narrower and more deliberate all the time, the points on which firms differentiate themselves will take on an increasing importance. Given GC’s evident interest in the use of technology by external firms, this factor may grow in significance in the near future.
‘Depending on the jurisdiction and the business activity being undertaken, it is of moderate importance,’ said the group counsel of one global engineering company. ‘However, in the selection of lead counsel for C-suite-led matters, it has moved to the forefront of selection criteria.’
Despite clear interest from the in-house community, the growth of legal tech hasn’t achieved the same blistering pace that fintech has managed. The rate at which the financial sector has caught on has meant wide-ranging technological innovation, at every level of the industry.
‘As successful fintechs have rapidly matured from start-ups to mature technology disruptors, banks have started the journey to transform their core digital capabilities, with several areas of focus. These include: a digital-native customer experience; big data and advanced analytics; moving towards a scalable technology landscape through cloud and automation; adoption of APIs (Application Programmable Interface),’ says Giulio Romanelli, associate partner at McKinsey & Company.
Part of the reason for the legal profession’s shortfall is a lack of enthusiasm on the part of the legal community and a natural aversion to change, but that doesn’t tell the whole story.
‘There’s a lot of hype in the space and I think there are often very clever technical solutions looking for problems,’ says Chris Wray, chief legal officer of Mattereum, a start-up working to bring blockchain technology to business.
‘Although there is interest in the theory or the potential, I think there’s also, quite rightly, a demand for: what’s the use case right now? I’m not sure I would criticise the profession generally for being somewhat cautious. I do think there’s a curiosity and a willingness to try and learn about both the potential implications and to update skills accordingly but there’s also, I think, the correct recognition that a lot of the use cases are still in the future.’
The reality is that, for blockchain, alongside more prosaic types of technological assistance, many legal teams remain in monitoring mode – surveying the field and keeping tabs on likely applications, but not necessarily investing just yet.
‘We simply have to be clever in finding the right applications, and also doing a little bit of trial and error rather than just rushing to one of the service providers, buying their generic application and then learning later that it was not the most suitable application,’ says Dr Alexander Steinbrecher, head of group corporate, mergers and acquisitions and legal affairs, Bombardier Transportation.
‘I’d rather invest a little bit more time window shopping and defining our needs rather than rushing ahead and being the first users.’
The sense among the in-house counsel surveyed was that their private practice counterparts aren’t faring much better: just 40% of respondents said their external legal advisers were implementing new technology to deliver their legal services and solutions. Still, one common sentiment among those interviewed was that private practice has a role to play in being a first mover in the legal tech takeover, setting the example for in-house teams to follow.
‘When we first undertook the research process of finding out what was in the market, it came as a pleasant surprise to see that law firms are leading innovation in the legal sector and how many are doing things like working with start-ups in developing new technology,’ says Cristina Álvarez Fernández, head of legal Europe at transport infrastructure developer Cintra.
‘Clients in particular are trying to change the way that they invoice, looking at alternate fee arrangements or, in some cases, bringing more work in-house. As a result, I think they have been forced to find ways to reduce cost and maintain their profitability. But at the same time, they will have no doubt seen other industries disrupted by technology and seen that this is the way forward.’
In an increasingly competitive European marketplace for legal services, corporate pressure on the billable hour is driving law firms (including those at the sharper, mid-sized end) to increase their own efficiencies, and reshape their service offering and value add for companies.
‘Let’s be fair: some parts of a lawyer’s job are not very fun. You want to be doing the legal work and so the technology enables that by taking away a lot of the drudgery. The smart lawyers understand that they can pull that off, they can get more work, win more competitive panels, they’ll grow their share of clients and have a more fulfilling legal practice,’ says a spokesperson at one law firm-sponsored legal tech accelerator.
Bridging the Gap between Technology and Four Generations
When acting for in-house counsel, adaptability is a quality that independent law firms have in their favour. It is the agility of their operations and the ongoing awareness of novel developments that can give them the competitive edge.
Globally, experts predict that by 2020, millennials and generation Z will account for more than half of the world’s working population. For the first time in history, four generations with an age gap of over 50 years will be working side-by-side in the same environment. Millennials are rapidly becoming the most powerful connector between these generations and will soon be in leadership roles within firms and in-house counsel positions. They are the first generation to grow up in a fully digital society, which accounts for a completely different approach to objectives. Leveraging the most technically savvy talent, coupled with a firm’s visionary decision-makers, will inevitably create a lucrative approach to meeting and exceeding client expectations.
As found by a survey for millennial lawyers and their millennial clients conducted by World Services Group, firms should look to develop expansive multigenerational strategies for their new client groups, offering the most comprehensive array of professional services. They should look internally to create committees that focus on the millennial client, on process efficiencies, and on keeping current with the latest technological developments. Then, by focusing on the client’s business as a whole, savvy firms may quickly become trusted partners asked to act on their strategic advice for deals or territories that they had not previously supported.
The biggest evolution to the legal industry is yet to come, and while technology is the cause, it is also the very thing that is bridging the generational gap in the industry. The successful law firms will be easily identifiable, not because of the technology they utilise, but because as a firm, the indispensable need for flow among the generations will create a new culture that more easily matches client needs.
But some in-house are more sceptical about the extent to which law firms are truly aboard the innovation wagon.
‘It’s mainly driven out of fear. It’s less: “Let’s be super innovative and change the market and then ultimately be super profitable”, it’s more: “I think something’s happening and it may have a negative impact on our business model so let’s work on it to manage the negative impact”,’ says Matthias Meckert, head of legal at PGIM.
‘The activity on the side of the law firms – all of them talk the talk but only a few are actually able to deliver. It may have something to do with the fact that law firms are run by lawyers and rarely by entrepreneurs. Behind the scenes, many admit that they are fearing the investment. The ones who invest do really exciting stuff.’
While in-house teams might be more cautious when it comes to making decisions on which solutions to adopt, at law firms, the conversation is sometimes clouded by existential angst.
‘The conversations we are having with in-house teams on the application of AI technology are different to the conversations we are having with law firms. With law firms, there’s always that concern of: “If we adopt this technology, how is it going to affect our model? How is it going to change the way that clients perceive us? Is it going to make the client value us less because we’re using technology to support us in the work?” Whereas with in-house teams, it’s fairly straightforward: “I need to make a change, and I can see that this is going to make my life more efficient, more interesting and more stimulating” – it’s a much less complicated discussion,’ says Emily Foges, CEO of legal AI platform, Luminance.
Disruption – at the margins
When asked whether technology had the potential to disrupt the legal profession over the next five years, 84% said they believed that technology will be disruptive. The real trouble comes when trying to drill down on what form this disruption might take.
Just 6% of those who believed technology will be disruptive in the next five years thought that the disruption would be negative. 66% felt that it would be somewhat positive, and 29% thought that the disruption would be entirely positive.
Between the believers and non-believers, there is room for nuance. Many GCs are taking an approach that falls dead in the middle of those who think that tech is going to revolutionise the profession in moments and those who think it’s all smoke and mirrors with no real capacity for change. Instead, they believe that rather than technology being a disruptor of the in-house legal role, it does not go far enough to modernise and truly transform.
‘By implementing some tech tools you get a 10%, maybe 20% efficiency increase. This is not really disruptive, this is where I am improving a little bit, I’m streamlining existing structures, but not changing the fundamentals,’ says Meckert.
