Legal Tech + AI in Germany: Things Are Evolving

Extract from Artificial Lawyer interview with Dr. Jochen Brandhoff

If there are barriers to adopting more advanced legal tech in Germany, e.g. AI systems, why is this? Are there any structural or market reasons that are preventing this?

Yes, there are a few barriers. One of the largest is a lack of capital. The legal market is still new to financial investors. Venture capital and private equity companies as well as many ‘business angels’ often do not understand the digital business models in the legal market.

There are many reasons for this. One reason is that the legal market is somewhat different from the ones they are familiar with. It is highly regulated, which investors often dislike. Another reason is that they have difficulties in judging the size of the market and the scalability of a business model. With so little capital, it is difficult to have truly great innovations. But you can still fill important niches.

Why is the legal market so new to investors? Here we come to the second barrier. Investors are not allowed to invest in law firms. Law firms in Germany are subject to prohibitions on ‘third party’ ownership or capital participation, unlike law firms in the UK after the passage of Legal Services Act of 2007.

This means, simply put, that law firms can only be owned by lawyers (and, to some extent, by tax advisors and accountants) – but under no circumstances can a purely financial investor take part in the law firm. Law firms thus invest only a (tiny) portion of their profits into technology development. I don’t want to make a value-judgment on whether these two prohibitions produce more advantages or disadvantages for the legal market. I will simply say that they are too poorly funded to be able to produce a great leap in technology.

Additional Reading: