Increasing Competition in China Causes Friction for Law Firms

To U.S. lawyers, Becky Xia's career move may not make much sense.

Earlier this year, the 27-year-old Chinese immigration lawyer leapt at the chance to join Littler Global, even though ' technically speaking ' doing so meant she could no longer practice law.

'When they asked me, I didn't hesitate to say yes,' she says, before heading out for a Western lunch of salad and fresh-squeezed juice in Shanghai's bustling financial district.

Xia, who studied English in school and graduated from China Southern Yangtze University School of Law in 2002, speaks her second language quickly and with a polished professionalism that leads her to apologize for showing up in sneakers.

At Littler, Xia says she gets to work with clients like Microsoft. And giving up her license to practice in China wasn't a big deal. The only real difference, she says, is she can't litigate, something she didn't do anyway.

Xia, and hundreds like her, practices in what Western lawyers see as a gray area. To Chinese firms increasingly competing with foreigners, it's a little more black and white: Under the rules, U.S. firms can't practice Chinese law nor can the Chinese lawyers who work for them. In April, the influential Shanghai Lawyers Association denounced what it said were widespread rule violations by Western firms.

The memo has the leaders of foreign and domestic firms here abuzz over the possibility of a government crackdown.

Some Western lawyers have speculated that AllBright, Shanghai's largest law firm, is behind the memo, a charge partners there deny. But they don't deny that foreign firms have overstepped.

'We learned a lot from our teachers at foreign law firms,' says AllBright partner Kevin Qian, 'but today those teachers need to comply with local regulations.'

AllBright partner John Huang adds that his firm welcomes Western competitors. 'We're not attacking foreign firms,' he says. 'They add a lot of value with their skill sets and management style. On the other hand, they need to comply with the rules.'

Thomas Shoesmith, a Thelen Reid & Priest partner setting up that firm's Shanghai office, says the rules aren't that clear. 'There are lots of bright lines, but a lot of area in the middle,' he says.

'The Chinese bar is very young, and the government is protecting against foreign competitors,' Shoesmith adds. 'It's no surprise.'

The reality, U.S. lawyers say, is that work for global clients in China often requires them to offer opinions on Chinese law.

Instead of forsaking that work ' and the billings it brings in ' many Western firms rely on Chinese lawyers brought in under the title 'legal consultant.'

'They're like superparalegals,' said Walker Wallace, an O'Melveny & Myers partner based in Shanghai. 'It's very sensitive. We're not supposed to hire Chinese lawyers, but officially, they're not: To be a lawyer you have to work for a Chinese firm.'

O'Melveny has about 10 of these legal consultants in its China offices at any given time, Wallace said.

At Jones Day, about half the people in its China offices were trained in Chinese law schools, said Peter Wang, a partner leading the litigation team in Shanghai. The firm has several organizational tiers, with U.S.-trained attorneys at the senior levels and Chinese law school graduates in a junior role.

'It's complicated,' he explained. 'They're lawyers, but they practice as legal consultants.'

Working in the Gray

From a conference room on the 25th floor of the Jin Mao tower, overlooking Shanghai and the Huangpu River that divides its new and old sections, AllBright's Huang and Qian are eager to talk about the future of firms in China. Inside their modern-art adorned offices, racks of Chinese magazines are displayed amidst the Financial Times and the English-language China Daily.

Huang says he hopes talk of a crackdown will create an opportunity for further cooperation between U.S. and Chinese firms. Because, he said, 'if you eliminate all the gray areas, all the foreign firms will go home.'

But the use of Chinese lawyers isn't the only cause of friction between foreign and Chinese firms.

Despite the official count of foreign firms hovering around 100, Qian says many more operate illegally, without a license. The application process can be time-consuming and opaque. While they are waiting for approval, they still practice, minus the official office space: 'They hide out in hotels,' Qian says.

Adam Li, a partner at the Chinese firm Jun He, said he's conflicted when it comes to the practices of foreign firms in China: 'No violation is good, but on the other hand, I embrace fair competition. I am a believer in the free market and playing on equal footing.'