‘Change gets really exciting once you say, “Let’s start big picture and not with the details – why are we doing that, how do we create value for our business, should we outsource or should we collaborate with others?” Then you start really changing the game.’
Most in-house commentators are confident that the core tasks carried out by lawyers are unlikely to face the kind of disruption that renders the profession obsolete. Although standard and routine work is likely to eventually be automated, businesses will still require lawyers to provide advice on more complex issues such as risk management and corporate governance. Many anticipate an opportunity to engage in more strategic, value-added work, such as relationship-building, lobbying and training across the business. Jobs lost are predicted to be on the routine end – perhaps paralegals, those providing exclusively contractual or notary services, or those providing non-complex high street advice.
private practice has a role to play in being a first mover in the legal tech takeover.
‘According to one global consulting firm, 85% of the jobs that people will have in 2030 don’t exist today – which is quite frightening, because it means that only 15% of today’s jobs will survive to 2030. But I would not say that 85% of what I’m doing with my legal team will no longer be done by us in 2030,’ says Steinbrecher.
‘… Smart in-house legal teams will have managed to develop in-house legal expertise and knowledge in areas where they are no longer dependent on external lawyers, and they can only do that because they are no longer wasting their time and energy on low-skilled, legal administration work.’
Far from reducing headcount in-house, it will actually help combat attrition, some predict.
‘People are less interested in doing day-to-day work on a repetitive basis. People would like to do projects which are more challenging, would like to be empowered. So if you could outsource more administrative and bureaucratic things to a service provider or a tech solution, super, as those tasks need to be completed,’ says Meckert.
‘We embrace those solutions as resources would become free to do higher value, higher risk, more intellectually challenging, more fulfilling work. This keeps my team engaged and allows a better contribution towards the business.’
Similarly, on the law firm side, a digital revolution must be accompanied by an analogue one for any real disruption to occur.
‘Law firms need cultural disruption. Lots of law firms talk about being disruptive, but very few are. There has been very little disruption of law as a service and the change that will be best received by their clients is unlikely to be technology led,’ says Ruth Pearson, general counsel of LendInvest.
A (value) chain reaction
The ecosystem of law firms, their clients, businesses, their in-house teams, and third-party legal tech providers has always been delicate, but the surge of innovation and technology is challenging the value chain to shift to accommodate the changing roles played by each link.
In light of this, each player must go through a process of understanding the space they occupy in this new value chain. Suddenly liberated by the digitalisation of research, due diligence, analysis and document drafting, lawyers will be free to build on the customer relationship by being more responsive and alive to the impact of their advice – particularly in companies moving at a highly innovative pace.
‘If my business is now fully embracing, for example, processing and collecting data and I could patch my piece of the puzzle – the legal data – into that platform, that’s great. In the age of platform industries, the law department can’t be an island, it needs to be integrated and fully aligned with the business and its digital strategy.’ says Meckert.
‘The best inspirations are those I get from conversations outside my “home” industry or with non-lawyers. Those ideas challenge the way we think traditionally.’
Patching into the corporate zeitgeist enabled the Cintra legal team to leverage company-wide investment in technology for the legal team and plan its own technological upgrade. The legal team has worked closely with the IT team to investigate potential new legal tech tools.
‘This isn’t something that’s unique to legal, it’s been happening in other departments already. In general, our company and the group are very interested in innovation and new technology,’ explains Álvarez Fernández.
‘I think that in time, we will see the relationship between in-house departments and external firms change as a result of technology – mostly where fees are concerned. I suspect that the fees of law firms can be reduced, or at least controlled, depending on the market and matters at hand. But I don’t think the interplay will shift.’
Many agree that they do not see an Uber-type revolution arriving on the horizon for the external legal services market, although most concede that there will be some future adjustment of legal service providers.
‘It will be a game changer in the end. Alternative service providers are entering the market in Europe (some have been in the States for a long time now) and some of them have their own technology,’ says Sánchez Soriano.
‘I’m also seeing small law firms with very, very specialised people in technology projects. I think that is becoming interesting because these are not the typical law firms that we are used to working with, but maybe for very technological projects, you’d call these people who are doing things in blockchain or using other technologies.’
Human resources
One other very significant way in which this trend towards technology is changing legal departments and private practice firms is in the makeup of their personnel. 60% of those surveyed for this report felt that today’s lawyers were not adequately equipped to adapt to technological changes within the legal profession.
In response, a focus on technology innovation has led, in some cases, to the creation of roles to specifically facilitate transformation, as innovation managers, data scientists and legal technology administrators begin to enter the field, particularly in law firms. However, such functions are currently less common in-house.
‘Sometimes I have found people in-house who, additionally to their own duties, are in charge of innovation, but the problem in many cases is that these people don’t have a real budget for implementation or even worse, that they don’t have the support from the general counsel or the wider business,’ says Sánchez Soriano.
But, at least on the technical side, some predict that these roles could eventually permeate the in-house ecosystem, as legal specialists with the responsibility for licensing and maintaining tools and platforms like the standardised written and coded terms utilised in smart contracts. Digital legal officers or lawyers that compile software tools with intelligent applications could evolve.
‘The new role of lawyer is more likely a legal process designer to some extent,’ says Dr Volker Daum, general counsel of B. Braun Group.
‘… This will create and maintain jobs, and may even create future jobs, because it’s not just legal advising anymore – we are part of the process and the value chain.’
But equally, although the nature and nascence of new technology makes it difficult to immediately separate the truly transformative from the passing curiosity, hard tech skills of some sort will inevitably be in need of an upgrade.
‘We have projects focused on everything from blockchain to machine learning, so as lawyers, we need to understand these technologies but also provide legal advice for the new questions and challenges that will arise as a business,’ says Sánchez Soriano.
‘We put a high premium on lawyers who understand our business well.’
‘…We will be considering all this for the training we need to give to our lawyers and the people we will be hiring in the future, so that we are able to provide legal advice to innovative projects. If you don’t understand blockchain, for instance, it will be very difficult for you to provide advice on it.’
Counsel are divided over the extent to which it will be necessary for lawyers to learn coding, beyond the skills that will likely be taught as a routine part of elementary education for future (and, to some extent, current) generations.
Shaking the foundations?
If lawyers entering the profession today are required to be of a different breed than those that came before them, the question must be asked: are legal education institutions preparing them for this?
Up until now, the bedrock of a solid legal training has been the time spent as a trainee or junior lawyer on due diligence, contract drafting and analysis.
‘We can already remember (fondly or not) the time when, not so long ago, junior lawyers would spend hours preparing first drafts of transactional documents and hence were indirectly trained to the underlying issues behind a specific drafting or wording,’ says Olivier Kodjo, general counsel of ENGIE Solar.
But even if the potential impacts of automation and AI are overblown, these institutions will have to adjust to avoid an undermining of the experiential foundations of the profession. Alternative training models will likely have to be found: a training that neglects the technological skills that are becoming part and parcel of the job is becoming increasingly unfeasible.
‘As educators, we need to be doing these things… Even if you are not convinced, you need to better train your students on these kinds of tasks because they ask for it,’ says Professor Christophe Roquilly, Dean for Faculty and Research at EDHEC Business School.
However it is achieved, demystifying technology for lawyers at all levels – and thereby equipping them for an innovative, digital future – will likely be a bridge to the elusive culture change that underpins the successful evolution and future-proofing of the industry.
