Hadfield, Gillian K.

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I/S: A JOURNAL OF LAW AND POLICY FORTHE INFORMATION SOCIETYResponse to Comments:"Legal Infrastructure and the New Economy"GILLIAN K. HADFIELDI have already thrown a lot of words at presenting the argument ofmy paper' so I want only to respond briefly to some of the helpfulcomments offered by my commentators.Roger Noll's observations about the challenges of developing amore innovative and effective legal infrastructure than we now haveare well-taken.2 I share his view that reducing the barriers tocompetition in the provision of legal goods and services, whileperhaps necessary to prompt real change, may not prove sufficient. AsOliver Goodenough also suggests, there are other potential economicobstacles (Professor Goodenough cites collective action problems andarms' race type incentiveS3) to overcome.4 I am probably an optimistin this regard, but perhaps not a "technological optimist" in the senseof believing that if clients demand it, it will come.Professor Noll lays out three key economic obstacles toinnovation: appropriability, knowledge base, and organizationalreadiness.5 I share his view that appropriability is not likely to prove aGillian K. Hadfield, Legal Infrastructure and the New Economy, 8 ISJLP 1 (2012).2 See Roger G. Noll, Impediments to Legal Innovation in Legal Infrastructure, 8 ISJLP 6o(2012).3 I discuss these obstacles and others in an earlier paper addressing the reasons why legalmarkets can fail to be competitive. See Gillian K Hadfield, The Price of Law: How theMarket for Lawyers Distorts the Justice System, 98 MICH. L. REV. 953 (2000)[hereinafter Hadfield, The Price ofLaw].4 Oliver R. Goodenough, Response to Gillian Hadfield's Legal Infrastructure and the NewEconomy, 8 ISJLP 70 (2012).5 Noll, supra note 2, at 62.I/S: A JOURNAL OF LAW AND POLICYmajor problem for law, at least, no more so than in other knowledge-based industries where the limited supply of expertise and otherfactors helps to secure a return on new ideas. As for knowledge base,while I do emphasize the importance of interdisciplinary collaborationto help solve legal problems, I did not intend to suggest that there isno need to expand the knowledge base beyond existing ideas. Nor didI intend to suggest that there will not be problems that are unsolvablebecause of constraints akin to the infeasibility of creating abiologically viable pest-resistant tomato. I am not claiming that everyproblem firms in the new economy face can be solved at a reasonablecost. More fundamentally, I doubt that the existing knowledge base issufficient-this knowledge base includes a very specificconceptualization of what it means to have, or solve, a legal problemin the first place. I appreciate that Professor Noll has not put mytheory to the impossible test of articulating what specific innovationscould emerge in a less restrictive environment. But I can imagine thatthe possibilities include systems of law that look very different fromwhat we currently have. We currently have almost no existingknowledge base on which to build, for example, a completelyalternative system of securing contractual commitments, one that didnot involve agreements and potential litigation over breach. 6 Andmaybe we cannot get there. But I am only claiming that we cannot getthere if we do not increase the capacity for such innovations toemerge.Professor Noll's most important observation is about thelimitations on collaborative innovation and hence the organizationalreadiness for innovation.: I agree that this too might account for thefrustration experienced by general counsel in securing new thinkingfrom outside counsel and for the growth of in-house legal departmentsin the past few decades. The argument here runs that outside firmslack an incentive to invest heavily in the detailed business andtechnological details of their clients because the client rather than thelaw firm will capture most of the benefits. It is simply too difficult towrite the contract that rewards the outside firm for the creation of6 I agree with Professor Goodenough that there are intriguing possibilities that harness thepower of networking such as contract wikis. (Professor Goodenough is one of our legalinnovators in practice, responsible for developing together with the LawLab at Harvard'sBerkman Center for Internet and Society, a fully digital LLC platform.) Although hesuggests my failure to sketch out these possibilities is a lack of boldness on my part, it isreally just the implication-as Professor Noll notes-of the fact that "innovation isimpossible to predict." Noll, supra note 2, at 61.7 Id. at 67-69.110 [Vol. 8: 1HADFIELDinnovative solutions: the measurement and pricing of "success" indeveloping innovations is inherently difficult, maybe impossible. Iagree that some of particularly specialized innovations may bedifficult to produce via contract. By the same token, for a large enoughcompany, there may be enough scale to justify the vertical integrationinto this kind of innovation.But I also think that much of the innovation that is needed is nothighly client-specific. The problem of excessive complexity and delayin contracting, for example, is fairly widespread. So too the problemsof excessive risk aversion and lack of appreciation of the multiplebusiness considerations that impact litigation strategy. Throughoutmuch of law, the development of expertise in highly specific problemsproduces generalizable strategies and innovations.Indeed, a key reason I have focused in this paper on the concept ofinfrastructure is because I think that the bulk of the problem ofinnovation is not specific to individual companies facing theWilliamsonian question of contract versus vertical integration. Thecontent of our legal infrastructure is, I have argued, largely a by-product of legal work-generated in the course of drafting laws,regulations, and contracts; resolving disputes and negotiatingtransactions; structuring organizations and relationships. This iswhere the contract templates, litigation practices, case opinions,regulatory models, and so on come from. A more open market, I'marguing, would shift the composition of that infrastructure largely as aby-product of bringing a more heterogeneous set of skills andmindsets to bear on individual legal matters. This is really a dynamicclaim rather than an individual make-or-buy claim. Suppose a groupof graphic designers and lawyers join together to form a consultingcompany that offers a visualized approach to supply contracting thatsubstantially reduces contractual delays, errors and costs. 