By denying foreign firms the right to practice, you're denying yourself the jurisdiction to regulate them, he said.

'On one hand, they're practicing PRC law de facto ' you can't close your eyes and say, 'I don't see it,” he said. 'If you include them in the market regulations, you give them standards, something that they're bound to.'

Li points to other problems he sees with foreign firms' gray-area operations. Because they rely on novice Chinese lawyers lacking seasoned supervision, foreign firms are likely to offer poor advice.

Li also believes U.S. firms demean their Chinese 'legal consultants' by paying them far less than their U.S.-trained counterparts. And he says opportunities for professional growth may prove illusory.

'Local lawyers want to move to an international firm because they could be better paid and can get international exposure,' Li said. 'Then, they find they're less paid with an inferior job and not necessarily getting better training.'

But leaders at U.S. firms see nothing exploitative about putting Chinese-trained lawyers on a smart career path.

'They're very young, very green, and they're often hoping to get international experience for their career track,' said O'Melveny's Wallace. 'They will often go abroad, get experience and come back to O'Melveny & Myers.'

Many lawyers here see friction as the inevitable result of increasing competitive pressures.

Hold onto Your Briefcases

By all accounts, there are going to be adjustments as the legal market matures and competition heightens. Many predict a shakeout that will result in several tiers of firms doing different types of work, much like in the United States.

Foreign firms' bread-and-butter work has tended to be foreign direct investments, but there is now movement to more complex cross-border transactions, where foreign firms can boast a value that's worth their higher billing rates.

'I think the competition is temporary, illusory ' the market is moving very fast,' said Landon Prieur, who headed Coudert Brothers' Shanghai office and is now with Orrick, Herrington & Sutcliffe. 'We have an extra 10 years of expertise to do something more sophisticated. They're moving into our old digs, and we're rubbing elbows.'

Xia, whose office at Littler is on the 20th floor of a high-rise that houses Google and Elizabeth Arden as well as monthly happy hours, is among those welcoming all those rubbing elbows.

She is hopeful the influx of foreign firms will quicken China's development, helping it smooth some of the country's cumbersome red tape on issues such as obtaining foreign work permits.

'By working in an international environment, we get advanced information from overseas, and it helps China as well,' she explained. 'China is very open. But it has been waking up very slowly.'

To U.S. lawyers, Becky Xia's career move may not make much sense.

Earlier this year, the 27-year-old Chinese immigration lawyer leapt at the chance to join Littler Global, even though ' technically speaking ' doing so meant she could no longer practice law.

'When they asked me, I didn't hesitate to say yes,' she says, before heading out for a Western lunch of salad and fresh-squeezed juice in Shanghai's bustling financial district.

Xia, who studied English in school and graduated from China Southern Yangtze University School of Law in 2002, speaks her second language quickly and with a polished professionalism that leads her to apologize for showing up in sneakers.

At Littler, Xia says she gets to work with clients like Microsoft. And giving up her license to practice in China wasn't a big deal. The only real difference, she says, is she can't litigate, something she didn't do anyway.

Xia, and hundreds like her, practices in what Western lawyers see as a gray area. To Chinese firms increasingly competing with foreigners, it's a little more black and white: Under the rules, U.S. firms can't practice Chinese law nor can the Chinese lawyers who work for them. In April, the influential Shanghai Lawyers Association denounced what it said were widespread rule violations by Western firms.

The memo has the leaders of foreign and domestic firms here abuzz over the possibility of a government crackdown.

Some Western lawyers have speculated that AllBright, Shanghai's largest law firm, is behind the memo, a charge partners there deny. But they don't deny that foreign firms have overstepped.

'We learned a lot from our teachers at foreign law firms,' says AllBright partner Kevin Qian, 'but today those teachers need to comply with local regulations.'

