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China has become a buyer’s market for legal services. Earlier this year, lawyers there were trading tales about a Western law firm that had agreed to handle an IPO for $100,000 — about a tenth of what such work would usually run, says Greenberg Traurig’s Jinshu “John” Zhang. It could have just been a rumor. But the speed at which it spread says something about the pressure law firms are under to discount fees as they battle for position in the fast-growing Chinese legal market. “The Chinese now are so spoiled,” said Carson Wen, chairman of Heller Ehrman’s China practice. “They either ask for fixed fees or discounts. It’s a fact of life in this market. But still, everyone wants to do it because the market is so large.” Some firms slash prices for work where they face lots of competition. Others say they maintain their rate structures but only seek out high-level work — such as complex M&A — that commands higher prices. U.S. attorneys in China agree that the pressure to discount is strongest in areas where everyone is eager to grab a share, such as capital markets and M&A. Vying for these projects can be extremely competitive, with many Chinese clients adopting the beauty contest approach. But they’re not always as savvy as U.S. clients in researching a firm’s reputation and expertise. Price can supersede experience, though most firm leaders say that the Chinese clients are becoming more attentive to quality as the economy matures. “If your only entry point is price, you don’t get their loyalty,” Zhang said. “And if price breaks is your only selling point, there is always someone who can undersell you.” For substantial matters — such as an IPO for a Chinese company in the U.S. market — it’s common to see about 20 U.S. firms competing. As a result, the winning firm sometimes receives up to 60 percent less than it might for a comparable deal in the United States, Wen estimates. For litigation matters, the discounts are often less steep, but can still be about 15 percent. When an antitrust class action against Chinese Vitamin C suppliers was filed in New York federal court earlier this year, more than 20 law firms competed for the work. This was the first U.S. antitrust class action against Chinese companies. “What is unique about China is that firms working on these new cases are perhaps willing to give more of a discount in order to get their foot in [the door],” said Zhang, who helped Greenberg Traurig join the handful of winning bidders. Some U.S. firms say the work they’re seeking can be profitable even when discounted. Other firms say the incentive is to establish relationships that may pay off later, as the publicly traded companies mature and prosper. Heller Ehrman, whose China practice includes about a quarter Chinese clients, has turned down some capital markets work because the fees just don’t make sense, Wen said. They don’t want to work for companies that are just “so-so” and don’t pay well. “Everyone runs a law firm like a business,” Wen said. “We can offer reasonable discounts, but nothing that makes us feel that it does not make good business sense. By going too cheap, one does a disservice to one’s clients.” But a successful experience guiding a company through its listing exercise can be parlayed into ongoing compliance work, a lucrative area for large Chinese companies with a global approach, said Christopher Stephens, the managing partner of Orrick, Herrington & Sutcliffe’s China group. Part of Orrick’s China strategy is to target more China-based clients. They currently account for about a quarter of the firm’s work there, with the rest coming from foreign companies doing business in China (sometimes called inbound work). Discounting is occasionally part of the strategy, Stephens said, though “when pricing becomes untenable, we do less of it. Otherwise, we aggressively pursue it. There’s competitive pressure to keep your hand in the market.” Paul, Hastings, Janofsky & Walker, whose China practice has about a third Chinese clients, focuses on the most sophisticated work in the region that allows them to keep the same fee structure, Chairman Seth Zachary said. But he acknowledges the need for flexibility. “I think we all have to understand that Chinese companies are new, capitalism is new, and it’s new for Chinese companies to think globally,” Zachary said. “The traditional issues of billing and understanding the value of legal services are still in the developmental stages.” The firm did the underwriting for the initial public offering for China Ocean Shipping (Group) Co., or COSCO. Paul Hastings is especially targeting Chinese industrial companies with global aspirations, Zachary said. It’s easier to represent U.S. clients in China since those relationships are already established — and profitable, said William Thomson, a Hogan & Hartson partner who has represented Chinese manufacturers before the International Trade Commission. Representing Chinese clients is a different story, he said. “It’s not unusual to offer reduced hourly rates or special package arrangements,” he said, pointing out that Hogan uses a different billing structure for some of its Chinese clients. “There are various ways of doing it — none are ideal — but in light of the competition to get representation, various deals are worked out.” Still, it’s important to establish those Chinese client relationships given the enormous potential of China, especially for a firm’s West Coast offices, Thomson said. The percentage of O’Melveny & Myers’ China-based clients is increasing as work in areas such as private equity, venture capital and initial public offerings mushrooms. “We follow the money,” said Howard Chao, the partner in charge of O’Melveny’s Asia practice. “Everyone follows the money. Every law practice follows the deal flow.” O’Melveny’s U.S. lawyers generally charge the same rate in China, although in a competitive area such as capital markets, they may examine fees on a case-by-case basis, Chao said. “There are definitely firms that are giving low-balls in China that they wouldn’t do in the U.S.,” Chao said. But, he added, “I think there is an ongoing shake-out. Clients are demanding better quality, and when you do that, you have to pay more for it.” As U.S.-based firms target higher-level work, the lower end is being taken over by local Chinese firms. Already, some local firms there are posing as real competitors for foreign direct investment work, mostly straightforward matters that require advice on regulatory issues. Many Chinese lawyers from prestigious firms such as King & Wood, a 400-lawyer firm, or Junhe, a 200-lawyer firm with a New York City office, are foreign-trained, with U.S. legal qualifications. And, unlike international firms, they don’t face any restrictions on handling strictly local matters. It’s a crowded field. In Shanghai alone, there are already nearly 150 foreign law firms, according to Orrick’s Stephens. U.S. firms such as Kirkland & Ellis are eyeing the efforts in China with interest, waiting to see if dreams of profitability really come to fruition, according to Rick Richmond, the firm’s managing partner in Los Angeles. Sheppard, Mullin, Richter & Hampton’s plan to open a China office in the upcoming year is motivated by its current client base moving into China, said David Huebner, who is spearheading efforts to open that office. After establishing a practice there, Heubner anticipates the firm will seek out some Chinese clients to diversify its base, though the focus will remain on inbound work. There are differing views as to whether it’s too early or too late for U.S. firms to enter China, said Lisa Smith, a director with Hildebrandt International. While some say it’s important to get in on the ground floor, the competition from the multitude of firms already there does drive prices down for some work, she said. “It might make sense to wait until the market is developed and the opportunities are clearer,” Smith said. “China is growing at an astronomical rate, so absolutely nothing is going to stay the same.”

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