Episode Summary
The conversation also zooms out to the public-facing implications: a judge’s nuanced AI-disclosure approach, what it signals for evidence and competence, and how “ownership” can quickly become a question of control over client data, technology stacks, and independent professional judgment—especially as AI investment pressures the traditional partnership model.
Key Takeaways
Courts Are Setting Practical Standards: Emerging AI-disclosure approaches signal how judges may evaluate transparency, evidence, and reliability.
Ethics Rules Constrain Capital Pathways: Rule 5.4 limitations influence how firms structure investment and modernization.
The MSO Model Separates Law from Operations: It enables outside investment in business functions while preserving formal legal practice ownership.
Governance Must Catch Up to Technology: Confidentiality, conflicts, and independence require clearer controls as AI becomes embedded.
Final Thoughts
Private equity in law isn’t just a business headline—it’s a stress test for how the profession will fund AI while protecting client interests and lawyer independence. The MSO pathway may unlock new investment, but it also raises hard questions about who controls the systems that increasingly define legal work.
For leaders in firms, courts, and legal tech, the point isn’t to take a side reflexively. It’s to get specific about governance: data stewardship, transparency, and guardrails that preserve independent judgment as AI becomes foundational infrastructure.
Transcript
Jen Leonard: Hi everyone, and welcome back to AI and the Future of Law, the podcast where we explore the exciting landscape of artificial intelligence and how it’s impacting the legal profession. I’m your co-host, Jen Leonard, founder of Creative Lawyers, here as always with the phenomenal Bridget McCormack, president and CEO of the American Arbitration Association. Happy New Year, Bridget.
Bridget McCormack: Happy New Year to you, and happy season three for our podcast, I think.
Jen Leonard: Yay! Season three kicking off with a bang. Feels like it’s going to be a cool year for AI.
So let’s get started.
As always, we have three segments to our show. For those who are new to listening, we start with our AI Aha!s—the things we’ve been using AI for in our day-to-day lives that we find particularly interesting. Then there’s our What Just Happened segment, where we share things that are happening in the broader world and connect the dots to legal.
And then our main topic that we explore that relates directly to the legal industry. Today we’re going to explore something we’ve both been really fascinated by, which is the increasing interest of private equity in law firms, what it means, and how it connects to AI.
But before we dive into all of that, let’s start with our AI Aha!s.
AI Aha! Moments
Jen Leonard: What have you been using AI for, Bridget?
Bridget McCormack: As always, very hard for me to choose. I narrowed it down to two quick ones, I promise.
The first is: I saw on—I don’t think it was LinkedIn, I think it was X—that somebody had given the latest version of NotebookLM a try on creating a deck. I always try it across chatbots to have them work on slides, just to see how they’re doing. It’s just, for me, a good way to compare and contrast.
I had a deck to put together for a presentation that required me to do some new thinking and new constructing. I kind of knew what I wanted to say in the presentation, but I had no idea what I wanted on the slides to reflect that.
So I just described all of that to NotebookLM, and it created the most unbelievable deck. I am really stunned by what it’s doing. So I highly recommend giving it a whirl if you haven’t lately. It’s definitely come a long way.
Jen Leonard: Did you just describe what you wanted on the slides, or did you feed it information?
Bridget McCormack: Yeah, I described what the presentation was about, points I wanted to make—and I had actually done a lot of thinking about that. I literally had, like, three points in three sections and what I was trying to achieve by those points.
And then I did give it a deck that I had used in another context, so it saw kind of my style in some of the ways in which I have used decks in the past. And that was it.
And then it told me to go about my business and come back, and it would have something for me—and it had something amazing for me. So I highly recommend it.
Jen Leonard: I saw Ethan Mollick using Nano Banana for slide decks. Did you see his Nano Banana slide decks? They’re amazing. I think his most recent One Useful Thing blog has pictures from his Nano Banana slides.
Bridget McCormack: Oh, I should check it out. Yeah, that’s interesting.
And then I have one other little one, just because I can’t help myself.
My husband and I ran a 5K on New Years Day because, you know, start the year off strong. It was 17 degrees in western Michigan, and the ground was icy, snowy. So I was both nervous about slipping and falling, but I had those things that you put on your running shoes—you probably know about this because you’re a runner.
Jen Leonard: Yaktrax.
Bridget McCormack: Yeah, those are great. But I was nervous about how to dress. Even though it’s only a 5K, I probably shouldn’t have been nervous about how to dress, but I needed, like, a coach to tell me what layers to wear.
