How to compete in Korea’s liberalised legal market

Author: | Published: 17 Jul 2012
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US law firms were first permitted to apply to open Seoul offices on March 6 2012, one week before the Korea-US Free Trade Agreement (Korus FTA) took effect. Since then, at least 13 US firms have submitted applications. In comparison under the EU Free Trade Agreement (EU FTA), which took effect six months before the Korus FTA, only one UK firm, Clifford Chance, had applied to open an office by press time.

Though many firms had been anxiously waiting for the Korean market to liberalise, significant details must be thought through before jumping into the pool. Just before going to press, four firms received preliminary approval from Korea's Ministry of Justice to open offices in Seoul. The government granted each of their nominated lead partners Foreign Legal Consultant (FLC) status. This makes it a fitting time to discuss different market entry strategies and consider the key factors that will determine which practices will be the long-term winners and losers.

Who, why, when and what

For many years a number of firms, such as Cleary Gottlieb Steen & Hamilton, Simpson Thacher & Bartlett and Paul Hastings, have been staffing a substantial amount of Korea-related legal work from their Hong Kong offices. It was no surprise, therefore, that they were among the first to announce their intentions to open a Seoul office. What has been more unexpected is the number of firms with relatively small Korea practices that have expressed an interest, including some lesser-known small firms with business ties to Korea. Based on existing data, it appears that as many as 20 firms may apply to open offices in Seoul by mid-2013.

Entry strategies differ greatly, but they can be broadly categorised as either an offensive/proactive or defensive/reactive approach. The firms with substantial existing Korea practices view opening an office in Seoul defensively (ie as a costly, necessary evil they must pursue to defend their share of Korea's legal work). In contrast, the firms that only have a toehold in Korea see real opportunity and are approaching the market offensively. By opening offices in Seoul they hope to get closer to potential clients and turn Korea into a lucrative new market for their firms. This is particularly true of top-tier global firms that hope to spin-off litigation and corporate projects from Korea to their other offices. These firms, however, charge premium rates. Second-tier international firms, which offer more competitive billing structures, are actually better positioned to compete for cross-border work presently being performed by domestic firms (in tandem with local counsel in foreign markets).

The lag time between application and expected launch date mentioned earlier is due to the regulatory framework, registration requirements and time needed for firms to qualify their lawyers locally. One of the hold-ups for UK firms is the fact that most Korea practice lawyers working for UK firms are actually US-qualified (which raised particular concerns prior to the passage of the Korus FTA). Other issues include the UK and European economic climate, tax issues associated with opening a Korean office, and political and trade policy uncertainties. However this is all part of the necessary due diligence process. Any firm contemplating a new office opening in Korea, or anywhere for that matter, should weigh all of the expected costs and potential benefits.

What will these new offices look like when they open? Initially, to control costs, they will start off small. Over time, assuming all goes well, the firms will increase their presence. The biggest problems most firms are likely to face are non-recurring start-up costs, and understanding the importance of being patient, providing the necessary financial support and maintaining a strong commitment in the medium-term. A firm's willingness to invest sufficient resources without immediate returns during the first three to six years is critical for long-term profitability and success.

It is worth noting that the formula is somewhat different for firms with established Korea practices than it is for firms just starting one. When the Korean legal market was closed, Korean companies wanting to be advised by international law firms had no choice but to pay all the collateral costs associated with getting that advice – including travel to Seoul and hotel tabs. Once a firm has an office in Seoul, or their competitors do, these costs can no longer be passed on to the client. They will have to be absorbed, and, therefore, will squeeze the firm's profit margins. To offset these costs, the firm will need to reap efficiencies from being closer to the client or increase their market share. The latter should be possible as a result of greater on-the-ground marketing opportunities and increased name recognition.

As mentioned earlier, to minimise start-up costs and associated risks, new offices will tend to start small with two to three partners and a well-defined area of practice specialisation. Even the biggest firms, with the largest Korea practices and established offices in Hong Kong, will most likely have fewer than 10 lawyers in Seoul for the next few years. Due to the Foreign Legal Consultant Act (FLCA), which requires foreign lawyers to have at least three years of prior legal experience, it appears that international firms will need to leave their junior associates behind, which creates significant inefficiencies.

