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American and British law firms have made no secret of their desire to push into the China market. But fast-growing Chinese firms are now pushing back. A fiery April 17 memo by the Shanghai Lawyers Association has accused foreign law firms of conducting “illegal business activities” by skirting regulations prohibiting them from practicing Chinese law. The group, representing lawyers in China’s largest city and burgeoning financial center, has called upon authorities to crack down on foreign firms to “put in order, regularize and purify the Shanghai foreign legal services market.” “The Shanghai Lawyers Association is well-known and very important, so a memo like this can only be worrisome,” said Jerome A. Cohen, a professor specializing in Asian law at New York University School of Law and former Beijing partner with Paul, Weiss, Rifkind, Wharton & Garrison. Though technically confined to practicing non-Chinese law in a cross-border setting, many foreign law firms, generally at the behest of foreign corporations operating in China, have pushed into the frontiers of the practice restrictions. Cohen, who opened the first Beijing office of a U.S. firm for Coudert Brothers in 1979, said the government has not strictly enforced the restrictions in the past out of recognition that doing so could hurt foreign investment in China, harming both foreign and local lawyers. That may be changing. The memo refers to investigations of foreign law firms by both China’s Ministry of Justice and Shanghai’s municipal government. Seattle lawyer Daniel P. Harris, who practices often in China and posted the memo and an English translation on his China Law Blog last week, said the expectation among lawyers in Shanghai is that the government will take some action against foreign law firms. “There’s a real feeling that something’s imminent,” he said. “There’s talk of shutting down two or three firms just as an example.” Even the possibility of such action would appear to run counter to what many observers have seen as a liberalization trend over the past several years. China has somewhat eased restrictions on foreign firms’ opening offices in Chinese cities and recently agreed to open its courts to lawyers from Hong Kong, a special administrative region of China with its own legal system. But the past several years have also seen the strong growth of Chinese law firms, many staffed by lawyers with experience at large U.S. and British firms. Lawyers with experience in the region broadly agree that it is the growing confidence of the local firms and their resentment of competition from foreign firms that are behind the Shanghai memo. A partner at one Chinese law firm said the 150-lawyer Shanghai firm AllBright, which touts itself as China’s largest firm, had made previous complaints about foreign law firms to the Ministry of Justice. “It is safe to say that AllBright and other Shanghai firms are behind this,” he said. ‘Illegal business activities’ The memo broadly outlines eight “illegal business activities” foreign law firms are allegedly engaged in. These include hiring large numbers of Chinese-licensed lawyers as “assistants” surreptitiously providing legal services even though they surrender their licenses on joining foreign firms; drafting contracts and opinion letters on Chinese law; conducting due diligence; handling applications and registrations with Chinese government agencies; and directing litigations and arbitrations in which Chinese lawyers make the appearances. The memo says some foreign firms practice Chinese law through their control of Chinese law firms. It also accuses some firms of disseminating “illegal and misleading propaganda,” including claims of expertise in Chinese law. The Shanghai lawyers group also claims foreign law firms are evading Chinese taxes because much of their revenue from China work is realized in overseas offices and never reported to Chinese tax authorities. Evan Cohen, a New York partner of British firm Clifford Chance who practiced in Hong Kong until 2004, said he was troubled by the broadness of the memo’s language, which could arguably apply to almost all activity by foreign law firms in China. “They include things like arbitration, which I always understood to be OK,” he said. He said Clifford Chance, which has more than 30 lawyers in China, did not practice Chinese law but did work with local counsel to advise clients on options in the China market. The firm itself stopped short of giving specific legal advice on Chinese law, he said. The Clifford Chance partner said the memo was a sign that the Shanghai firms were becoming “territorial.” Though he said he did not expect a similar outcome, he noted that law firms in India had pushed similar issues in the past, including tax claims on overseas revenue, resulting in litigation and a diminished presence of foreign law firms in that market. ‘In the trenches’ The head of the Hong Kong office of a