The New Physics of Legal Tech: Infrastructure, Capital, and the Coming AI Realignment (Part 1 of 2)

The year 2025 was a banner one for legal tech. We've seen Harvey, a company that didn't even exist four years ago, achieve an $8 billion valuation. Filevine raised $400 million, and we saw a giant acquisition by legal tech standards when Clio acquired vLex. Agentic AI solutions are the big new thing. There is much to be excited about, even as many question valuations and the lofty promises of AI solutions in the market.

Rather than reprise 2025, I'm focusing on 2026 and the market's physics. Rather than bold predictions, I want to share insights on market forces and, in part 2, cover the pressure points where the legal ecosystem will bend.

Here are six macro trends to watch that will help legal innovators at law firms, in law departments, and at legal tech companies discern and interpret market signals, especially as chatter about an AI bubble creates distracting noise.

Here's to a great holiday season and Happy New Year for legal tech!

1. Geo-Politics and the AI Industrial Revolution

We are entering an AI Industrial Revolution, which is creating a rallying point for U.S. policy. The United States believes it must win the AI race. The prior administration passed the CHIPS and Science Act of 2022 to provide incentives to reduce the reliance on China and Taiwan for semiconductor manufacturing, intending to move more production onshore. The Biden administration also approved the reopening of the Three Mile Island nuclear facility to increase power generation to support Microsoft's data center expansion. Reliable energy and water for cooling are required for expanding AI compute power.

The current administration is building on these moves to pursue infrastructure investment to scale compute power. Actions are informed by U.S. foreign policy and also influence policies for investment, cybersecurity, energy, and water. The impact of AI on the American workforce may even influence immigration and education policies.

Legal innovators should watch for U.S. policy changes that may be early indicators of fits and starts in the AI Industrial Revolution, which can ripple into legal tech.

2. The Magnificent 7

The Magnificent 7 are the seven publicly listed companies with the highest valuations. They also account for about one-third of the S&P 500's value. Like it or not, most retirement portfolios will live and die by the performance of companies central to the expansion of AI infrastructure and applications. Government support is closely linked to expansion.

Positive earnings announcements mean continued expansion of AI. There are intercompany dependencies with other large companies, including Oracle, OpenAI, and even Harvey. Transformation across industries, such as legal, depends on the broader market. Hiccups may slow progress temporarily.

3. LLM feature expansion benefits the legal profession

Most Generative AI features in legal tech wouldn't exist if it weren't for the advances of large language models (LLMs). This is where the rubber meets the road for legal tech.

The pace of new features from LLM providers, including deep research and agentic capabilities, has increased utility in legal tech applications. Expect more of the same in 2026.

Legal innovators must leverage LLMs, but also be mindful that their use can be like dancing with elephants. Don't get so close that the elephant steps on you. Legal innovators must focus on defensible applications that go beyond LLMs. Proprietary data is one way to create a moat. Providing service and support is another. Build so that the next wave of LLM enhancements can be leveraged, and the risk of obsolescence is minimized.

I've written about how to think about OpenAI's product roadmap. However, it would be difficult to predict that OpenAI would develop a contract extraction tool!

Finally, keep your eye on Google. Its researchers were central to the development of LLMs. Expect Google to challenge OpenAI with Gemini and NotebookLM in 2026, leveraging its incumbent position in search.

4. AI adoption in law will go mainstream

Most BigLaw legal tech AI usage has been from early adopters. Using AI can be like a golfer learning how to swing a club differently. The results aren't instantaneous, and it feels awkward. In 2026, users will "improve their AI golf swing" to be more proficient. For example, some attorneys prefer specific formats or language in legal briefs. They also struggle with prompting. As attorneys learn to provide better context in prompts, AI solutions can produce output that aligns more closely with their preferences. Attorneys who master AI will gain a competitive edge and force the more pragmatic majority of attorneys to follow suit.

There will be push and pull between products like ChatGPT, Microsoft Copilot and specific legal AI solutions. But adoption will reign in 2026.

How much LLMs improve at solving for legal problems will define what legal innovators need to do to deliver solutions that meet the standards of the profession.

5. ROI pressure increases in 2026

Thomson Reuters (TRI) stock is down about 18% this year, mainly because analysts don't see sufficient return on its substantial AI investments, even though the business is strong, and long-term business transformation is more important. The valuation of TRI's peers, including Wolters Kluwer (WKL.AS) and Reed-Elsevier (RELX), are also down this year. These public companies are good proxies for gauging pressure, disruption and ROI in the legal tech market.

Law departments will be expected to show a real return in 2026. Law firms will need to remain competitive relative to peers. And venture-backed legal tech startups will see pressure to deliver revenue to support additional funding or a pathway to becoming cashflow positive.

I believe current valuations can only be justified by significant productivity gains that reduce labor costs. For this to happen, we need to see more productized legal services, higher productivity in firms, and work automation as tasks move in-house.

As a legal innovator, your organization's metrics will be paramount. Combining them with publicly available data points such as stock prices, investment trends, and valuations will help you interpret your execution.

6. Unauthorized practice of law (UPL)

Broad consumer adoption of ChatGPT for legal answers, coupled with pressure for ROI, will blur the lines between what constitutes legal advice and what constitutes UPL.

UPL is where technology, consumer behavior, ROI pressures, and professional regulation collide, and where the physics of the market are likely to drive structural change. Look for part 2 in the New Year, where we'll examine how systems may bend in 2026!

AI was used in support of this article.