One of the most interesting questions is how the size and practice of these firms will change during the three phases of liberalisation. In the first phase, new offices can only advise on the laws of the firm's home jurisdiction. To be able to offer local law advice, the firm will need to develop mutually-beneficial referral relationships with Korean lawyers. Given there is already a substantial number of foreign-qualified lawyers working at the top Korean law firms, this will be a complicated process. As a result, there may be substantial new opportunities for high-quality second-tier Korean firms to develop strong referral relationships with international firms.

From an office's third year, the Korus FTA will permit firms to enter into profit-sharing arrangements with Korean law firms. However firms must wait until year six to provide Korean legal services (via full partnerships with Korean lawyers). Some, but by no means all, international law firms will be interested in taking advantage of the opportunity to work more closely with Korean lawyers. Again, the smaller second-tier Korean firms will likely be targeted for many of these affiliations and mergers.

A new playing field

There are two key categories of foreign-qualified lawyers: those who are already practicing in Seoul, and those who have a Korea practice but are based outside of Korea. The playing field for both has already started changing.

Understanding the FLCA is critical for this discussion. Although the FLCA was enacted in 2009, the rules were not enforced and were not a matter of concern for foreign-qualified lawyers working in Korean law firms until the passage of the recent FTAs. The FLCA rules will have a serious – and perhaps unexpected – impact on lawyers who have spent their entire legal careers in Seoul and now wish to consider working for a foreign firm.

Under article 4 section 1 of the FLCA, a lawyer is eligible to be registered as a foreign legal consultant only if they have 'three or more years of experience with legal services in a home country of license'. Luckily, there are two key exceptions. First, if the lawyer has performed legal services concerning the laws of his or her country of licence in another foreign jurisdiction (such as Hong Kong), that experience can be counted. Second, if a lawyer's work has focused primarily on research, studying or reporting on the laws of the country where he/she is licensed, up to two years of that experience may be counted.

The only foreign-qualified lawyers who cannot meet this requirement are junior associates who do not yet have three years post-bar admission experience, and more senior lawyers who began their legal careers in Seoul right after graduating from law school. Unfortunately, there are quite a few lawyers who fall into the latter category. While it appears that these lawyers will be allowed to continue working for Korean firms or as in-house counsel, they would need to leave Seoul for the required year before working for an international law firm's Seoul office. For the lawyers who are fortunate enough to find a firm willing to provide them with this invaluable year in another office, the rule could have a positive impact on their careers. For many, however, the rule may inhibit them from exploring options at foreign firms.

Initially, the liberalisation of the legal market will be felt most strongly by foreign-qualified lawyers who are working outside of Seoul. This group has always known that at some point in time the market might open in Seoul. However they did not know exactly when or what they would do when it did open up. Some of these people are delighted – there is now an end in sight to their constant trips to Seoul and they should be able to move themselves and their families closer to relatives and friends. Others prefer the status quo. Their families don't want to move to Seoul – they are settled in their lives and see substantial costs and risks involved in a move. While some lawyers are excited to be the ones to open their firm's new Seoul office, others worry if the strategy they recommend will be successful and whether the office will be profitable. These lawyers also need to adjust their career expectations, timelines and goals to respond to the realities of the new professional playing field.

It is likely that lateral movements of associates and partners in Korean and international law firms will increase as people try to align themselves with strategies they support. Should the firm open an office in Seoul? Who should staff the new office if they do? Which practice areas should they emphasise? Which local firm should they work with? These questions are not easily answered and will continue to be the subject of much debate at many firms. Also, new positions will open up as lawyers move on. In addition, there are signs that the top Korean firms want to bring on new lawyers to strengthen their foreign law practices in the hope of fending off the threat posed by the market's new entrants.

A good fit

Foreign-qualified lawyers working in Seoul today who are deciding how to shape their careers may want to consider four questions to help them determine if a move will be advantageous. These questions (or more precisely, the answers) can also help foreign firms assess which foreign-qualified lawyers will be good lateral hires.

Firstly, who are my core clients and what is the most profitable and/or professionally satisfying type of work I do for them? Secondly, how reliant are these clients and this work on the fact that I am employed by a Korean law firm with purely domestic law capabilities? Thirdly, how much additional work could I get from my core clients if I were to work for a firm with a global platform and how much would the new firm enhance my ability to attract new clients? Finally, how price sensitive are my clients and could I continue servicing the same types of clients and/or deals if I were to join an international law firm with higher billing rates?