8 Theinnovative contracts that result may be better than the alternativewordy documents conventional lawyers would draft. But because ofthe kinds of contracting-for-innovation problems Professor Nollemphasizes, they will still fall short of a first-best solution to meet theneeds of the company's clients. Nonetheless, these innovativecontracts will enter the set of legal materials available in the future,providing some heterogeneity in the contract databases available tofuture lawyers. They might form the teaching materials in a new lawschool class or they might be carried over into the in-housedepartment of the next company the general counsel works for, where8 See, e.g., Gerlinde Berger-Walliser, Robert C. Bird & Helena Haapio, Promoting BusinessSuccess Through Contract Visualization, 17 J.L. Bus. ETHICS 55 (2011).2012] 111I/S: A JOURNAL OF LAW AND POLICYthey are married with the specific industry or company knowledgethat produces an even better solution. This is how I would expectinnovation in law to come about.Brian Cabrera's comment provides a much more detailed pictureof what the world looks like from the client side in the new economythan my brief anecdotes and survey results can ever do.9 This is thedemand side of the market talking directly to the supply side aboutwhat it needs and what it's willing to pay for: "Too often," he says, "Iam presented with an approach that answers the legal question but []does not address the business problem."o He urges potentialproviders to consider "solving for the complete data set" rather than"the legal answer."" Reading the 10-K and the company website, headds, is not enough to fix that shortcoming; he is looking for providerswho are willing to invest in a deep understanding of his business andwho have developed the capacity (personal and organizational) tothink globally at the speed he is required to act.' 2Professor Noll's economic analysis suggests that Mr. Cabrera'sadvice may go unheeded and fail to produce a response from thesupply side of the market because of the economics of collaborativecontracting. The providers Mr. Cabrera is talking to may struggle tosee a return on the investment in the deep engagement with hiscompany and his industry that he is suggesting they undertake. Evenwith reduced regulatory barriers and increased competition, the pullof the demand side may be insufficient to overcome the powerfuleconomics of innovation.I suspect, however, that even if we cannot get to the first-bestsolution, we are pretty far from even the second-best solutions thatcould be generated to Mr. Cabrera's legal needs. The comments byProfessor Goodenough and Peter Kalis give me some reason towonder about that.13 Both are lawyers who are, or have been, in thebusiness of providing legal services to companies like Mr. Cabrera's.And yet both express doubt that the problems I have articulated on9 See Brian E. Cabrera, The New Economy and its Implications for Legal Services: A HighTech Perspective, 8 ISJLP 80 (2012).lo Id. at 87.1 Id.12 Id. at 86.13 See Goodenough, supra note 4; Peter J. Kalis, The Hadfield Tunnel: A Comment onLegal Infrastructure and the New Economy, 8 ISJLP 91 (2012).112 [Vol. 8:1HADFIELDthe client side in the new economy can really exist. Both ProfessorGoodenough and Mr. Kalis reason as follows: The market iscompetitive. Therefore any client who really wanted somethingdifferent could get it. Therefore either I am wrong about my claim thatthere is a significant gap between what even large corporate clients areable to purchase in legal markets and what they need, or clients are (inMr. Kalis' wordsl4) just being "whiny."There are three responses I want to make to the claim fromoutside providers, who are understandably perplexed (and, in Mr.Kalis's case, apparently fairly incensed) by the suggestion that they arenot providing as much value as their clients need.'5First, both Professor Goodenough and Mr. Kalis assert that themarket for legal services is competitive because providers experienceit to be competitive. But the experience of competition is not the testfor whether a market is competitive in the economic sense. Protectedmarkets can be intensely "competitive:" suppliers will fight "tooth andnail" (in Professor Goodenough's wordsl6) to gain access to supra-competitive profits. Competitive markets, in the economic sense, aredefined by the conditions of competition-who can compete, in whatorganizational form, with what financing, with what kind ofemployees and partners, and with what limitations such as privateinformation and transaction costs-not by the experience ofcompetition. Moreover, the fact there are some competitors does notmean that a market is competitive in the economic sense; there aredegrees of imperfect competition that can hamper the generation ofcost-effective solutions and innovations.1714 Kalis, supra note 13, at 103.'s 1 note a surprising tendency in lawyers' responses to my work to exaggerate my claimsand hence make of them a straw target. The claim is not that today's lawyers provide novalue; it is that the value is less than it could be and what clients are ideally looking for.