Privatizing Legal Ethics

Posted on February 23, 2012 by | Leave a comment

In a new post at Legal Week, Richard Moorhead draws attention to an interesting new research paper on legal ethics by Christopher J. Whelan & Neta Ziv.  The paper, titled “Privatizing Professionalism: Client Control of Lawyers’ Ethics” (to be published in a forthcoming issue of the Fordham Law Review, now available on SSRN) explores the ethical burden corporate clients place on their outside counsel.  Whelan and Ziv examined the formal guidelines given to outside counsel by their clients, as well as informal industry ethical norms, to determine what impact corporations can have on the ethical standards and behavior of their lawyers.

The authors found that clients can, in fact, exert considerable influence over the ethical behavior of their outside counsel.  More significantly, Whelan and Zin make the argument that such influence is an important form of “private regulation” that may fill in the gaps between government regulation of legal ethics and self-regulation by the industry:

Thus, the privatizing of professionalism may offer a new method with additional tools for the effective monitoring of lawyer ethical conduct.  External regulators cannot effectively monitor individual lawyer or law firm behavior, but corporate clients can, via their [outside counsel] guidelines and other procedures.  Not only can clients, especially in-house counsel, monitor lawyer conduct directly and indirectly, they have the leverage to direct and to manage particular behavior.  Our research suggests that this is in fact what many corporate clients, to a greater or lesser extent, actually do.

It is an interesting development in the evolution of legal ethics standards.  The authors are right that clients are better positioned to monitor the behavior of their own lawyers, and may also be better able to incentivize ethical behavior.  But it is precisely that closeness that makes private regulation questionable.  It may work well when the ethical concerns are typical and the motivations of both client and outside counsel are aligned.  But that will not always be the case.  As Moorhead rightly points out, the trend raises a key question: “What happens when business interests and ethical interests are in opposition?”

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Chinese Lawyers Head West

Posted on February 23, 2012 by | Leave a comment

We’ve written several times in the past few months about how firms are growing their global presence in markets ranging from Turkey to Indonesia to Brazil, and these firms have generally been large, international Western law firms.  What caught our eye recently was a small flurry of activity by some of China’s largest firms looking to expand into Western markets, typically in support of Chinese cross-border investment opportunities in Europe as well as in Africa and Latin America.

Grandall, one of China’s leading law firms, recently established an office in Paris that will focus primarily on Chinese investment in Europe and Africa, mergers & acquisitions, and dispute resolution.  In a statement to The Lawyer, Liu Wei, executive partner of Grandall in Shanghai, said:

 “The decision to establish an office in Paris is driven by our clients’ growing needs to invest into France and Europe.  Paris is centrally located in Europe and allows us easy access to many other European countries.”  He added, “[t]he Paris office will also enable us to provide legal services to clients investing into Africa.”

Zhong Lun, another leading Chinese firm, has launched an office in London, staffed with the entire London office (three partners and four associates) from Zhonglun W&D, which broke off from Zhong Lun in 2003.  As reported in The Asian Lawyer, Robert Lewis, senior of counsel at Zhong Lun in Beijing, notes that “the firm is hoping to use its London office to reach European companies doing business in China as well as expand its referral network.”

Chinese firm, Yingke, announced plans in late January to open offices in Warsaw and Istanbul, following the firm’s announcement in late 2011 that it would open an office in London.  The firm secured its first European presence in 2010 when it entered into a cooperative agreement with Hungarian law firm Várnai & Partners.  Last year, the firm’s Italian branch was set up as a joint venture in Verona with Italian law firm Advoco to take advantage of bilateral trade and investment between China and Italy.  With an economy based on agriculture, industry and financial services, and one of Italy’s main transportation hubs, Verona accounted for 30 percent of Italy’s total investment in China in 2010.