‘Innovation flows much better when people are able to see machine learning not as magic, not as something that someone with a magic wand goes ‘Ping!’ and it starts working,’ says Professor Enrique Dans, Professor of Information Technologies and Systems at IE Business School.
In today’s business world, more than ever before, learning is a lifelong pursuit and it is the responsibility for those at the top of each organisation – the corporation, the law firm, the law school – to have the foresight to set a tone that prioritises innovation and agility. For true innovation to take hold, there needs to be an agreement of what constitutes good service and an alignment of priorities and mindsets throughout the organisation and the value chain – to avoid each party being left incompatible with the other.
Much has been said about whether disruptive technologies could spell the end of the legal profession as we know it, but GCs aren’t worried. In fact, they’re excited.
Of those in-house counsel surveyed for this report, the vast majority agreed that technology will disrupt the legal profession in the next five years, with 94% acknowledging that technology will be at least somewhat disruptive. 32% said that they feel this disruption will affect the profession to a great extent.
Every respondent that said they expected there to be some disruption in the next five years felt that this would be positive, with 71% saying that the disruption will be ‘somewhat positive’, and 29% saying that it will be ‘entirely positive’.
‘I’m fully convinced of the benefits of the AI, and we all need to adapt to what is coming, because it is coming, whether we like it or not,’ says Cristina Álvarez Fernádez, head of legal at Cintra. ‘I’m 100% optimistic this technological revolution is going to be good for us: we’re simply going to provide legal services differently.’
This positivity is echoed by the approach many of the GCs interviewed for this report have taken to the issue: embrace disruption and reap the benefits.
‘The legal function needs to and can play a role in showcasing the benefits of introducing technological solutions in an enterprise,’ says Johan Huizing, associate general counsel at Itron. ‘We must be leaders in adoption of high-performing technology and not merely followers. Only then can we play a role as thought leaders and will we be accepted as team members that have value for the business.’
To what extent do you agree that technology has disrupted the legal profession in the past 5 years?
‘Legal professionals who want to thrive in modern business must lean towards technological transformation,’ adds Tobiasz Adam Kowalczyk, head of legal at Volkswagen Poznan.
‘The great news is that lawyers have the tools at their disposal to enable this change. The digital revolution offers us the chance to compete, and it provides law firms and legal departments with the ability to transform into something much more exciting. The legal profession will not disappear, but it will surely change due to technology. This shift will most probably trigger new forms of what being a lawyer means. The sooner we accept it as the new normal, the better off we’re going to be.’
One general counsel from a prominent international engineering firm, who did not think that AI will be a factor within the next ten years, said that their main concerns were ethical.
To what extent do you agree that technology will disrupt the legal profession in the next 5 years?
‘How can you build trust in code? There are ethical questions around its use in certain applications such as disciplinary actions or other employment-related areas,’ they said.
‘It’s not all hype, but the profession is very conservative and the ultimate question is: to what extent will management trust a “machine”?’
Virtually all of those surveyed agree that AI will be a disruptor in the legal industry, with just 9% feeling that it will not be a disruptor at all. Despite this apparent enthusiasm, just 6% said their team currently uses an AI solution, all of whom said they only use it to assist in low-level work. Within this small group, overall feelings on AI’s ability to act as a disruptor in the industry are positive: 83% agreed that AI would be a disruptor, with half feeling that such disruption would come between the next five and ten years.
When asked which factor was more important when considering adopting an AI-based tool, all respondents cited either the reduction of costs (38%) or an improvement in quality of work (62%).
‘Looking forward, AI will be able to cover all technical and easy legal work: cost reduction, quality improvement,’ says Artem Afanasiev, general counsel of DIXY Group.
Overall, the key disagreement comes over the question of when, not if. Over half feel that AI-based disruption would come between the next five to ten years, but a portion said they thought the disruption would come much later: 23% think it won’t be a factor for at least ten years.
Overall, how positive do you think technology disruption will be?
Then comes the question of preparation. If disruption is coming for the legal profession, all eyes will turn to the incumbent lawyers to see how they fare in response to the seemingly inevitable changes heading for their profession. Whether or not legal education institutions and professional development programmes throughout Europe have left today’s lawyers well placed to adapt and thrive will be imperative.
When asked about current lawyers’ preparedness for technological disruption, the in-house counsel surveyed and interviewed were less enthusiastic. 14% felt that today’s lawyers, on average, were adequately prepared; 61% did not. The rest were unsure.
‘AI is limited for the majority of in-house right now because the base data sets are not in place, substantial enough or well enough maintained,’ explains the general counsel for a prominent consumer goods brand.
‘This is a real point of difference with the accounting/finance world where recording data in a structured way has always been the order of the day – that area will see a huge impact from AI in the near future whereas in-house legal first needs to get its ducks in a row, change its behaviours and set that foundation upon which expensive AI solutions are built.’
As corporate leaders, in-house counsel are faced with the challenge of determining which new technologies can bring the biggest impact to their operations. As we hear from in-house lawyers and others who have contributed to this survey, AI and other forms of technology can enhance in-house legal departments in many ways: due diligence review, first-draft contract preparation, contract management, legal operation analysis, litigation analysis, legal research and much more. AI can create efficiencies in previously labour-intensive legal processes, and therefore provide counsel with the luxury of time for problem solving and applying legal judgement and analysis.
But the pace with which technologies are developed necessitates a complicated analysis of return on investment, and whatever path is chosen is always done so with risk.
These new processes will certainly influence change within in-house departments and law firms alike. Focusing on where time is best spent and developing a strong base objective is only the tip of the iceberg as these developments continue. Going forward, the legal leaders in organisations will be constantly tasked with seeking technologies that best fit their unique business needs and objectives.
The key for decision makers will be to strategically choose and implement systems and processes that unlock the true potential of their teams, and point the way to the future of their organisations. It will require a change of mindset.
As a strategic business partner to in-house counsel and our members, WSG makes technology and innovation a cornerstone of its core service objectives. With immediate access to distinguished professionals and the real-time sharing of leading-edge information, we support firms and clients in their ability to capitalise on business objectives.
As customers, professionals in and around the legal profession – such as those leaders featured in these pages – will be arbiters of the success, or otherwise, of new tools, applications and services. Professionals such as these are at the helm of this potentially unbounded – yet risky – integration as machines and humans share everyday challenges.
WSG congratulates those who participated in this report, and thanks them for their keen analysis of new technologies – and the future of the industry.
Between the reams of paper (literal and virtual) spent discussing the question of how technology will affect the legal profession, as well as the thousands of legal tech companies springing up around the world, technology is on the minds of in-house teams of all sizes and from all sectors.
But, often, what isn’t communicated is exactly how in-house counsel feel about the technological revolution hitting their profession and how their teams and businesses have responded – if at all.
To that end, GC magazine in partnership with World Services Group went out to a selection of elite general counsel from across Europe with a comprehensive survey covering all things related to the use of legal tech at in-house teams.
The responses came from a vast selection of in-house counsel in a diverse range of industries. From finance and insurance, to healthcare and IT, the opinions collected and presented in this report paint a fascinating picture of the contemporary state of technology within the in-house legal community in Europe.
These responses, explored in detail in this report, provide a valuable framing of the wider discussion about technology and its various applications, both from the perspective of an in-house remit, as well as a broader look at its impact on the profession. From the pressures on external advisers to get ahead of the technological curve, to the so-called revelation of blockchain and its predicted effect on how legal work is conducted, the topic is vast.
