Korea looks set to finally open its doors to foreign law firms but international firms remain adamant that this won’t affect their Korean strategies. ALB investigates.
The recent announcement by the Korean government to permit foreign law firms to establish representative (or liaison) offices there as early as October has been greeted warmly by international firms with extensive Korean practices. The announcement was made in line with Korea’s commitments under free trade agreements (FTAs) with the United States, the European Union and United Kingdom. Statements like ‘long overdue,’ ‘a step in the right direction’ and ‘it’s time’ will accurately capture the sentiments of most in regard to the update.
Yet despite these latest developments, consensus is that even if Korea opens its doors later this year, it may not have as profound an impact on the Korean strategies of international firms as some are expecting. Many transnational firms are more than willing to continue with their tried-and-tested Korea strategies, which have been around just as long as the idea of liberalisation itself.
Talk on liberalising the Korean legal services sector has been around for longer than some lawyers care to remember. For many Korean partners at international law firms, it has been the source of speculation and idle gossip for more than 20 years. According to these partners the process has always followed the same pattern: start, stall, and stop.
“Opening up of the legal sector along the lines mentioned by the Korean government earlier this year has been in the pipeline for about three or four years now,” said Eric Yoon, head of White & Case’s New York-based Korea practice. “But it’s a debate that has been raging for a long time. The first I heard about it was when I was in law school in 1986. Since then there have been a dozen announcements laying out timetables for liberalisation, but just when momentum builds something comes along and seems to set us back to where we started.”
Yet it’s widely believed that things are much different this time. The liberalisation cause is backed by Korean FTAs with the US, EU and ASEAN, all of which are in their final stages of negotiation, awaiting only ratification by President Lee Myung-bak. The talk now, it seems, is not if Korea will open the doors of its legal sector to foreign firms but rather, how quickly it will do so and what methods will be used. “The momentum that is needed for something as monumental as legal sector liberalisation is now clearly there,” said Yoon. "The recent passage of the Foreign Legal Consultant Act is a good sign that the Korean government has actually cemented a foundation for the opening of the legal market,” said Jae Chul Lee, head of DLA Piper’s Korean practice.
Slow, uncertain change
As is so often the case with corporate change in Korea, any progress is likely to be slow, cautious, conservative and incremental - rightly so, according to the lawyers ALB spoke to. What is difficult in this instance is that no definitive methods for the implementation of the processes covered in the Act have been outlined, meaning it is difficult for international law firms to plan their business development strategies.
“Upon the successful ratification of the Korea-US FTA or the Korea-EU FTA … the legal market is scheduled to open from the following year in three different phases, over a period of 5 years, beginning from a branch office to a full-blown law firm,” said Lee. “Although it is difficult to predict when the FTA will be ratified either in the US or EU, my guess is that the Korean legal market is likely to open within 2 years or so.”
This is a far cry from the October 2009 partial opening suggested by the Korean government earlier this year. But while there still may be some confusion regarding a timetable for the entry of foreign firms, there is no doubt that they will face restrictions, in terms of the types of work they can handle and their business structures. These are unlikely to be substantively different to those faced by international law firms in mainland China, Japan or elsewhere in Asia-Pacific.
“The implementing details of the new regime are not yet available, but we expect continuing restrictions on the ability of foreign firms to advise on Korean law or to share profits with Korean-qualified firms,” said Christopher Stephens, who is Orrick, Herrington & Sutcliffe’s managing partner in Asia. “It’s likely that representative offices of foreign firms would be permitted to advise on English, New York or other foreign law, or serve as liaison offices to resources elsewhere in the firm.”
Restrictions make the prospect of opening in Korea for the short to medium-term not the highest value proposition for international law firms. All of the international law firms with the strongest Korean practices (Orrick, White & Case, Linklaters, Baker & McKenzie, DLA Piper, Allen & Overy and Cleary Gottlieb) have been running successful practices out of their Hong Kong, Tokyo (or in some cases US) offices for more than 20 years. They have built up lucrative, albeit informal, referral networks with leading Korean firms and are the beneficiaries of secondment arrangements for young lawyers.