And finally, in an interesting twist on how Chinese lawyers are expanding beyond their borders, Spanish firm Uria Menéndez and China’s bar association, the All China Lawyers Association (ACLA), recently launched a program for Chinese lawyers aimed at preparing them for the Latin American and European legal markets.  Beginning with management and international business law training at the firm’s principal office in Madrid, the program then places the participants in the firm’s office in Brussels to familiarize themselves with European legal issues relevant to Chinese investors.  The last part of the six-month program will see the lawyers posted to Uria Menéndez offices in either Latin America or in Europe to participate in cross-border work.  Juan Martín Perrotto, managing partner of Uría Menéndez’s Beijing office notes:

The Latin American component of the programme is particularly attractive to Chinese companies, given the current trend of Chinese outbound investment and the relatively limited knowledge of Chinese firms regarding the local legal market.

The firm notes that the program “has sparked a great deal of interest in the Chinese legal market and the number of applications is expected to be high.”  The program begins in September and will accept up to 10 PRC lawyers.

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Hong Kong Still Struggling with LLP Liability

Posted on February 17, 2012 by | Leave a comment

Legal Week is reporting that despite efforts by the Hong Kong Department of Justice (DoJ) to integrate the local legal network with international liability standards, obstacles still remain for LLPs.  Currently, local liability laws force global LLPs like Skadden Arps, Cleary Gottlieb and Weil Gotshal to maintain independent local partnerships for their Hong Kong practices.

Earlier this week, the Hong Kong Law Society held a well-attended meeting to discuss the issue, and it is clear that practitioners are still not happy with the proposed reforms:

A more recent DoJ draft held that the designated partner would still be liable if a client sued, but could potentially extricate themselves by identifying another partner deemed more blameworthy.

Huen Wong, the immediate past president of the Honk Kong Law Society and ex-Fried Frank Asia managing partner, described this formula as “unacceptable”, noting that in a normal lawsuit, the judge would work out and apportion blame without the need for partner “finger pointing.”

In response to feedback, the DoJ recently agreed to remove this clause, but offered no details on what would replace it.

Another issue is the length of clawback periods, which the DoJ currently sets at six years for law firms – an uncomfortably long time for former partners to remain under threat of clawback in the event of a bankruptcy or dissolution.

Hong Kong’s growing prominence in business and law may increase pressure for regulatory reform.  Hong Kong edged out New York in 2011 as the world leader in IPOs, with more than $30 billion in new listings.  With U.S. financial markets still significantly less lucrative than they once were, global firms view Hong Kong as an important, and growing, venue for transactional work.

Though Legal Week indicates that not all firms are eager to integrate their Hong Kong practices (citing tax issues, among other concerns), many firms would certainly consider integration if the local liability laws were updated.  And other firms may well decide to take the leap into the Hong Kong market if the necessity of setting up a local partnership were eliminated.  Bringing the local liability rules in line with international practice would, at a minimum, offer global firms the flexibility to determine how best to participate in this increasingly competitive and lucrative market.

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Strict Rules on International Law Firms in Brazil Likely to Remain in Place

Posted on February 17, 2012 by | Leave a comment

Last November we covered a story that Latin Lawyer (subscription required) was reporting on regarding the decision by the Brazilian Bar Association (OAB) to maintain Brazil’s strict regulations against any type of formal alliance with international firms.  The OAB then charged its Federal Council with forming a commission to help clarify the rules.

This week, Latin Lawyer has again provided another update that indicates that these regulations will continue to remain in place.  Issued on Tuesday, the draft rule would:

[P]rohibit many habits and structures currently in place in existing associations in Brazil, and rigorously enforce total physical, financial, administrative, and promotional separation between local and international firms. Foreigners found breaking the rules would lose their Brazilian licence; non-compliant Brazilians would face OAB disciplinary proceedings, with administrative, civil and even criminal penalties.

If passed, firms would no longer be permitted to use phrases such as “associated with” or “in cooperation with,” joint communications would be prohibited, and the sharing of back office functions would also not be allowed.  All Brazilian firms associated with international firms would be required to register with their local bar and any international lawyer found to be in breach of the rules could have their license revoked as a foreign legal consultant.