It’s evident that technology is already making an impact on the profession. Of those surveyed, 84% of in-house respondents reported that they use some form of specialised legal technology within their legal department, with 82% revealing that their department’s use of technology had increased in the past five years. For a profession that’s often accused of being filled with technological laggards, that’s a significant change, and one which only stands to become more pronounced when you consider that every single survey respondent acknowledged that technology can enhance outcomes for in-house departments.
there is clearly an appetite for the kinds of solutions being offered in the legal tech marketplace.
At a base level, there is clearly an appetite for the kinds of solutions being offered in the legal tech marketplace. Why this need has arisen, what form it should take, and what effect this is likely to have on the profession in the long term are more nuanced questions, requiring a holistic view of not just the survey responses, but the opinions and activities of the various players in the legal tech market.
Why bother?
With over 1,400 legal tech companies around the world, the world of innovation has exploded into the lives of lawyers – in-house and private practice alike – with some interesting (and, at times, conflicting) results, not least given the notoriety of the legal profession as an outpost of conservatism.
But there is a clear need, and to predict where legal tech is going, it is crucial to understand what is driving that need for in-house counsel.
For the 84% of survey respondents who indicated that they were utilising specialist legal technology within their departments, increased efficiency was the most frequently cited factor that general counsel were considering when implementing new technology, at 84%. That was followed by ease of use at 50%, customisability at 32% and ability to integrate with existing systems at 31%.
If the pressure driving the push to adopt legal tech is the need to provide the business with better efficiencies and more value for money, then the cost of entry for many of these legal tech solutions is a barrier that needs to be overcome in order to gain the support of the wider business. A clear-sighted approach to tech only intensifies the imperative for a cost-benefit analysis, and, seldom a profit-centre, in-house departments know more than most about the need to do more with less.
How is technology changing relationships in the legal industry?
The headlines are fraught with impending doom and gloom for lawyers today. The reality is that there are only a handful of law firms racing to implement the latest innovations that technology has to offer. Law firms are slow-adopting, service-based partnerships driven by providing the best value to their clients. It is the relationships that hold the most significance for both in-house counsel and law firms alike. Therein lies the reason why, ultimately, the true drivers of change within firms are their clients.
In-house counsel can better identify reasons to pressure firms to evaluate their processes, and firms are doing just that to find opportunity. However, it is the re-evaluation of simple processes and the use of current technology within the firm that can bring enormous gains in creating better efficiencies without ever adopting anything new.
For the leading firms who are a part of World Services Group (WSG), being able to leverage innovative technology with firm relationships globally is just one resource that has enhanced the speed with which firms can react to in-house needs. Though technology will continue to play an incremental role in the firm’s evolution, it is the ‘people’ that will continue to be the key to success in the legal industry.
Like the motivation for WSG, which is to create a powerful relationship-based network among the premier firms in each location of the world, it is not the technology, but the access to important technology, that will be paramount. There will be no ‘robolawyer’ to take away the personal relationship required between in-house counsel and their advisers to achieve true results. It is the proven, results-focused relationships that are becoming the true innovation.
Firms are not losing business because of their lack of cutting-edge tech, but they should take time to analyse processes, investigate new technologies and invest in access to long-term solutions for their clients. That is what will retain ongoing, long-lasting client relationships in the face of an increasingly tech-heavy world.
‘To remain competitive, we need to increase productivity while enhancing the quality of legal processes against an ever decreasing cost base. In order to achieve this there is no other solution than to embrace technology,’ explains Johan Huizing, associate general counsel EMEA at Itron.
It was common refrain to hear a willingness from general counsel to adopt legal tech solutions throughout their department – but getting buy-in from the business and the necessary budget to execute was a clear hurdle for many. While 70% of the in-house counsel surveyed for this report felt that their company was supportive of implementing new technologies, only 56% had seen this translate to a bigger budget allocation on their balance sheets.
‘If you consider that it’s a strategic issue for you, probably it’s better to internalise, or to invest into some legal tech and then to see the results. I mean invest in terms of putting money into external projects, not only buying a product or a service,’ advises Professor Christophe Roquilly, dean for faculty and research at EDHEC Business School.
But for teams with a smaller head count in particular, taking that first step was often the hardest. Teams with smaller headcounts had the worst rate of uptake of technology, with 42% of departments with less than ten people saying that they didn’t use any legal technology at all. They were also less likely to have received an increase in budget for technology over the past five years, with only 47% reporting an increase in budget for technology (compared with 57% overall). Yet, in many cases, it was smaller teams who thought they stood to benefit the most from tools that can deliver better bang for the buck.
‘There is still the need for smaller teams to provide increased efficiencies, but the budget doesn’t allow for it. It’s then left to us to find ways to use technology to provide efficiency, but essentially for free. That’s not to say it can’t be done, it’s just more difficult,’ said one general counsel from the consumer goods sector.
Some corporates we spoke to were lucky – or large – enough to have internal resources for tackling bespoke software development projects, or budgets for cultivating start-up arrangements – though the latter is much less common for in-house teams than for law firms. But whatever the infrastructure or budget available, investment in tech requires bravery, given the unpredictable return on investment and, in many cases, the long-term nature of that return.
But while budget proved to be one of the biggest predictors of tech use and implementation within in-house legal departments, communication and demonstrating the value – particularly for larger companies which required a higher degree of coordination across existing systems – was also proving a challenge.
the predictive power of technology is encroaching on the legal system itself.
‘Money is nice, but implementing a new bit of technology will require the cooperation of the whole business – from the board down to the IT department. So money is something, but it’s not the only thing,’ explains one general counsel from the utilities sector.
Types of tech
The legal applications of technology are vast, ranging from the rudimentary to the complicated. Generating by far the most interest among those surveyed were the basics: for example, the most commonly cited use of technology was for contract management, from 55% of respondents.
But technology can provide legal departments with solutions far beyond a contract management system (often little more than a repository of documents) or a standard contract template.
Software for law firm relationship management, including e-billing and increasing transparency around legal spend, is often seen as a boon, and such tools can be make or break for a frictionless relationship. At present, 20% of respondents cited that their use of technology included tools for law firm relationship management, but based on the interviews complementing the quantitative research, this is an area that appears to be prime for expansion in the short term.
‘We demand use of our billing platform and insist that our rules for invoice submitting are followed. This has increased our understanding of the drivers for outside legal spend and budgeting and resulted in a better control of such spend,’ explains Huizing.
‘We move away from firms that are low performers when it comes to the use of our billing solution or that execute poorly on following our instructions for entering reports or invoices.’
At the least, technology can assist external firms to be more cost-efficient, so that those savings can then be passed on to their in-house clients. But there are more benefits to be reaped from an internal-external relationship that leverages technological solutions. Through this, the firm and the in-house department can cut through the noise that comes from two independent, far-away entities trying to collaborate with one another.
‘We’re building collaborative tools. We saw that a lot of time goes into emails and phone calls between a lawyer and a client. Now obviously that’s part of the personal relationship with the lawyer and client, and that’s not going anywhere. But if you’ve got five emails back and forth trying to describe what part of the land the lawyer is talking about, that’s just inefficiency. So by bringing both the lawyer and the client onto a collaborative workspace on [our] platform, you can cut out a lot of that needless, repetitive back and forth,’ says Ed Boulle, co-founder of legal tech company Orbital Witness.