(For other examples of exaggeration of my claims, see supra notes 18 and 21 andaccompanying text.) Mr. Kalis also interprets my discussion of the frustration generalcounsel feel with trade regulations or contracting requirements as evidence that they (andI) think there should be no regulations or contract requirements. In what I take as anexpression of pique, Mr. Kalis suggests that those who think what lawyers do isunnecessarily burdensome should draft their own contracts or let the CFO (or gardener)handle their next complex deal unaided. I do not find this response very productive ofinsight.16 Goodenough, supra note 4, at 74.17 See Hadfield, The Price of Law, supra note 3.2012] 113I/S: A JOURNAL OF LAW AND POLICYSecond, neither Professor Goodenough nor Mr. Kalis engages withthe majority of my argument, which is economic and theoretical innature. 8 In this paper and in earlier work I have offered severalreasons to think that the markets for legal inputs may fail to becompetitive. The reasons include the complexity of law and how thatlimits the supply of potential suppliers, the difficulty consumers of lawface in evaluating the quality of providers in the face of very noisyinformation about the causes of good and bad outcomes, and the sunkcosts in legal relationships that make ex post switching expensive.19They include the obstacles to efficient contracting for innovation thatProfessor Noll discusses. And they include the regulatory barriers Iexplore in this paper and other work.2o That economic analysis cannotbe swept away with the report that providers find the marketcompetitive.Third, and perhaps most importantly, the lack of engagement withthe fundamental economics here is one of the reasons I am doubtfulthat existing legal markets will be responsive to the needs of the neweconomy any time soon. The key complaint from clients is that theirlawyers just don't "get" their business, that there is a "DNA gap"between outside lawyers and clients. I have attempted to provide atheoretical roadmap to what "getting" the business of the neweconomy might entail. The general counsel I spoke to and those18 Mr. Kalis erroneously thinks that the fact that firms in the 1950s also could be describedas innovative or that even Cisco has conventional supplier problems characteristic of theold economy engages with the analysis. Professor Goodenough points to the entertainmentindustry of twenty years ago (which is not actually that long before the takeoff thateconomists identify in the technology industry-I bought my first Mac over twenty-fiveyears ago). But both misunderstand the nature of the argument. The new economymoniker is a catchall for describing the ways in which globalization and technology-particularly Web 2.O-have shifted economic organization and interaction. See Hadfield,supra note 1. The old/new economy does not consist of what I called the -prototypical" and-stylized" old/new economy firm. These are abstract analytical devices for grasping howthe shift in economic organization due to globalization and the web have impacted theeconomic demand for law. I think I could not have been clearer about this. See id. at 12.Moreover, all of the characteristics I point to are expressed as changes, not absolute levels:increased boundary-crossing, more pervasive and complex transactions in information,and so on. The claim is not that prior to the transformations of the last few decades therewere no businesses with any of these characteristics and now all firms are characterizedexclusively by these characteristics.19 See Hadfield, The Price ofLaw, supra note 3.20 See Gillian K. Hadfield, Legal Barriers to Innovation: The Growing Economic Cost ofProfessional Control over Corporate Legal Markets, 60 STAN. L. REV. 1689 (20o8).114 [Vol. 8: 1surveyed by many others21 are attempting to educate the providermarket about what they would be willing to pay top dollar for. BrianCabrera in his comment here takes pains to sketch out how a providercould win his business by solving his problems better. I am perplexedwhy the response is not: tell me more. I doubt that these clientcompanies-Google, Synopsys, Cisco, Juniper Networks, Mozilla,CBS-would respond this way to feedback from their customer base,or to insights into the structural reasons why solutions they are nowoffering are not producing as much value as they could. I think that'show competitive providers would-and should-respond.21 Both Professor Goodenough and Mr. Kalis are wrong to say that my conclusions aboutthe gaps between demand and supply are based on anecdotal evidence from five SiliconValley general counsel. While I would think any provider would be interested in the viewsof the general counsel I spoke to-they are expert observers who are peering over the edgeof the modern economy-these anecdotes are offered only as illustrations to make the datafrom other sources and my theoretical claims vivid. My claims are largely based ineconomic theory and observations about the attributes of current legal practice such as thereliance on craft-based production and densely worded documents. The empirical evidenceI offer about the gaps as perceived by clients includes large-scale surveys of generalcounsel, such as those done by BTI, Altman Weil, researchers at Harvard Law School, andthe Association of Corporate Counsel, as well as data about legal fees and costs. SeeHadfield, supra note 1, at 31, n.6o, 32-33 nn.65-66 (2012).2012] HADFIELD 115

Response to Comments: "Legal Infrastructure and the New Economy"

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Response to Comments: "Legal Infrastructure and the New Economy"

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