The OAB’s Commission on International Relations will vote on the new rule by March, when it will go to the National Council of the OAB.

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2012 Client Advisory Forecasts an Uncertain Year Ahead

Posted on February 16, 2012 by | Leave a comment

Yesterday the Hildebrandt Institute and the Law Firm Group at Citi Private Bank released their annual Client Advisory which reviews the factors that impacted the legal industry in the past year and offers a prognosis as to where the market is headed in the near term. For this year, the Client Advisory forecasts that “2012 will be a year of challenge and uncertainty, with continued soft demand and rising costs impacting firm efforts to maintain profitability at acceptable levels.”

As we reported last month, the legal market ended 2011 with demand growth slightly positive, but overall performance for the year was fairly lackluster as the industry experienced growing pressures on law firm profitability.  While the first half of the year started strong, growth in demand for legal services slowed considerably in the second half of the year, and this was seen most notably in corporate and transactional practices.  However, there were bright spots, such as IP litigation as well as labor & employment, litigation and real estate which showed positive demand growth in 2011.  But there are also reasons to remain cautious:

It seems premature, however, to say that the market has stabilized. Moreover, even if stabilization has occurred, it is still at a significantly lower level than in the pre-recessionary period. Since it is unlikely, based on overall economic conditions, that the demand for legal services will grow robustly for the foreseeable future, the legal industry will be forced to live with uncertainty for some time to come.

Going forward, this uncertainty “will be exacerbated by both constrained growth in revenues and rising expenses,” creating “significant challenges for many law firm leaders.”  There will be “[c]ontinued sluggishness in demand growth” that will make it difficult for firms to “maintain profitability at acceptable levels.”  Other factors such as client pushback on rates, increasing direct and indirect expenses, and the increasing cost of maintaining leverage will all contribute to a challenging year ahead for law firms.  

“If current conditions persist, firms will be increasingly challenged to examine new models for the delivery of legal services,” said Michael Abbott, general manager of the Hildebrandt Institute. He adds:

New business models based on redesigned work processes, greater emphasis on project management, and new approaches to expense management and professional development may unlock greater efficiencies. The most successful firms will continue to be those that can achieve and deliver the greatest value to their clients.

The Advisory incorporates data from the Hildebrandt Institute’s Peer Monitor Index, which presents data from 116 U.S.-based law firms and from Citi Private Bank’s Law Watch Quarterly Flash: Full Year 2011, which includes data collected from 178 firms, including 81 Am Law 100 firms, 47 Am Law Second 100 firms and 50 additional firms.

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Lawsuits Against Law Firms On the Rise

Posted on February 10, 2012 by | Leave a comment

The Wall Street Journal reports this week that law firms are increasingly facing claims by disgruntled clients and former partners:

Getting blamed for poor results is nothing new for law firms, but they say clients have become more willing to sue in recent years. Claims of employment discrimination and firm mismanagement also are popping up more often as postrecession, law firms cull their ranks and sideline some partners in an attempt to boost profits for those who remain.

Ropes & Gray and McDermott Will & Emery are among firms facing major malpractice suits.  Last month a federal judge in the District of Massachusetts denied Ropes & Gray’s motion to dismiss an $83 million lawsuit concerning the firm’s handling of patent applications for Cold Spring Harbor Laboratory.  And a case brought by J-M Manufacturing Co. against McDermott touches on a number of hot topics for large law firms, including the use of contract attorneys and the protection of client data.  J-M is alleging that negligent oversight of contract lawyers led to the release of nearly 4,000 privileged documents to the U.S. Attorney’s Office in Los Angeles.

The increase in the size and frequency of such claims has led some firms to beef up their professional liability coverage:

Professional-liability insurance typically has been among the top operating costs for law firms, after compensation and real estate. Most firms, particularly those with 50 or more lawyers, buy malpractice insurance, says Anne Marie Davine, who leads the U.S. law-firm practice at insurance broker Marsh. The biggest firms are taking out multimillion-dollar policies, and midsize partnerships that may have been underinsured are increasing their coverage, insurance brokers say.