Even for the most expansionist firms, for example, DLA or Bakers, there exists little incentive to break from the mould and establish a branch office in Seoul. But the question remains: what, apart from the most compelling of factors (client demand) would make a Seoul branch office a must for every international firm? White & Case’s Yoon says these involve giving international firms the ability to develop their practise in Korea, without some of the more onerous restrictions usually placed on foreign firms entering new markets. “Conditions favourable to the entrance of foreign firms would be things like allowing firms to use their brand without dilution, and allowing foreign firms to plan the trajectory of their own practice without external influence (for example, joint ventures). More generally, creating a marketplace where foreign firms have a reasonable expectation of that their new office will become profitable within a fair amount of time,” he says.
Domestic law firms
Suggestions such as these are enough to send shivers down the spines of most local firms in Korea - some of whom are already claiming that if foreign law firms are allowed to enter, restrictions such as those mentioned by Yoon must be implemented to level the playing field. As always, foreign firms maintain that when and if they are permitted entry, they will not be competing for the same type of work as their domestic counterparts.
In fact, all suggest that liberalisation will only serve to strengthen the domestic legal industry - as the competition which will likely eventuate from their presence will lift standards across the board. “If Korea permitted foreign law firms to establish offices and hire locally qualified lawyers to advise on Korean law, the legal services sector would flourish even more,” said Orrick’s Stephens. “The accretive nature of foreign law firms to a legal market such as Korea actually increases the opportunity for everyone. Local law firms would retain a range of competitive advantages, and the better local firms would respond to the competition in ways that would expand their operations and improve profitability.”
But one needs only to cast an eye over Korea’s daily broadsheets to see that most local lawyers in Korea do not share Stephens’ (or for that matter, the other international firms’) optimism. Liberalisation will crush the domestic legal industry, said partners at some Korean firms. It will see their best and brightest talent poached by US and UK firms, and slowly but surely erode their client base.
Are such fears warranted? One needs only to look at other legal markets across Asia who also embarked on the long road to liberalisation to see that, by and large, domestic firms have thrived in the face of increased international competition. Japan is the most pertinent example: 22 years since the legal sector was opened to foreign law firms, it is Japan’s largest domestic firms, like Anderson Mori & Tomotsune, Mori Hamada & Matsumoto, Nagashima Ohno & Tsunematsu and Nishimura & Asahi, who are the most formidable players in the legal arena.
Yet arguably, it is at the mid-tier of the market where things have been shaken up the most. The more observant may note that all of the Japanese ‘big four’ firms named above are the product of mergers and alliances between smaller firms. Those who were not able to find merger partners have either disappeared or been subsumed by international law firms under the auspices of joint law ventures.
Level playing fields
Will this happen in Korea under liberalisation? Few international lawyers ALB spoke to predict that domestic law firms will cast as conspicuous a shadow over a liberalised market there, for a number of reasons. Most notably, the Korean legal market is only half the size of Japan’s, based on recent Korean Bar Association estimates. “The 22-years it took for the Japanese legal market to settle down after liberalisation will be greatly shortened in Korea,” said a partner at an international law firm who did not wish to be named.
“We are probably looking at a maximum ten years to get an understanding of the complexion of the market post-liberalisation. I feel we will see very few independent firms remaining. The market is not large enough to support firms the size of local Japanese firms and I feel that within a decade it won’t be the Kim & Chang’s, the Lee & Ko’s or the Bae Kim & Lee’s — the indigenous players — who will be the largest.”
It seems the writing is on the wall, but just how will domestic law firms in Korea counter this foreign challenge? If their actions over the past year are any indication then they will be seeking strength in numbers.
So much was evident from ALB 50, our guide to the largest law firms in Asia. In 2008, the largest Korean law firms increased headcount by an average of 20 per cent. Lee & Ko went from 237 to 312 lawyers in this period, Yoon, Yang, Kim, Shin & Yu from 181 to 282 and Kim & Chang retained its place as Korea’s largest firm increasing in size from 380 to 430 lawyers.