At the last minute I panicked because my husband was wearing two pairs of socks, and I put on an extra pair of socks, which was not what Gemini told me to do. We got there and we’re waiting in the car because it’s so cold, and my feet were just feeling—it was just too tight, you know? Like the second layer of sock was just too much.
So I got back on with Gemini and I was like, “Look, my toes feel really tight. What should I do?” It was so upset. Gemini was like, “Take them off immediately. Listen to me. Trust me. You do not need a circulation problem. That is the biggest problem you could have. If your toes can’t move around, your feet are absolutely not going to be warm.”
So there I am, taking my shoes off and taking my socks off. I was in the driver’s seat, so I had to go get in the back of the car because I had no room. And I have to say, Gemini was correct. My outfit was perfect. My feet were warm. I was able to run the whole time, and I have Gemini to thank for that.
Jen Leonard: I am dying, because in a recent episode we talked about how I consulted Gemini about ski attire, and it was so adamant that my family not put on two pairs of socks.
Bridget McCormack: Oh God, I forgot you already told me that.
Jen Leonard: Yeah. It really has a thing about two pairs of socks. Can AI have phobias?
Bridget McCormack: Maybe. I mean, why not? You know, it’s developing its own capabilities. Like, we know that.
Jen Leonard: Emergent neuroses.
Bridget McCormack: Emergent neuroses. Exactly. Yeah. What about you? What’s yours?
Jen Leonard: This is, like, my favorite AI yet, and I hope I’m not violating my children’s privacy by sharing this. But I just cannot tell you how grateful I was to Gemini for this.
I was having one of those parental nights where my son was doing his homework. He’s been doing such a great job all year. He’s in middle school now, and he was doing a great job on his Latin homework and his math homework. He’s been reading a whole lot—he’s reading Percy Jackson—and he’s really into them. He’s read the whole series.
He had this reading prompt at school, and it was the most open-ended prompt. It was just sort of like, pick any quote in the book and write why you think it’s important to the story. And he just would not do it. He was like, “Mom, it’s literally impossible.”
To me, this was making no sense. Just pick anything in the whole book, just pick it and open it and put it down. And it’s one of those moments where you’re banging your head against the wall. And I’m thinking he’s being super stubborn.
Then it just devolves into tears, and I’m like, okay, we’re just going to have to call it a night.
Nothing good is going to happen.
So he goes to bed, and I log on to Gemini and give all the context. I’m like, we’re doing great in all the other areas. He’s read the books. He talks about them all the time.
And Gemini gives me all of this detailed stuff about child development and the different ways that a child’s brain develops, and how they’re able to deal with or respond to convergent prompts faster than divergent prompts. It said it actually may feel literally impossible to sift through something that feels that wide open.
It gave me techniques like: when you next sit with him, go together through the book and pick out three quotes together, then have him pick one of those three. And when he has to write about it, create a template: this is the quote I chose, this is the character that said it, this is why it was important.
The next morning we did that, and he’s like, “Mom, that was so much easier. I really enjoyed doing that.” I had interpreted it as stubbornness, not wanting to do it. I would have continued interpreting it that way. I would have been like, he doesn’t like to read.
Versus Gemini explaining exactly what it was and how to solve for it. I was just so grateful. And I know teachers are grappling with how to deal with this, but it was just such a positive use case.
Bridget McCormack: That’s amazing. Actually, that’s so great. I admire you for thinking to actually ask. Those are the kind of things I don’t always think about, and later I’m like, oh, I wonder if there would have been some helpful feedback.
Jen Leonard: Thank you to Gemini. I will continue doing that more, I think. I don’t want it to solve their homework for them, but I want to use it as a tool as a parent.
Bridget McCormack: A collaborator on demand—again, like in an area where you might not have one at the ready. I love you and your kids, but if you called me, I would have been like, “I don’t know what to do about that”
Jen Leonard: Well, not only that, but we had gone to a parent-teacher conference, and the teacher was sort of like, “How can I get him to push through to share more prompts for writing?” And I went, “I don’t know. I would hope you know. But Gemini knew.”
I emailed the teacher, and I had so much—I know teachers feel strongly about AI, so I didn’t disclose that this is how I did it. I was like, “Oh, I did some internet research, and I think it might be about divergent tasks.” We worked on this, and this might be helpful.
So hopefully she doesn’t listen to AI and the Future of Law or else I’m now outed.
Bridget McCormack: Yeah, you’re totally outed.
What Just Happened
Jen Leonard: So Bridget, what just happened?
Bridget McCormack: It’s hard for us to pick and choose here, but I’m going to mention two things.