Given the risks involved, such precautions are probably a smart choice for law firms.  But the added costs associated with increased coverage will only add to the trend of rising expenses that are making growth so difficult in the current legal economy.

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Summer Associate Hiring Up in 2012 (at least for some)

Posted on February 9, 2012 by | Leave a comment

Last fall, some large law firms (including Bingham McCutcheon and Skadden, Arps, Meagher & Flom) indicated that they would be significantly increasing (sub. req.) the size of their summer associate classes in 2012.  The increase in hiring appears to have had a noticeable effect on summer employment numbers at some of the nation’s top law schools.   This week Reuters reports some early numbers from a handful of elite schools:

At New York University School of Law — currently ranked No. 6 by US News & World Report — preliminary data show that about 70 percent of incoming third-year students got summer associate positions in 2011, up 15 percentage points from 2010. At No. 5-ranked University of Chicago, the number was 77 percent, up eight points from 2010. The increase was three percentage points at No. 1-ranked Yale, and four percentage points at No. 7-ranked University of Michigan.

Despite these signs of life, the overall job market for law students is far from recovered.  As we discussed last week, hiring levels are still close to half what they were prior to the economic downturn.  While some large law firms are ready to increase hiring, most firms remain cautious.  And for mid-level firms, there may never be a return to pre-downturn hiring levels:

“Top-end firms continue to rely heavily on summer associate programs, but mid-level firms are reassessing their processes for training lawyers,” [consultant Paula Avery] said. “There’s a differentiation in the market.”

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BPOs, LPOs, and Hybrids: No One Size Fits All

Posted on February 7, 2012 by | Leave a comment

Last week, we took a look at recent trends in the legal process outsourcing (LPO) space. Specifically, we discussed how large law firms are using LPO providers to help drive down the costs of providing legal services to their clients.  There is an equally vibrant movement afoot by firms to hold down or cut costs, by either moving their business process support (BPO) functions to lower-cost locations or even providing LPO-type services to their clients. 

Moving support service functions is not entirely new – Orrick pioneered the concept when it established its Wheeling, West Virginia operations center in 2002. Last October Pillsbury announced that it would launch a services center in Nashville that the firm expects to be fully operational by the fall of 2012.  The new center will eventually employ 150 people providing IT, finance, word processing, new client intake and other non-legal professional services.  In September, WilmerHale opened a business services center in Dayton, Ohio, which has since grown to over 200 employees. 

In the UK, the trend has been similar, but firms across the pond are also providing more LPO-type services in addition to moving support functions to lower-cost regions.  Leading UK firm Herbert Smith officially launched an office last April in Belfast devoted to document review and analysis work from litigation, arbitration and regulatory investigations.  With the arrival of 18 new fee earners last month, the office has more than doubled in size in less than a year.  Allen & Overy, in more of a hybrid model, also established an office last year in Northern Ireland providing support services, as well as a legal services center that delivers “some of the routine or less complex elements of legal work.”  Last spring, as an alternative to outsourcing for its clients, Taylor Wessing launched its New Street Solutions, a new division that offers a technology-based “combination of data mining, active contract management and due diligence services.”   The offering claims, in trials, that it “delivered efficiency savings of a minimum of 60% on the cost of core business and legal processes.” 

In an interesting development last week, Legal Week reported that Taylor Wessing  was considering spinning off New Street Solutions to become a separate entity that would provide its services to other law firms.  While the venture is still quite modest and no match for established LPO providers – Legal Week reports that it has 10 staff and that it expects to “bring in more than £300,000 in revenues in its first financial year in operation” – the firm hopes that it can, through a separate entity, sell more of its services to other law firms.

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Large Law + LPO Providers = Growing Trend

Posted on February 3, 2012 by | 1 Comment

With law firms under continuing pressure to provide innovative client services and drive down costs in their operations, it is no surprise that a growing number of firms are rethinking the traditional model for delivering legal services. One trend that shows no signs of letting up is the use of legal process outsourcing (LPO) providers such as Pangea3 and Integreon.  And the usage is not only growing by corporate counsel, early adopters of third-party services, but now increasingly by large law firms both in the US and overseas.