leading New York firm agreed, adding that, despite the broadness of the language, it was clear to him the Chinese law firms were most concerned about a particular subset of foreign firms. Top New York firms like his own, he said, are heavily focused on cross-border capital markets work alongside the major banks. Chinese firms are not generally in a position to compete for this work, he said. But he said other large U.S. and British firms were very much “in the trenches” competing with Chinese firms for what has become lucrative midmarket work representing foreign multinationals attempting to navigate the thicket of Chinese regulations in order to expand their manufacturing and retail operations in the country. Though the China market has a reputation for forcing expensive foreign law firms to accept low or discounted fees, such fees can still produce high margins when the work is performed primarily by relatively low-paid Chinese lawyers. The Hong Kong partner said local firms were also profiting enormously from this spread, to the degree that experienced associates working in Asia for Western firms now clamored to become partners at local firms. But he said foreign firms in this market were advantaged by their ability to pay Chinese lawyers more and their name recognition among multinationals. “I’m not entirely sympathetic to my American peers on this issue,” the partner said, adding, “I am a little worried that if they get pushed out of that market, they’ll come back and compete with us.” Several lawyers who spoke to the New York Law Journal about the issue said Jones Day and Baker & McKenzie were the large U.S. firms seen as competing most directly with Chinese firms for both business and staff. It is unclear how large a presence they and other U.S. firms have in China, as many local hires would likely not be included on Web sites or other attorney rosters. For example, Jones Day’s Web site lists only eight lawyers in Shanghai, but a firm brochure for the office boasts that it has “nearly 30 legal professionals, making Jones Day one of the largest foreign law firms in Shanghai.” It notes that several of these are “China-trained lawyers with significant experience in Chinese and Western legal environments.” Chinese lawyers ‘not ready’ Harris in Seattle said the foreign law firms’ chief advantage was foreign corporations’ reluctance to rely on local lawyers. In many instances when Chinese and American law firms ostensibly work together for the sake of complying with regulations, he said, “the American clients don’t even know the Chinese lawyers exist.” But he said those clients’ reluctance was not wholly unjustified. Chinese lawyers, he said, were generally not highly skilled in the client service arena. He said his experience was that many Chinese lawyers often failed to present options to clients, instead recommending and performing the same transactions over and over again. “My suspicion is they’re not ready,” he said of the Chinese law firms’ ability to take on more work for foreign clients. The Chinese authorities’ concern about antagonizing those clients by essentially forcing them to use local counsel may temper their enthusiasm for a prolonged crackdown on foreign law firms, said Harris. The head of the Asia practice for a large New York firm agreed, noting that both the Chinese justice ministry and the local Shanghai government had both proven themselves fairly pragmatic in the past. “There’s a point at which they know they’re mostly hurting themselves,” he said, noting that China’s main interest at the moment was in encouraging greater foreign investment. He predicted that those firms already in China or eager to expand there would be undeterred. Several lawyers noted that China has traditionally been less restrictive on foreign firms’ practice than other major markets in the region, such as Japan and South Korea. In the latter nation, foreign law firms are not permitted to have offices at all. But NYU’s Cohen notes that China’s more relaxed approach is based on its choice not to enforce strict rules that are in place. “The threat that the formal rules might be enforced is an ever-present Sword of Damocles over the foreigners and occasionally, as in this case, proves to be troublesome,” he said. Cohen said China might consider embracing the de facto integration of legal services that is taking place in individual firms comprised of both foreign and local lawyers. Though foreign firms’ hiring of Chinese lawyers was well known, he said local firms’ recruiting of foreign lawyers could prove equally if not more significant. “If service to the client is the criterion, rather than the financial interests of local and foreign lawyers, integrated service should be the goal, as I argued in Hong Kong and Japan in the ’70s and ’80s and as is now possible in both places,” he said. “This would expand opportunities for local lawyers as well as foreign counterparts.”

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