‘The baseline is that we must be able to communicate very effectively with our external law firms. This requires that they use state-of-the-art communication and cloud-based collaboration software,’ adds Gábor Kukovecz, head of legal and operations at Diageo.
‘In the near future, we will implement a collaboration software, in which we work together with our external law firms, that they must fully implement.’
Far from being limited to external relationships though, tools and platforms which assist legal in becoming more accessible to the wider business also proved popular.
‘Legal is building knowledge management tools to get to a single source of truth – a lot of the technology we’re using, because we’re operating at scale, supports us when we need to have information held reasonably accessible, so that everybody can rely on them,’ explains Nina Barakzai, general counsel for data protection at Unilever.
IBM also has a shared knowledge platform called the Legal Community, which is used to integrate items such as contractual provisions, presentations and internal processor memos on regulations.
‘It’s a collaborative community space, and that’s very useful. You have owners, who can replace or change things on a particular subject, and it is shared with all the rest of us who are members,’ says Vincent Martinaud, counsel and legal manager at IBM.
Teams with smaller headcounts had the worst rate of uptake of technology.
Legal case management is another popular focus and 40% of in-house counsel surveyed cited case management as one of their uses for technology. This can include the basic paperwork-inducing case management tasks, but can also extend to case review administration and analytics.
Increasingly underpinning many tools is artificial intelligence (AI), as machine-learning tools are designed to quickly parse and categorise vast amounts of information, presenting it back for lawyer review in a fraction of the time taken for junior associates or paralegals to do the same.
‘I really think that our job will change, especially the analysis of documents, because of the way AI now is able to read and understand natural language – including your notes and the ability to decipher a picture, for instance,’ says Martinaud.
At the outer reaches of technology applications in the sector are predictive justice tools, employed to forecast case outcomes, including judges’ decisions – although these are by no means widespread or particularly popular among those who contributed to this report. But, as algorithms creep into our everyday lives, often unseen, the predictive power of technology is encroaching on the legal system itself, for example, in the criminal justice system.
‘[In Spain] work is being done on “algorithmic justice” – for petty thefts and things that are repetitive, the possibility of being able to come up with a first verdict, of course allowing the two parties to appeal if they don’t agree with the verdict, but releasing many human hours that could add value in more complex cases,’ says Enrique Dans, professor of information technologies and systems at IE Business School.
‘All the things related to an insurance claim, traffic problems when there’s no victims for example, these could be very well examined right now, with the current state of technology, by algorithms. You could ask one insurance company to negotiate with the algorithm of the other and get into an agreement, only bringing the human lawyers in if they are really required. That could take away a significant part of the burden for lawyers right now.’
Measuring the impact
When asked whether technology had the potential to disrupt the legal profession over the next five years, 84% said they believed that technology will be disruptive. The real trouble comes when trying to drill down on what form this disruption might take.
Just 6% of those who believed technology will be disruptive in the next five years thought that the disruption would be negative. 66% felt that it would be somewhat positive, and 29% thought that the disruption would be entirely positive.
Short of profession-changing disruption, technological tools like collaborative platforms, AI document review and smart contracts, and the increased automation that they facilitate could adjust the day-to-day lives of lawyers in subtler ways, by disrupting routine, everyday processes. However, introducing more technology often means more constraints on flexibility.
‘It does start to mean a little less flexibility and a bit more rigidity around the terms you’re putting in place and the structure of the relationships – because it has to have been thought out in advance, especially if you have multiple parties involved in supply chains,’ says Chris Wray, CLO of blockchain start-up Mattereum. ‘It’s kind of legal design – mapping out who are the parties here, what are the contractual relationships and what are the key provisions and then, given all that, once that’s clearly in mind, what is it we’re trying to automate, and have we mapped out different kinds of disputes that may arise and provided appropriate procedures for the resolution of those disputes?’
Of all current technological innovations, artificial intelligence has undoubtedly generated the most hype, and the most fear. Wherever AI goes, the image of a dystopian future is never far away, nor is a conference room full of nervous lawyers.
The reality, of course, is quite different. Some corporate legal teams, particularly those already in the tech field, or those at companies handling huge amounts of customer data are ahead of the curve. But, for many in the legal world, the future is a far-off land – for now.
‘When you hear people saying that tomorrow everyone will be replaced by robots, and we will be able to have a full, sophisticated conversation with an artificial agent… that’s not serious,’ explains Christophe Roquilly, Dean for Faculty and Research, EDHEC Business School.
‘What is serious is the ability to replace standard analysis and decisions with robots. Analysis further than that, when there is more room for subjectivity and when the exchange between different persons is key in the situation… we are not there yet.’
Much of the conversation around AI, particularly in the in-house world, remains a conversation about potential. The expanding legal tech sector is teeming with AI-based applications in development, but on the ground, even in the legal departments of many of Europe’s biggest blue chips, concrete application appears to be limited.
‘I think the US may be a bit further down the road than Europe. AI is coming, people are thinking about it, some in a partial way, but it will be developing quickly in the coming years. It may have more or less the same role as the internet had 15 years ago changing radically the way we work, but we’re not there yet,’ says Vincent Martinaud, counsel and legal manager at IBM France.
‘While the legal function may change to the extent that there are tasks we may not do anymore in the future, does that mean we will be disrupted? I don’t think so.’
Those views largely align with the general counsel surveyed across Europe on AI.
Only 9% of those surveyed anticipate AI becoming a disruptor in the legal industry within the next two years. 59% of those surveyed expected AI to be a disruptor within the next five to ten years, with the remaining 32% saying it would not be a disruptor within the next decade.
Understanding Argument – Professor Katie Atkinson, head of the department of computer science at Liverpool University
‘You can model argumentation in all sorts of different specific domains, but it’s particularly well suited to law because arguments are presented as part of legal reasoning.
It could be a computer arguing with a human, or it could be two machines arguing autonomously. But it’s basically looking at how arguments are used in order to justify a particular decision and not another alternative. We do that through constructing “formal models”, so you can write algorithms that can then decide which sets of arguments it is acceptable to believe together. That provides you with automated reasoning and, ultimately, a decision about what to do and why.</lip
It’s not necessarily trying to replicate what humans do, it’s more trying to take inspiration from how humans argue and then get an idealised version of that. There’s literature going back to the time of the ancient Greek philosophers on how people argue, so we take a lot of inspiration from that work, and also from legal theories – we look specifically at how legal argumentation is conducted.
What you’re trying to do is come up with a model that can be applicable over multiple situations and then you just feed in the specific facts of specific cases into those models to determine the decision in that case.
Looking at an idealised form of argumentation doesn’t necessarily mean that we can’t consider nuances, preferences and subjective information – all of which can also be modelled.
My own particular research has looked at how we can build these models of argument and then test them using sets of legal cases that are well known in the published literature on AI and law. Over three domains we got a 96% success rate in replicating the human judges’ decision and reasoning, and we’ve published work on that evaluation exercise.’
While the legal industry may represent a potentially lucrative market for software developers, it does not offer the potential gains of sectors like healthcare or finance.
‘In AI, we see many developments with our cars, many developments in the healthcare sector, and therefore changes in these sectors will probably come faster. In the legal field we do see changes, but I don’t think we are at the edge of it,’ notes Martinaud.
