Start With the Appropriate Entity
Before starting your journey towards creating a law product or automated legal service, an initial decision you must make is the kind of entity that owns, develops, and licenses the digital application. The choice of the operating entity is the first decision you must make when deciding the develop a softwasre applicationfor use by your law firm. This blog post is primarily for lawyers or law firms thinking about developing a legal product or offering an automated legal service.
First, let’s review some basics.
Digital applications are not “sold”; they are licensed. There can be a one-time license-free (transactional) or licensed as part of a subscription, in which case it is a SaaS, a software as a Service.
An “automated legal service” is a legal service that is software-powered and sold by a law firm entity. Automated Legal Services have a legal service component whereby the lawyer provides human services such as legal advice, custom drafting, or legal analysis. These services are human, not software services.
Let’s assume you want to develop an automated service for your law firm, the purpose of which is to give your firm a competitive edge, either through the generation of leads or through a fixed price unbundled legal service. Rather than develop the software component through the law firm, which would own the intellectual property in the software application, I would place ownership in a separate non-law firm entity, either a limited liability company (LLC), a C Corporation, or an S Corporation. I would then license the application back to the law firm for use as a component of the legal service to be delivered.
Here are six reasons why you should create a new operating entity to own the software application:
Reason #1: You can finance the development of the software application with outside investors who are not lawyers. Generally, you can’t have nonlawyers invest in your law firm to develop software. The better alternative is to have ownership of the software applications reside in a non-law firm entity, whether an LLC, an S corporation or a C corporation. The financing advantage alone is enough to justify setting up a separate entity.
Reason #2: If you decide to convert the software component of your automated legal service into a law product that doesn’t involve the delivery of any legal service, you want the entity that owns and licenses the application to the end-user to not be encumbered by professional responsibility rules which only apply to lawyers and law firms. Since you are likely to be selling or licensing your software in many jurisdictions where you are not a member of the bar, you would want to avoid a charge of UPL if your law firm offers the software application.
Reason #3: You would need to secure a separate internet liability insurance policy to protect you from any liability claims, although they are rare. It gets complicated if you are operating as a law firm and want to add this coverage to your malpractice insurance policy. Your malpractice insurance policy would not protect you from your law product’s claims because it is not a legal service.
Reason #4: You can license the software application for use by the law firm and set the license fee high enough to pull most of the cash generated by the service from the law firm to the other entity. There are tax advantages as a result of this shift in funds.
Reason #5: By placing ownership of the software application in a separate entity, you are effectively ring-fencing your liability and protecting your law firm.
Reason #6: If you build a substantial law product business, you can sell it to another company or non-law firm buyer. If the law firm owns the technology, you are constrained as you can only sell your law firm practice to another law firm or a lawyer. Placing ownership of your software application is very limiting. Your exit options are enhanced when the software application and associated intellectual property is owned by a company, rather than a law firm.
In all the years I have operated in this space, I have always placed ownership of software applications in an LLC or Corporation. I have usually ring-fenced a particular set of software applications into one company and then have the company wholly owned by a parent holding company to ring-fence liability for that specific application or project. In this way, I limit liability to a single project which is isolated from my other assets.
Case Study: Hello Divorce.
Let’s take a closer look at how www.hellodivorce.com has structured its relationship to an underlying law firm that provides legal services.
Hello Divorce is a California-based website created by Erin Levine, a California family law attorney. Hello Divorce is designed to offer a lower-cost divorce service to the broad middle class. The site provides California standard divorce forms that are powered by a web-enabled document automation solution.
Hello Divorce is a separate corporation from the law firm that provides additional legal services. Hello Divorce is incorporated in Delaware and is qualified to do business in California, presumably to provide the structure for outside investment.
Hello Divorce, Inc., recently raised $2,000,000 to expand to other jurisdictions. See the story here about this fundraise.
Hello Divorce Service Levels
Hello Divorce offers four levels of service plus the option of contracting for out-of-court divorce mediation.
Level l is a DIY Divorce. The user gets a set of California divorce forms with details on how to file, serve the other party process, and other instructions. No lawyer involvement. The divorce forms are wen-enabled. The user completes an online questionnaire and the forms are created immediately.
Level II is a DIY Divorce plus the assistance of a Legal Document Assistant, a role which is authorized under the California LDA Statute.