Judge Marty McGee, who’s a trial judge in North Carolina, was issuing what’s basically an administrative order for parties who file pleadings and litigate cases in his court and use AI. It was a very thoughtful order about when AI disclosure is required and when it’s not.
I think, for whatever it’s worth, the dividing line for Judge McGee is if AI was used to build or enhance any kind of evidence that the court or a jury is going to be considering, it has to be disclosed. But if it’s used in the kinds of routine tasks that lawyers do—calendaring, email, even e-discovery and drafting—it doesn’t have to be disclosed.
It’s a very, very nuanced and thoughtful order, and it includes a section on education where lawyers can go learn about AI. One of the sources he points them to is our podcast, so that was very exciting.
And Judge McGee, we salute you for your thoughtful work on helping us all navigate what this technology means for resolving disputes in courts.
Jen Leonard: That is so cool. Thank you, Judge McGee.
Bridget McCormack: I know, wasn’t it? It was exciting to see that. Thanks for the call-out.
The second thing that happened—and is a thing that’s happening, I guess—is all of the focus, I think at the end of the year and the start of the new year, on the question of whether we are in an AI bubble.
And of course, you know, the question of whether it’s a bubble is simply whether the enthusiasm we’re hearing and seeing is kind of ahead of reality—whether the price of the asset is disconnected from its intrinsic value.
I think the argument goes something like this: the tech companies are spending trillions of dollars on chips and building data centers. I mean, the talk at the end of the year was all about data center building in space, which it sounds like a lot of the big companies are researching and planning to do.
And there’s a mismatch with what we’re seeing in terms of revenue tied directly to AI products. There are a lot of people recalling a similar feeling with the dot-com bubble, which in fact was a bubble and did burst. People are saying today feels a lot like 1999.
I hate to make big predictions, but I’m not with the bear case on this one. Unlike that era, where there were like a gazillion startups, AI is already doing some real work—especially in coding. If you’ve followed coding, I think Claude Code’s latest product makes it sound like that industry is just permanently changed already.
And within legal, we know that it’s doing significant work here in the beginning of 2026 that is unlikely to backtrack. I think it’s only headed in one direction.
It’s also true that the companies that are doing the buying and the investing are not companies that can’t handle any kind of economic setback. You know, Microsoft and Google, Nvidia—they all have the balance sheets to endure a correction, unlike some of the startups that we saw in the early 2000s.
And finally, it’s also the case that bubbles usually pop when there’s too much supply, and that’s just not the case right now with AI. We’re still supply-constrained. There’s not enough chips, there’s not enough energy, and that suggests that demand is pretty durable.
I was at a conference in December—the Wall Street Journal CEO Council met for a couple of days—and the CEOs at that conference were all talking about AI. It’s a main topic. Everybody’s talking about it.
I was having a side conversation with somebody who said, “Nobody asks, what’s the ROI of electricity?” Right? And this is like electricity. You can’t say, “Oh, I haven’t seen the ROI on that one pilot yet.” So, you know, we’re going to keep the candles in the living room? No—we’re going to go with electricity. We think it’s probably the future.
But I don’t know. You must have listened to a bunch of conversations about this, Jen. Do you have any other thoughts on the AI bubble topic, or do you take the other view?
Jen Leonard: I think that if there is a bubble, it’s not like one big bubble that would burst and create an implosion across the entire economy. I think that there may be one or two big startups that don’t have the revenue streams you’re talking about that could burst because they’re overextended in the commitments they’re making. But I don’t think the entire ecosystem of AI would burst.
Before we started recording, you and I were talking about a really cool interview with Demis Hassabis, who leads Google’s DeepMind research and a little bit of their productization efforts as well. He talked about the lack of pressure they feel at Google, as compared with some of the other major labs, to generate revenue, which allows them to focus on advancing their AI models and a lot of the other work they do.
To me, that doesn’t feel bubbly at all. It feels like they don’t have that kind of pressure because if they experience a downturn in AI, they can support it with their other significant revenue streams.
Like you said, I don’t see scarcity in the supply anywhere. I actually think even if there were to be some sort of downturn economically because of AI, it would, in our industry at least, accelerate the pressure on law firms in particular to adopt AI.
One of the interesting things is that even though it feels like—and in fact has been—a really fast adoption of AI in a conservative industry, I feel like law firms have been given a fair amount of grace by their clients.
It’s now been over three years since ChatGPT came out, but there hasn’t been a ton of demand for the business model to change dramatically. I think that’s primarily because the economy’s been relatively stable and healthy. If there were to be a recession, I think that would change pretty quickly.