Many of these questions will undoubtedly lead to other questions, but they are a good starting point for understanding the type of platform that will be right for an individual lawyer and whether they can succeed in a foreign firm's Seoul office.

What it takes to succeed

The risks of moving to a new firm are significant, particularly when that firm is entering a market for the first time. How can a prospective lateral candidate determine if a firm will be successful in Seoul? Five factors should be considered when assessing this.

Firstly, does the firm have a long-term commitment to the new market (ie a willingness to invest the resources necessary to succeed) even if short-term profitability is not possible? Secondly, does the firm have strong Korea practice group leadership with a market entry strategy that is appropriate for the local conditions? Thirdly, what is the firm's track record in other new markets, and if it has closed new offices in the past, did it have a rational reason for doing so and learn from its mistakes? Fourthly, will the new Seoul office have strong links to the rest of the firm, either by virtue of the partners who are being sent to open the office or the firm's global management style? Finally, how stable is the firm on a global basis and does it have a culture that will support the growth of the lateral candidate's business?

An international firm's foreign office will ideally have a mix of partners with strong ties to the firm's headquarters and partners with local expertise, including language skills and professional connections. The latter can be home-grown or brought in laterally. Excellent legal skills and a strong brand name are important, but will not be enough as new markets mature and become increasingly competitive.

Future opportunities

While there are some concerns that the incoming liberalisation will have a negative impact on the top Korean firms, new opportunities will be created for individual Korean lawyers. Although Korean lawyers have historically been low in supply and high in demand, the recent introduction of a law school system and the push to increase the number of junior Korean lawyers will result in a larger pool. If the legal market were to stay as it is today, eventually some of those young lawyers might find it difficult to get jobs.

Starting in phase three (year six) of the liberalisation process, foreign firms will offer another career option for Korean lawyers who cannot become partners in their existing firms or are looking for a different type of work environment. Heightened competition for Korean lawyers should have a positive impact on lawyers who stay at the top Korean firms, too. As their career options increase, Korean firms will need to find new ways to keep these lawyers happy.

The entry of foreign firms will also have a significant impact on lawyers working for second-tier domestic firms. As discussed earlier, during phase one many of these firms will start to enjoy a larger market share as they develop referral relationships with foreign firms. And in the future, some of those firms will most likely be acquired by foreign firms. This possibility is already causing certain Korean firms to make concerted efforts to keep their firms small enough to be acquired, focusing on quality rather than quantity.

A helpful model

To better understand how Korea's market liberalisation will unfold, we have only to look at Japan. Foreign law firms were permitted to begin practicing in Tokyo in 1987. In the beginning, foreign lawyers had to register as Gaikokuho Jimu Bengoshi (gaiben) and newly-opened offices in Japan could only practice the laws of their home country. The rules followed the same pattern as those planned for Korea. In the mid-1990s, international firms were permitted to have a limited form of joint operation with Japanese lawyers. In 2004, the law changed to allow foreign lawyers to operate in partnership with Japanese lawyers. Today, more than half of the international law firms in Tokyo have a mix of foreign and domestic lawyers. While I fully understand that the two countries and their lawyers are different, it is an instructive model, and the continuing efforts to eliminate the restrictions that determine who can be registered as a gaiben may provide a road map for how the FLC rules can be refined in Korea.

It should be noted that initially, to become a gaiben in Japan, lawyers were required to have five years of practice experience. Over time, the five-year requirement was reduced to three, one of which can be accrued while working in Japan. These rules only apply to partners and senior lawyers, so they do not impinge upon the ability of foreign law firms to have junior associates working in their Tokyo offices, since they are only supporting senior lawyers and not giving legal advice to clients.

Based on my experiences in the Tokyo legal market, it seems firms and lawyers who want to succeed in Korea will benefit from a healthy balance of local market knowledge, local connections, top-quality legal skills, readiness to pick up emerging talent, an unwavering dedication to their clients, familiarity with the regulation's phase-in requirements, commitment to the long-term, and, most of all, a great deal of patience.

By Major, Lindsey & Africa consultant Laurie Lebrun in Tokyo