With relatively few lawyers utilising AI solutions at present (8.8% of survey respondents reported using AI solutions – with all applications being in low-level work), perhaps it’s time for a reality check.
Applications
For many in-house counsel, the chat bot is the most readily available example of how AI (in a first-stage form) can make life easier for in-house teams. At IBM, Martinaud is using Watson, the company’s deep learning AI for business. Through this platform, the legal team uses, for instance, a chat bot called Sherlock, which can field questions regarding IBM itself – its structure, address, share capital, for example. The team is also working on a bot to answer the myriad queries generated by the business on the topic of GDPR, and on a full data privacy adviser tool which can receive and answer questions in natural language.
‘These are the kinds of questions you receive when you’re in the legal department, and it’s very useful to have these tools to answer them or to ask the business to use the tool instead of asking you,’ says Martinaud.
‘An additional example of Watson-based technology that the legal team has started using is Watson Workspace, a team collaboration tool that annotates, groups the team’s conversations, and proposes a summary of key actions and questions, which is organised and prioritised.’
Another early use-case for AI in the legal profession has been the range of tools aiming to improve transparency in billing arrangements.
Last year, IBM stepped into the mix with Outside Counsel Insights, an AI-based invoice review tool aimed at analysing and controlling outside counsel spend. A product like Ping – an automated timekeeping application for lawyers – uses machine learning to track lawyers as they work, then analyses that data, turning it into a record of billable hours. While aimed at law firms, its applications have already proved more far-reaching.
Daniel Saunders, chief executive of L Marks, an investment and advisory firm that specialises in applied corporate innovation, says the technology is a useful means of monitoring service providers’ performance.
‘As someone who frequently is supported by contract lawyers et al., increasing the transparency between the firms and the clients is essential. Clients have no issue paying for legal work performed, but now we want to accurately see how this work translates to billable hours,’ he says.
‘Furthermore, once law firms implement technologies like Ping, the data that is gathered is going to be hugely beneficial in shaping how lawyers will be working in the future.’
Information management
The clear frontrunner in terms of AI-generated excitement among the corporate legal departments who participated in the research for this report was information management, which can be particularly assisted by developments such as smart contracting tools.
‘Legal documents contain tremendous knowledge about the company, its business and risk profiles. This is valuable big data that is not yet fully explored and utilised. It will be interesting to see what AI can do to create value from this pool of big data,’ says Martina Seidl, general counsel, Central Europe at Fujitsu.
Europe’s race for global AI authority
Artificial Intelligence (AI) is on course to transform the world as we know it today. A 2017 study by PwC calculated that global GDP will be 14% higher in 2030 as a result of AI adoption, contributing an additional €13.8tn to the global economy. The same study states that the largest economic gains from AI will be in China (with a 26% boost to GDP in 2030) and North America (with a 14.5% boost) and will account for almost 70% of the global economic impact. In addition, International Data Company (IDC), a global market intelligence firm, predicts that worldwide spending on AI will reach €16.8bn this year – an increase of 54.2% over the prior 12-month period.
The runners in the AI race are, unsurprisingly, China and the United States, but Europe has pledged not to be left behind. The European Commission has agreed to increase the EU’s investment in AI by 70% to €1.5m by 2020.
Closing the gap
The European Commission has created several other publicly and privately funded initiatives to tighten the field:
Horizon 2020 project. A research and innovation programme with approximately €80bn in public funding available over a seven-year period (2014 to 2020).
Digital Europe Investment Programme will provide approximately €9.2bn over the duration of the EU’s next Multinational Financial Framework (2021 – 2025). These funds will prioritise investment in several areas, including AI, cybersecurity and high-performance computing.
European Fund for Strategic Investments (EFSI). An initiative created by the European Investment Bank Group and the European Commission to help close the current investment gap in the EU. The initiative will provide at least €315bn to fund projects which focus on key areas of importance for the European economy, including research, development and innovation.
However, AI funding is not the only pursuit. While China has pledged billions to AI, it is the US that has generated and nurtured the research that makes today’s AI possible. In the research race, Europeans are striving to outpace the competition with the creation of pan-European organisations such as the Confederation of Laboratories for Artificial Intelligence in Europe (CLAIRE) and the European Lab for Learning and Intelligent Systems (ELLIS). CLAIRE is a grassroots initiative of top European researchers and stakeholders who seek to strengthen European excellence in AI research and innovation, and ELLIS is the machine learning portion of the initiative.
One main hurdle stands in the way of Europe and its run to the finish: the EU’s General Data Protection Regulation (GDPR). GDPR regulates EU organisations that use or process personal data pertaining to anyone living in the EU, regardless of where the data processing takes place, at a time when global businesses are competing to develop and use AI technology. While GDPR forces organisations to take better care of personal client data, there will be repercussions for emerging technology development. It will, for example, make the use of AI more difficult and could possibly slow down the rapid pace of ongoing development.
Individual rights and winning the race
Europe has plotted its own course for the regulation and practical application of legal principles in the creation of AI. Ultimately, the advantages of basing decisions on mathematical calculations include the ability to make objective, informed decisions, but relying too heavily on AI can also be a threat, perpetrating discrimination and restricting civilians’ rights. Although a combination of policy makers, academics, private companies and even civilians are required to implement and maintain ethics standards, continue to question AI’s evolution and, most importantly, seek education in and awareness of AI, it will be a coordinated strategy that will make ethics in AI most successful.
For Nina Barakzai, general counsel for data protection at Unilever, AI-powered contracting has proved to be a real boon in understanding the efficacy of privacy controls along the supply chain.
‘Our combined aim is to make our operations more efficient and reduce the number of controls that are duplicated. Duplication doesn’t help those who are already fully loaded with tasks and activities. Where there is confusion, it should be easy to find the answer to fix the problem,’ she says.
‘That’s where AI contracting really comes into play, because you analyse how you’re doing, where your activity is robust and where it isn’t. It’s a kind of issue spotting – not because it’s a problem but because it could be done differently.’
At real estate asset management company PGIM Real Estate, the focus of AI-related efforts has been to build greater efficiency into the review of leases, to enable a more streamlined approach to due diligence. The legal team approached a Berlin-based start-up that had developed a machine-learning platform for lease review.
‘Since we do not want the machine to do the entire due diligence, we use a mixed model of the software tool reviewing documentation and then, for certain key leases which are important from a business perspective, we have real lawyers looking at the documentation as well,’ says Matthias Meckert, head of legal at PGIM.
‘It’s a lot of data gathering and a machine can do those things much better in many situations: much more exact, quicker of course, and they don’t get tired. The machine could do some basic cross checks and review whether there are strange provisions in the leases as well.’
Similarly, transport infrastructure developer Cintra has looked to the machine-learning sphere for the review and analysis of NDAs, and is almost ready to launch such a tool in the legal department after a period of testing is completed.
‘People always find the same dangers in that kind of contract, so it’s routine work. It can be done by a very junior lawyer – once you explain to that lawyer what the issues are, normally it’s something that can be done really quickly,’ says Cristina Álvarez Fernández, Cintra’s head of legal for Europe.
Far from being a narrative about loss of control, AI in the in-house context is as much a story of its limitations as its gains.
Do you think that AI will be a disruptor in the legal industry?
