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