The R&D Tax Credit Aspects of Law Firm Artificial Intelligence



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Law-Firm-AI

        Big data and artificial intelligence (AI) are transforming the legal sector. According to IBM, 2.5 quintillion bytes of data are created every day, with 90 percent of all data created within the last two years. AI is fueled almost entirely by data.  The reason for the recent success of Siri, Alexa and other AI autobots involves, to a large degree, the advent of big data; and if there’s any field that is ripe to utilize the technology, it’s the heavily data oriented legal sector.  

        Over 100 million court cases are filed in U.S. courts each year.  Presently, there are over 3,000 crimes in the U.S. Federal criminal code. The Affordable Care Act, one piece of legislation, is 2,700 pages long.  The U.S. tax code is over 70,000 pages long.  Each county, state and municipality across the country has its own set of intricate rules, codes and regulations, which are constantly in flux.  With globalization, foreign and international laws are increasingly relevant.  To a large degree, a lawyer’s job involves sifting through piles of data, researching increasingly voluminous laws and regulations, discovering facts which may be buried underneath a trove a detailed data and identifying trends within big data analysis.   

        Enter artificial intelligence.  Law firms use AI to analyze legal issues, pull case briefs, review documents and sift through data.  As clients demand reduced rates, more law firms have been establishing teams to address efficiency.  Artificial intelligence provides an increasingly practical solution.  It can now be used to read documents, interpret data and identify relevant case law.  When law firms integrate and experiment with AI, they may be eligible for the Research and Development Tax Credit.


The Research & Development Tax Credit

        Enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.  On December 18, 2015, President Obama signed the bill making the R&D Tax Credit permanent. Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax and startup businesses can utilize the credit against $250,000 per year in payroll taxes.


AI in the Legal Field by the Numbers

        Artificial intelligence in the legal field is quite prevalent already.  Altman Weil, a national leading legal consulting firm recently published a report assessing technology at law firms.  One survey in the report noted that 7.5% of responding legal firms are currently using tools involving AI.  Another 28.8% are researching the available options and 37.8% are familiar with the trend.  According to a survey conducted during the 2015 LegalTech, New York conference, 90% of U.S. law firms are already applying some form of data analytics within their organization. Presumably, this data analytics represents the mustard seed that will eventually become big data.  Technology firms have recognized the trend.  According to the research firm CB Insights, more than 280 legal technology startups have raised $757 million since 2012.  According to research by Thomson Reuters Legal, 597 lawtech patents were filed worldwide in 2016 up from 436 in 2015 and just 99 in 2012.           
                 
        As law firms begin to adopt the technology, shifts in workplace demographics offer clients more value for their dollar. A 2016, Deloitte insight report predicted that over 100,000 jobs in the legal sector have a high chance of being automated.   To date, there has been an overall net increase of approximately 80,000 jobs, most of which are higher skilled and better paid.  These new high skilled roles mainly involve developing and managing legal sector technology.  

        Lawyers can utilize the technology to cut down on the long, grueling hours that the field requires.   Dana Remus, a professor at the University of North Carolina School of Law, and Frank Levy, a labor economist at the Massachusetts Institute of Technology conducted a study on new legal technology and determined that utilizing all new legal technology presently available could reduce working hours by 13%.  McKinsey estimates that 23% of all legal tasks could be automated using current technology.


Document Review

        Given the expanding data realm coupled with the intensive nature of document review projects, eDiscovery is ground zero for AI in the legal field.  Reviewing 50,000 – 100,000 documents for any given project is typical. AI systems can comb through those documents and filter out relative material for human review in a fraction of the time using less resources than traditional methods.  Instead of reviewing 50,000 documents, legal professionals can use natural language processing to scan and predict which legal documents are relevant, allowing them to weed out 80% of non-relevant files.  Already, due to automated technology integrations at large law firms, only 4% of lawyers’ time is being spent on document review according to the study conducted by Frank Levy and Dana Remus.


Smart Review

        Even intelligent and complex tasks like writing contracts can be automated.  Already artificial intelligence is being used to identify concepts such as non-compete clauses and change-of-control provisions.  

        Human scrutiny is still required, but only after much of the leg work has been done by the computer. Now, all that’s required from the lawyer is that he/she review the document created by the machine and request edits.  

        One startup, LawGeex, uses AI to read contracts and compare them to similar versions in a database.  The software combines machine-learning algorithms and text analytics to quickly pinpoint discrepancies, recognizes if any clauses are rare, missing, or potentially problematic, and provides a plain English report that informs clients on exactly what they’re signing.


Legal Research & Analysis

        Perhaps the most impressive AI task is the ability to analyze and discuss legal concepts. Artificial intelligence software can even pull case law for comparison and legal precedent. Ross Intelligence software utilizes IBM’s Watson artificial intelligence technology, reads through thousands of cases and delivers a ranked list of the most relevant case law.

        The software can even create memos.  The user simply types in a legal question and Ross replies a day later with a few paragraphs summarizing the answer along with a two-page explanatory memo.


Data Analytics

        Data analytics is perhaps the most widely used form of AI in the legal industry.  According to a survey conducted during the 2015 LegalTech, New York conference, 90% of law firms are already applying some form of analytics within their organization.  Before retaining counsel, predictive analytics can be used to align clients with lawyers or assess the likely outcome of a case. During litigation it can be used to support circumstantial arguments or understand the jury.  After the case is over, it is then used to inform a decision on pricing.  

        Lex Machina:  Acquired by Lexis Nexis in 2015, this startup analyzes data about court rulings and provides insight on past success and failure rates. Judge Analytics, by Ravel is a platform that offers detailed insights on any US judge.

        Lexoo: Lexoo, another startup, uses data analytics to match prices from experienced and self-employed lawyers with work for mid-size companies, effectively cutting out the traditional large law firm and replacing it with a more cost competitive alternative. Another startup in the UK, Ravn, uses software to  extract data from official title deeds at the Land Registry and analyzes details to serve legal notices in real estate cases.

        Battea Class Action Services: Located in Stamford CT, Battea Class Action Services uses AI and advanced analytics to scour public companies’ securities investments in order to spot losses resulting from false disclosures.  In the event that they find a lead, they can then build a case and retain a client around it.


Conclusion

        Artificial intelligence is transforming the legal sector. Innovative lawyers use AI to sort, arrange and interpret a massive amount of big data. Time spent evaluating, integrating and experimenting with this technology presents a good opportunity for R&D tax credits which are available to stimulate innovation.   

Article Citation List

   


Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Michael Wilshere is a Tax Analyst with R&D Tax Savers.

Chloe Margulis is a Tax Analyst with R&D Tax Savers.


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