This week there was the announcement of Nixon Peabody’s preferred vendor agreement with LPO provider Pangea3 (a Thomson Reuters business).  The agreement with Pangea3 was established “in response to client demand to reduce the risks, burdens, and costs of electronic discovery (e-discovery) review.”  Pangea3 will be Nixon’s recommended LPO provider, “where appropriate,” and the firm’s clients will be able to benefit from preferred pricing.

Last October, in a move that was hailed as a “first” for an Australian firm, Mallesons Stephen Jacques announced an agreement with LPO provider Integreon to become the firm’s preferred supplier for LPO support services.  In March, the firm is set to combine with China’s King & Wood to create King & Wood Mallesons with over 1,800 lawyers.

While India remains the top destination for offshore work, other countries such as the Philippines and South Africa have also experienced an uptick in demand.  At the same time, onshore options in the US and the UK are gaining traction, fueled by client desire to have third-party work performed in a more familiar local environment.  Last year Pangea3, with major locations in Mumbai and New Delhi, opened a new office in suburban Dallas, taking on work “that customers – including law firm customers – want to source externally, but involve matters that by law have to be managed and performed in the United States, for instance matters subject to export controls regulations.”

In November, Integreon opened a new document review center in the Washington, DC-area to address demand for managed review services by local general counsel and DC law firms. And in the UK, Integreon also announced the official opening of its onshore LPO facility in Bristol last week, providing clients with contract management, document review, compliance support and M&A due diligence. “As the delivery of legal services evolves, it’s clear that most law firms and corporate counsel require a mix of onshore and offshore support”, said Janet Taylor-Hall, Global Head of Legal Process Outsourcing at Integreon. She adds, that while cost is certainly a factor in determining where the work should be performed, other factors ranging from work complexity and legal restrictions to language skills and time zone differences all must be taken into consideration.

It is fair to say that firms will continue to work hard to drive costs out of their operations where it make sense and without jeopardizing client satisfaction.  And it is clear that the use of LPO providers by large law firms is here to stay as part of that equation.

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Law Firm Hiring and the Value Proposition

Posted on February 3, 2012 by | 1 Comment

The American Lawyer reports this week that lateral partner moves were up 22% in 2011, after dropping to their lowest levels in more than a decade in 2010.  While the uptick is partially due to the absorption of former Howrey partners following the firm’s dissolution last spring, AmLaw attributes the resurgence to economic pressures that have made organic growth challenging for law firms; bringing in lateral partners is a way to increase profits and market share despite stagnant or declining market demand.  The increase in lateral hiring has presented opportunities for partners ready to make a move, and has enabled some firms to acquire new business or specialized experience.

There may also be some positive news for mid-level associates.  The Wall Street Journal took a fresh (and largely pessimistic) look at law firm associates on Monday (sub. req.), noting at least one bright spot: “[R]ecruiters report more opportunities for experienced mid-level associates.”  The key word here is “experienced”.  Firms seem to be thinking critically about how new lawyers can add value immediately.  For lateral partners, that value most likely comes in the form of a book of business.  But associates can offer value in the form of key skill sets or familiarity with a particular practice or industry.

The opportunities are harder to come by for recent law school graduates.  According to the WSJ article, entry-level associate classes are stabilizing at “as much as half” what they were in 2008.  Firms that cut their incoming class sizes to respond to the economic downturn remain cautious about returning to their old hiring levels.  One reason is continued instability in the global economy.  Paul Hastings managing partner Greg Nitzkowski puts it succinctly: “What happens if Greece falls apart again?”

But part of the challenge for new law school graduates is the question of value.  While partners and mid-level associates can capitalize on their years of practice experience, most new lawyers will require an investment on the firm’s part in order to realize their value.  And the looming threat of another global financial crisis makes that investment a risk.  For the time being, firms are hedging their bets.

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