So no matter which way it turns out, for law firms at least, I don’t think the story will change in terms of urgency.
And for society as a whole, I think it would be much more similar to the dot-com bust in the sense that AI will continue to progress. We’re already using it all the time. It’s not as though the web stopped being relevant in our lives because the dot-com bubble burst.
I do think there will be a lot of consolidation in the next year, particularly in legal. I think there are 400-plus AI products on the market, and what we’re seeing with a lot of our clients is more wariness around purchasing subscriptions.
There was a frenzy of that last year at this time. Now there are a lot of idling pilots, and firms are more cautious about what they’re signing up for. I think you’ll see a lot of acquisitions and then some consensus in the marketplace about which ones are worthwhile.
Main Topic: Private Equity in Law Firms and AI
Jen Leonard: Okay. So speaking of market forces, that moves us into our main topic today, which is a force that previously had not impacted the legal industry. It’s impacted many other industries.
Actually, right before I started exchanging articles with friends about this before the holidays, I was reading about it in a different industry—roofing, actually. But it’s private equity in law firms.
This sort of came on my radar in the middle of 2025, and as we were talking about even earlier today, it has become one of the hottest topics in legal, even just in the last year.
So maybe to set the stage for this, just to back up a little bit and explain how it became such an emergent issue: traditionally in the U.S., Rule 5.4 of the Rules of Professional Conduct generally prohibits non-lawyers, including private equity firms, from owning law firms.
This is one of the things that you and I talk about all the time. It has kept the guild closed. It also creates a whole lot of other outcomes, including mono-disciplinary leadership of law firms and, to some extent, the lack of innovation in the business model.
In the middle of 2025, Holland & Knight put out a memo that talks about the concept of the management services organization model.
So how this model would work as a workaround of Rule 5.4 is that the law firm would be split into two separate legal entities. The law firm itself would be owned completely by lawyers and therefore would be compliant with Rule 5.4.
This entity would hold the client retainers, it would practice law, and it would be governed by all of the ethical obligations that govern lawyers.
The second entity would be the management services organization, or MSO. And this organization, in this conception, would be owned by private equity. They would own all of the business assets that were previously owned by the firm.
So this would include the technology, the real estate lease, the non-lawyer staff, the billing software, and the AI licenses. This is why there is an AI component to this.
The way this would be structured is that the law firm would pay the MSO a management fee, and that would be how the MSO would generate revenue. It would not be tied to the revenue of the firm in any way, because of another prohibition in the rules on splitting fees with non-lawyers.
So this was the first sort of piece of the puzzle here—the Holland & Knight memo.
Then came the capital interest. Publicly, Burford Capital, which has previously been famous in the legal landscape for litigation financing—where they bet on single cases—said they would move to law firm financing.
Instead of funding one lawsuit, they would own a piece of the MSO that powers the whole firm. Burford came out publicly last summer in a piece in the Financial Times saying that they would be really interested in MSOs in the U.S. law firm market.
I think one of their leaders was quoted as saying that it’s “crazy,” quote-unquote, that private equity hasn’t previously been involved in the market for private legal services in the U.S.
Historically, partners in a partnership model always want to take home all of their profits at the end of the year. They have not retained earnings, so there’s no retained earnings line on a P&L for a partnership.
That’s prevented firms from reinvesting in technology. So the private equity firm would provide the cash so that law firms could use the MSO to invest in AI upgrades in exchange for equity in the MSO.
So that’s sort of the backdrop.
Then the next chapter of the story came in the fall, when McDermott Will & Emery came out publicly and said that they had taken an inbound call from a private equity interest, in a story that ran in the legal media.
That was a big story because no big, prestigious firm had previously disclosed conversations like that. It could be the beginning of normalizing these types of conversations.
I’ve heard on the ground other law firm managing partners say that they’ve fielded similar conversations.
I’ll also say that you and I do these presentations about AI constantly, Bridget, and they stoke some urgency. In the fall, I started adding sections to presentations about this, and it’s a whole other level of people being both surprised and rattled by this development.
There’s often not a full understanding of the reasons behind private equity interest—initially thinking it’s just about increasing profitability—without understanding that it’s related to AI, the need to invest, and also the declining interest in and availability of equity stakes in law firms for ascending talent.
So the pie is growing in profits for firms, but there are fewer equity partnerships available. There’s a generation that’s not really taking ownership in firms.
