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What does ROSS Intelligence collapse mean for the rest of the LegalTech industry

How the Thomson Reuters’ lawsuit against ROSS Intelligence forced the company out of business, and what it tells us about the future of Legal Tech.

Over the last couple of weeks, the biggest development in Legal Tech was undoubtedly about the consequences of the lawsuit that was filed against ROSS Intelligence in May 2020.

In the sad news released on December 11, 2020, the company announced it will be stopping its operations on Jan 31, 2021, and promised to migrate all its customers to other legal research products.

Founded in 2014 at the University of Toronto in Canada, ROSS Intelligence is a platform for legal research. Co-founders Andrew Arruda, Jimoh Ovbiagele, and Pargles Dall`Oglio developed an AI engine that helps legal practitioners scan through thousands of legal briefs in order to extract helpful legal insight.

The startup graduated from Y-Combinator in summer 2015, and went on to raise $13mil in Seed and Series-A funding.

Since then, ROSS opened a second office in the US, and managed to attract a wide range of customers to use its product - namely law firms of all sizes, as well as academic institutions and pro bono organizations.

The downfall started when Thomson Reuters - Westlaw’s parent company - filed a lawsuit against ROSS Intelligence back in May 2020. In the lawsuit, ROSS was accused of leveraging Westlaw’s copyrighted material to train their artificial intelligence models - an allegation that the co-founder and CEO Andrew Arruda firmly denied.

And while the legal battle is still ongoing, the expenses associated with litigation were too much for the company to bear. Last week, the company announced that it would lay off all its employees and continue as a going concern only for the purpose of fighting the lawsuit.

'The company will continue as a going concern so that the facts at the heart of this lawsuit are brought to light and so that Westlaw’s tactics - using litigation as a weapon and stifling competition - do not succeed' - Arruda said in a statement.

What does it mean for the Legal Tech industry?

The story of ROSS intelligence is not over yet. Yet this incident sent shockwaves through the rest of the legal tech industry.

Historically, legal tech startups faced the two biggest challenges in the industry: existing competition and lack of technology adoption.

Recent developments will at least make investors add another layer of competition research to their due diligence process. The number one question investors ask in meetings, as it relates to competition, is what would happen if an incumbent comes up with a similar product.

But in this case, ROSS Intelligence disrupted Westlaw bottom-up - by starting with individual use-cases where customers felt the most pain, and innovating their way up to compete for the market share against a product that already dominated the market.

In a case like this, it’s not the indefensibility of the IP nor the new competitive threats that derailed ROSS's success, but rather a prolonged legal battle that made the company highly unfavorable in the eyes of both clients and follow-on investors.

Just like in 2000, when internet startups fell out of favour, it may take years for investors to regain interest in any legal tech startup that would directly compete with the existing entrenched competition.

As to potential customers’ appetite for legal tech, it will make law firms think twice before choosing a startup offering over a current market leader.

It’s unfortunate, because small companies and new entrants usually make the whole ecosystem better - by bringing much-needed innovation in a form of technology and fresh ideas. Without big customers’ buy-in, it will take a long time before new products can reach scale in order to compete with current market offerings on an equal footing.

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