‘If your own process is not really working right, if you don’t have a clear view on what you’re doing and what are the steps in between, using a technology resource doesn’t really help you. What do I expect, what are the key items I would like to seek? You need to teach the legal tech providers what you would like to have – it’s not like somebody coming into your office with a computer and solving all your problems – that’s not how it happens!’ says Meckert.
When introducing AI solutions – or any technology for that matter – having a realistic understanding of what is and isn’t possible, as well as applying a thoughtful and strategic approach to deployment is critical to gaining buy-in and maximising potential.
‘The risk is of treating new software capability as a new shiny box: “I’ll put all my data into the box and see if it works”. My sense is that AI is great for helping to do things in the way that you want to do them,’ says Barakzai.
Emily Foges, CEO, Luminance
‘The decision to apply our technology to the legal profession came out of discussions with a leading UK law firm, and the idea of using artificial intelligence to support them in document review work was really the genesis of Luminance, which was a great learning experience. For example, we had to teach Luminance to ignore things like stamps – when you have a “confidential” stamp on a document, to begin with, it would try and read the word “confidential” as if it was part of the sentence.
We launched in September 2016, targeting M&A due diligence as an initial use-case: an area of legal work in pressing need of a technological solution. Since then, Luminance has expanded its platform to cater to a range of different use-cases. The key to Luminance is the core technology’s flexibility, making it easily adaptable to helping in-house counsel stay compliant, assisting litigators with investigations, and more.
When a company’s documents are uploaded to Luminance, it reads and understands what is in them, presenting back a highly intuitive, visual overview that can be viewed by geography, language, clause-type, jurisdiction and so on, according to the user’s preferences. The real power of the technology is its ability to read an entire document set in an instant, compare the documents to each other to identify deviations and similarities, then through interaction with the lawyer, work out what those similarities and differences mean.
I view the efficiency savings of Luminance as a side benefit. As a GC, you want to have control over all your documents – know what they say, know where they are, know how to find them, know what needs to be changed when a regulation comes along, and have confidence that you have not overlooked anything. I think the real change we are seeing with the adoption of AI technology by in-house counsel is that lawyers are able to spend much more time being lawyers and much less time on repetitive drudge work. They are freed to spend time providing value-added analysis to clients, supported by the technology’s unparalleled insights.’
‘If you’ve got your organisational structures right, you can put your learning base into the AI to give it the right start point. My realism is that you mustn’t be unfair to the AI tool. You must give it clear information for its learning and make sure you know what you’re giving it – because otherwise, you’ve handed over control.’
Tobiasz Adam Kowalczyk, head of legal and public policy at Volkswagen Poznan, adds: ‘Although we use new tools and devices, supported by AI technologies, we often do so in a way that merely replaces the old functionality without truly embracing the power of technology in a bid to become industry leaders and to improve our professional lives.’
What’s in the black box?
Professor Katie Atkinson is dean of the School of Electrical Engineering, Electronics and Computer Science at the University of Liverpool. She has worked closely with legal provider Riverview Law, which was acquired by EY in 2018, and partners with a number of law firms in developing practical applications for her work on computational models of argument. This topic falls within the field of artificial intelligence and seeks to understand how people argue in order to justify decision-making. Her argumentation models are tested by feeding in information from published legal cases to see if the models produced the same answer as the original humans.
For Atkinson, a key aspect of the work is that it does not fall prey to the ‘black box’ problem common to some AI systems.
‘There’s lots of talk at the moment in AI about the issue of an algorithm just spitting out an answer and not having a justification. But using these explicit models of argument means you get the full justification for the reasons why the computer came up with a particular decision,’ she says.
‘When we did our evaluation exercise, we could also see how and why it differed to the actual case, and then go back and study the reasons for that.’
From a practical perspective, engendering trust in any intelligent system is fundamental to achieving culture change, especially when tackling the suspicious legal mind, trained to seek out the grey areas less computable by a machine. But Atkinson also sees transparency as an ethical issue.
‘You need to be absolutely sure that the systems have been tested and the reasoning is all available for humans to inspect. The results of academic studies are open to scrutiny and are peer reviewed, which is important,’ she says.
‘But you also need to make sure that the academics get their state-of-the-art techniques out into the real world and deployed on real problems – and that’s where the commercial sector comes in, whereas academics often start with hypothetical problems. I think as long as there’s joined-up thinking between those communities then that’s the way to try and get the best of both.’
British legal AI firm Luminance also finds its roots in academia. A group of Cambridge researchers applied concepts such as computer vision – a technique typically used in gaming – in addition to machine learning, to help a computer perceive, read and understand language in the way that a human does, as well as learn from interactions with humans.
CEO Emily Foges has found that users of the platform have greater trust in its results when it creates enough visibility into its workings that they feel a sense of ownership over the work.
‘In exactly the same way as when you appoint an accountant, you expect that accountant to use Excel. You don’t believe that Excel is doing the work, but you wouldn’t expect the accountant not to use Excel. This is not technology that replaces the lawyer, it’s technology that augments and supercharges the lawyer,’ she says.
‘That means that the lawyer has more understanding and more visibility over the work they’re doing than they would do if they were doing it manually. They are still the ones making the decisions; you can’t take the lawyer out of the process. The liability absolutely stays with the lawyer – the technology doesn’t take on any liability at all – it doesn’t have to because it’s not taking away any control.’
This understanding of AI as a tool as opposed to a worker in its own right was essential to framing the measured response that many of our surveyed general counsel took to the revolutionary potential of AI.
‘Depending on the role of AI, it can be an asset or a liability. However, AI will prove useless to make calls or decisions on specific cases or issues. It can, however, facilitate the decision-making process,’ says Olivier Kodjo, general counsel at ENGIE Solar.
A balancing act
The increasing prevalence of algorithmic decisions has caught the attention of regulators. A set of EU guidelines on AI ethics is expected by the end of 2018, although there is considerable debate among lawyers about the applicability of existing regulations to AI.
For example, the EU General Data Protection Regulation (GDPR) addresses the topic of meaningful explanation in solely automated decisions based on personal data. Article 22 (1) of the GDPR contains the provision that:
‘The data subject shall have the right not to be subject to a decision based solely on automated processing, including profiling, which produces legal effects concerning him or her or similarly affects him or her’.
This mandates the presence of human intervention (not merely processing) in decisions that have a legal or significant effect on a person, such as decisions about credit or employment.
The UK has established an AI Council and a Government Office for Artificial Intelligence, and a 2018 House of Lords Select Committee report, AI in the UK: Ready, Willing and Able? recommended the preparation of guidance and an agreement on standards to be adopted by developers. In addition, the report recommends a cross-sectoral ethical code for AI for both public and private sector organisations be drawn up ‘with a degree of urgency’, which ‘could provide the basis for statutory regulation, if and when this is determined to be necessary.’
Europe’s Race for Global AI Authority
Artificial Intelligence (AI) is on course to transform the world as we know it today. A 2017 study by PwC calculated that global GDP will be 14% higher in 2030 as a result of AI adoption, contributing an additional €13.8tn to the global economy. The same study states that the largest economic gains from AI will be in China (with a 26% boost to GDP in 2030) and North America (with a 14.5% boost) and will account for almost 70% of the global economic impact. In addition, International Data Company (IDC), a global market intelligence firm, predicts that worldwide spending on AI will reach €16.8bn this year – an increase of 54.2% over the prior 12-month period.
The runners in the AI race are, unsurprisingly, China and the United States, but Europe has pledged not to be left behind. The European Commission has agreed to increase the EU’s investment in AI by 70% to €1.5m by 2020.
Closing the Gap
The European Commission has created several other publicly and privately funded initiatives to tighten the field:
Horizon 2020 project. A research and innovation programme with approximately €80bn in public funding available over a seven-year period (2014 to 2020).
Digital Europe Investment Programme will provide approximately €9.2bn over the duration of the EU’s next Multinational Financial Framework (2021 – 2025). These funds will prioritise investment in several areas, including AI, cybersecurity and high-performance computing.
European Fund for Strategic Investments (EFSI). An initiative created by the European Investment Bank Group and the European Commission to help close the current investment gap in the EU. The initiative will provide at least €315bn to fund projects which focus on key areas of importance for the European economy, including research, development and innovation.
However, AI funding is not the only pursuit. While China has pledged billions to AI, it is the US that has generated and nurtured the research that makes today’s AI possible. In the research race, Europeans are striving to outpace the competition with the creation of pan-European organisations such as the Confederation of Laboratories for Artificial Intelligence in Europe (CLAIRE) and the European Lab for Learning and Intelligent Systems (ELLIS). CLAIRE is a grassroots initiative of top European researchers and stakeholders who seek to strengthen European excellence in AI research and innovation, and ELLIS is the machine learning portion of the initiative.
One main hurdle stands in the way of Europe and its run to the finish: the EU’s General Data Protection Regulation (GDPR). GDPR regulates EU organisations that use or process personal data pertaining to anyone living in the EU, regardless of where the data processing takes place, at a time when global businesses are competing to develop and use AI technology. While GDPR forces organisations to take better care of personal client data, there will be repercussions for emerging technology development. It will, for example, make the use of AI more difficult and could possibly slow down the rapid pace of ongoing development.
Individual Rights and Winning the Race
Europe has plotted its own course for the regulation and practical application of legal principles in the creation of AI. Ultimately, the advantages of basing decisions on mathematical calculations include the ability to make objective, informed decisions, but relying too heavily on AI can also be a threat, perpetrating discrimination and restricting civilians’ rights. Although a combination of policy makers, academics, private companies and even civilians are required to implement and maintain ethics standards, continue to question AI’s evolution and, most importantly, seek education in and awareness of AI, it will be a coordinated strategy that will make ethics in AI most successful.
‘From my end, it is the same old battle that we have experienced in all e-commerce and IT-related issues for decades now: the EC does not have a strategy and deliberately switches between goals,’ says Axel Anderl, parter at Austrian law firm Dorda. ‘For ages one could read in e-commerce related directives that this piece of law is to enable new technology and to close the gap with the US. However, the content of the law most times achieved the opposite – namely over-strengthening consumer rights and thus hindering further development. This leads to not only losing out to the US, but also being left behind by China.’
Anderl speaks to an uncomfortable reality nestled in among the ethics portion of the AI debate. While some remain concerned about the ethical questions posed by AI technology, this concern may not be shared by everyone. However, like most things, those who feel unrestrained by codes of ethics will be at a natural advantage in the AI arms race.
‘We are aware that if other, non-European global actors do not follow the fundamental rights or privacy regulations when developing AI, due to viewing AI from a “control” or “profit” point of view, they might get further ahead in the technology than European actors keen on upholding such rights and freedoms,’ explains a spokesperson from Norwegian law firm Simonsen Vogt Wiig AS.
‘If certain actors take shortcuts in order to get ahead, it will leave little time to create ethically intelligent AI for Europe.’
The ethics dimension also extends to the future treatment of employees. Despite headlines spelling doom for even white-collar professions, those we spoke to within in-house teams were reluctant to concede any headcount reduction due to investment in AI technology.
‘I don’t think this will replace entirely, at least so far, a person in our team other than in the future we would have a negotiation or similar, that we will cover that person with technology,’ says Álvarez Fernández, head of legal, Europe at Cintra.
‘I think this is going to help us to better allocate the resources that we have. I don’t think this will limit the human resource.’
And nor should it, says Atkinson:
‘You wouldn’t want to automate absolutely everything. One of the key aims with my work has been: let’s automate what we can, let’s try and improve consistency and efficiency,’ she says.
‘That ultimately helps the client and it frees up the people to do more of that people-facing work with their clients. People still want to speak to a human being on a variety of options and we still absolutely do need those checks from the humans on what the machines are producing.’
Whatever the future holds, the consensus for now seems to be that any true disruption remains firmly on the horizon – and although the potential is undeniably exciting, to claim that the robots are coming would be… artificial.
When it comes to the implementation of technology for in-house legal departments, getting buy-in from the rest of the business proved to be one of the most influential factors in the likelihood that a team was to have implemented technological solutions within their department.
71% of the in-house counsel surveyed for this report said that they felt their company was supportive of implementing new technology solutions. The remaining 29% did not.
This support manifested in the amount of budget allocated to in-house departments for technology spend: just 27% of counsel from non-supportive companies had been given an increased budget to spend on new technology, while 67% of those from supportive companies had seen an increase.
‘Money is nice, but implementing a new bit of technology will require the cooperation of the whole business – from the board down to the IT department. So money is something, but it’s not the only thing,’ explains one general counsel from the utilities sector.
Is your company supportive of implementing new technology solutions?
Those who did feel that their businesses supported them were empowered to actually implement legal technology into their departments: 95% reported that they had used specialised legal technology within their department, compared to just 58% of those who did not receive the same support. They also tended to be from larger teams, with over half being responsible for teams numbering ten or more.
Despite being a predictor for the level of technology use within departments, comparing those who felt their organisation was supportive of the implementation of new technology with those who did not unveiled some interesting insights.
Those who were well supported in the implementation of legal technology (and therefore more likely to have actually done so) were, on the whole, less cynical about technology: just 34% felt that it would greatly disrupt the legal profession in the next five years. At the same time, 39% thought that today’s lawyers were adequately equipped to deal with technological disruption within their profession.
Compare this to those who were not well supported, where 42% were as positive on the question of current lawyers’ preparedness. Just 27% felt that technology would greatly disrupt the legal profession in the next five years.
6% of those who said they did feel that their organisation was supportive of implementing new technology said that they felt that technological disruption would be a negative for the legal industry, compared to 4% of those who did not feel supported.
The amenability of teams to the use of new technology was also significantly different between the groups: 73% of those in non-supportive organisations said that their team members were receptive to the use of new technology, as opposed to 94% in supportive organisations.
This may have as much to do with the composition of those groups as anything. Counsel whose businesses did not feel supported tended to be from larger companies in more traditional sectors. 80% of those that felt their businesses did not support them belonged to businesses with annual revenues of at least £1bn, and 31% were responsible for a team of more than 10 lawyers. Over half were from companies involved in financial services – the likes of banking, insurance and audit.
‘With a smaller team, you tend to be more agile in your budget choices,’ says one general counsel in the fintech sector. ‘Also, with a smaller headcount, the actual investment you’re asking for from the business is likely to be much less than if a multinational bank was to look to adopt a global legal tech solution.’
Of those who reported their company as being supportive of implementing new technology solutions, just 39% felt that today’s lawyers were properly equipped to deal with technological change, 92% felt that AI would be a disruptor to the legal industry and 94% felt that their team members were receptive to new technology. For those who felt their company was not supportive of implementing new technology solutions, the numbers were 42%, 88% and 73% respectively.