I think leadership understands they need new options for investment and future-proofing their firms. But there’s also been analysis, including from Jordan Furlong, about some of the potential downsides of taking private equity and the risks involved—like clearly defining what you mean by business assets and handing over control of things that were previously under partner control, and the changes that could create.
Bridget McCormack: I’ve also heard a lot of this on the ground, both from law firm partners and from funders, that this is an area of acute interest right now.
One idea is that you could build an MSO that supports more than one law firm. You could build a massive MSO, and law firms could plug into it. The law firm piece of the business could plug into these MSOs.
I think that’s the model that has been used, successfully or unsuccessfully, in other industries—health care, dentistry, veterinary medicine. Lots of industries have seen that model work.
So the MSOs could be rolled up and grown to bring efficiencies across the business of law.
I also hear the alarm from some lawyers who believe this is a threat to independent professional judgment, which is paramount to what it means to be a lawyer. Turning lawyers into something like Uber drivers for hedge funds is an ugly picture—not why they went to law school, not what they want to do.
On the other side, there are those who believe the traditional law firm model is not working for lots of people, including some lawyers who work at those firms.
If the legal profession is going to be able to invest in AI at scale, it’s going to need capital that the current law firm structure doesn’t allow. This influx of capital could be a lifeline to the traditional partnership model, which some think is broken.
If at the end of every year a business were to give out all of its profits to the partners, it would have zero for R&D. That’s just not a model set up to win at a time when AI investment requires real capital.
Letting lawyers be lawyers and funders run the tech might be a solution to the way the partnership model gets in the way of scaling.
The other side of that, of course, is that when private equity owns the MSO, it’s controlling the firm’s technology, data, brand, and bank accounts. It’s hard to say it’s not really controlling the firm, at least in practice.
That can erode the loyalty to clients that Rule 5.4 is meant to protect.
I think it’s a complicated question. I do think it’s hard for law firms with a traditional partner profit-sharing model to build for the future.
I can imagine being a senior associate coming up on the partnership track and worrying about how the firm is going to do the R&D needed to stay relevant in ten, twenty, thirty years.
It feels to me like there could be generational differences in how lawyers think about this issue. I’d be curious if there’s data on that, because you could imagine 30- or 35-year-olds saying,
“There’s not going to be an equity partnership for me unless we build for the future. If dividing up the business and taking on a capital partner is how we do that, then let’s do it—so at least we have a future.”
I also think about what a change in the law firm business model could mean for access to legal services, which is something you and I care deeply about.
Lawyers talk about the guild model protecting clients, but it also protects prices. It keeps prices high and prohibits economies of scale. Every other industry has used economies of scale to lower costs.
Nora Engstrom at Stanford wrote a piece—co-authored with a former student, I think—in the Yale Law Journal about auto clubs at the turn of the twentieth century. They offered legal services as a benefit of membership.
Members didn’t just get maps—they also got legal services, affordable legal services, literally pennies on the dollar. Lawyers at these auto club legal service agencies did everything: felonies, habeas corpus appeals, complicated legal work.
That doesn’t exist anymore because bar associations sued them out of existence. It’s an ugly history in our profession. They were shut down because the work was too cheap and threatened other lawyers’ practices.
I don’t think the current model is working for most Americans.
Law firms focus on serving their clients, not on serving everyone, and that’s understandable.
But as a profession, if we care about what makes us important, we have to figure out how everyone has some access to legal information and legal services when they need it.
Thinking about different business models that could make legal services more democratically available should be a conversation we’re all interested in having.
I don’t know what the right answer is, but it does feel like a timely conversation. It would be quite a headline if private equity turned out to be part of the solution to expanding access to justice—a happy accident, perhaps, even if it wasn’t the intended outcome.
I think it would be interesting to see what would happen if a firm welcomed private equity investment—whether partners would lateral out immediately or whether generational dynamics would pull the other way.
Equity partnership is declining. It’s increasingly unlikely to become an equity partner at the firm you start with. Most people become equity partners laterally, if at all, and many are non-equity partners.
Junior partners often see that decision-makers are focused on retirement and not on making the investments necessary for long-term success. That creates unworkable dynamics.
So is private equity attractive to younger partners because it feels more sustainable, or does it repel talent because it signals decline? I don’t know.
Bridget McCormack: My guess is we’ll return to this topic. I think we’re going to hear more and more about it throughout 2026.
Jen Leonard: Well, thank you, Bridget, for walking us through all of these interesting developments. And thank you to everyone out there for tuning in and walking through it with us. We’ll look forward to more super interesting conversations during season three, and to joining you next time on AI and the Future of Law. Until then, be well.