Level III is an additional service also provided by a nonlawyer. From the website: “An experienced divorce expert guides you through your divorce from start to finish using our proprietary software to make it super easy on you.”
Level IV is a DIY Divorce plus two hours of lawyer advice. From the website: “Everything included with Divorce Plus + two hours of legal coaching with an experienced lawyer for advice, strategy, creative problem solving, review/revise agreements, and mediation consulting.”
In California, this legal service is provided by Ms. Levine’s law firm. In other states where Hello Divorce operates, lawyers are contracted to provide services made available through Ms. Levine’s law firm.
If you analyze these four levels of service using the framework advocated in this Blog:
Level I would be a law product as the user gets fillable legal forms without the assistance of any attorney or LDA.
Level II and Level III would be an automated legal service as it is a service that is offered that includes both the law product and the addition of a legal document service by LDAs.
Level IV is an unbundled legal service that is also an automated legal service. As in Level I, the legal forms component is powered by a digital application, but lawyers provide additional legal services for a flat fee.
There may be issues offering a legal service from a non-law firm website, but that is a subject for another blog post.
Here is how the website describes the relationship:
“Hello Divorce Inc. is not a law firm and its website as well as technology-enabled self-help services and forms are not a substitute for the advice of an attorney.”
“Hello Divorce offers interactive guides and checklists, various tutorials on the divorce legal process. Hello Divorce also provides (1) generally published, factual information, that has been approved by an attorney and pertains to legal procedures, rights, or obligations, with you representing yourself in a legal matter; (2) access to relevant, published legal documents; (3) a “Do-it-yourself” divorce form generator; and (4) access to affiliate lawyers who you can hire to assist you in your legal matter. We are also a legal document assistant (LDA) corporation offering self-help services, as defined by California B&P Section 6400. LDA services in California (only) include: completing, filing and/or serving (delivering) legal documents at your specific direction.”
“Ready to meet your ‘on call’ lawyer? Lawyers from Levine Family Law Group (LFLG) will provide you legal advice and real, practical assistance with your divorce. You manage your case and handle the uncomplicated stuff. Your lawyer will jump in when you need her/him, operating behind the scenes. No complicated intake process, no retainers*, no mishigas. Just smart, kind lawyers keeping you on the right track.”
“All attorney services are provided by independent attorneys contracted through Erin A. Levine, PC and are subject to a separate attorney-client agreement.”
Disclaimer from the website:
“While Hello Divorce is not a law firm, Hello Divorce does provide access to a marketplace of lawyers and/or lawyers that are employed or contracted with Erin A. Levine, PC, dba Levine Family Law Group. Hello Divorce users that access lawyers through its platform enter into an attorney-client relationship directly with the lawyer and law firm – not with Hello Divorce. Should you decide to access and pay for any legal or lawyer help through any of Hello Divorce’s affiliated entities (e.g. Levine Family Law Group), you will be required to review and accept a new “Terms and Conditions” (aka attorney engagement letter) specifically related to the services and fees that you are hiring them to perform. The applicable “Terms and Conditions” may be unrelated to this site, a screen for conflicts of interest, and other policies of the particular lawyer or rules of the State Bar Association in which they maintaining the integrity of the law firm’s service.”
“Please note, affiliated lawyers do not “fee split” (share fees) with Hello Divorce unless specifically allowed by the state that service is performed. All legal fees generated are paid directly to the lawyer or law firm that is hired by you. That lawyer may be required to pay Hello Divorce a standard monthly fee which provides them, among other things, with: (1) effortless client on-boarding; (2) form generating software and other resources to assist them to provide cost-effective legal help to consumers; (3) easy file management; and (4) access to a marketplace of consumers who desire legal help from lawyers who are familiar with the Hello Divorce platform.”
Hello Divorce has a pretty complicated business model, but it accomplishes the objective of providing an entity that can be financed by outside investors. There have been other examples where a non-law firm corporation offers law products, and a separate network of lawyers offers additional legal advice and support. The most prominent example of this business model is LegalZoom.
Even if you have a small-scale project, I would still offer the law product component through a separate non-law firm entity. The advantages outweigh the inconvenience of setting up a separate entity. It is more complicated to restructure the organization later if the product/service begins to scale.
The bottom line: Don’t own, finance, or sell your law product through your law firm. Offer unbundled automated legal services through the law firm, and license the law product technology from the corporation to the law firm.