AllBright partner John Huang adds that his firm welcomes Western competitors. 'We're not attacking foreign firms,' he says. 'They add a lot of value with their skill sets and management style. On the other hand, they need to comply with the rules.'

Thomas Shoesmith, a Thelen Reid & Priest partner setting up that firm's Shanghai office, says the rules aren't that clear. 'There are lots of bright lines, but a lot of area in the middle,' he says.

'The Chinese bar is very young, and the government is protecting against foreign competitors,' Shoesmith adds. 'It's no surprise.'

The reality, U.S. lawyers say, is that work for global clients in China often requires them to offer opinions on Chinese law.

Instead of forsaking that work ' and the billings it brings in ' many Western firms rely on Chinese lawyers brought in under the title 'legal consultant.'

'They're like superparalegals,' said Walker Wallace, an O'Melveny & Myers partner based in Shanghai. 'It's very sensitive. We're not supposed to hire Chinese lawyers, but officially, they're not: To be a lawyer you have to work for a Chinese firm.'

O'Melveny has about 10 of these legal consultants in its China offices at any given time, Wallace said.

At Jones Day, about half the people in its China offices were trained in Chinese law schools, said Peter Wang, a partner leading the litigation team in Shanghai. The firm has several organizational tiers, with U.S.-trained attorneys at the senior levels and Chinese law school graduates in a junior role.

'It's complicated,' he explained. 'They're lawyers, but they practice as legal consultants.'

Working in the Gray

From a conference room on the 25th floor of the Jin Mao tower, overlooking Shanghai and the Huangpu River that divides its new and old sections, AllBright's Huang and Qian are eager to talk about the future of firms in China. Inside their modern-art adorned offices, racks of Chinese magazines are displayed amidst the Financial Times and the English-language China Daily.

Huang says he hopes talk of a crackdown will create an opportunity for further cooperation between U.S. and Chinese firms. Because, he said, 'if you eliminate all the gray areas, all the foreign firms will go home.'

But the use of Chinese lawyers isn't the only cause of friction between foreign and Chinese firms.

Despite the official count of foreign firms hovering around 100, Qian says many more operate illegally, without a license. The application process can be time-consuming and opaque. While they are waiting for approval, they still practice, minus the official office space: 'They hide out in hotels,' Qian says.

Adam Li, a partner at the Chinese firm Jun He, said he's conflicted when it comes to the practices of foreign firms in China: 'No violation is good, but on the other hand, I embrace fair competition. I am a believer in the free market and playing on equal footing.'

By denying foreign firms the right to practice, you're denying yourself the jurisdiction to regulate them, he said.

'On one hand, they're practicing PRC law de facto ' you can't close your eyes and say, 'I don't see it,” he said. 'If you include them in the market regulations, you give them standards, something that they're bound to.'

Li points to other problems he sees with foreign firms' gray-area operations. Because they rely on novice Chinese lawyers lacking seasoned supervision, foreign firms are likely to offer poor advice.

Li also believes U.S. firms demean their Chinese 'legal consultants' by paying them far less than their U.S.-trained counterparts. And he says opportunities for professional growth may prove illusory.

'Local lawyers want to move to an international firm because they could be better paid and can get international exposure,' Li said. 'Then, they find they're less paid with an inferior job and not necessarily getting better training.'

But leaders at U.S. firms see nothing exploitative about putting Chinese-trained lawyers on a smart career path.

'They're very young, very green, and they're often hoping to get international experience for their career track,' said O'Melveny's Wallace. 'They will often go abroad, get experience and come back to O'Melveny & Myers.'

Many lawyers here see friction as the inevitable result of increasing competitive pressures.

Hold onto Your Briefcases

By all accounts, there are going to be adjustments as the legal market matures and competition heightens. Many predict a shakeout that will result in several tiers of firms doing different types of work, much like in the United States.

Foreign firms' bread-and-butter work has tended to be foreign direct investments, but there is now movement to more complex cross-border transactions, where foreign firms can boast a value that's worth their higher billing rates.

'I think the competition is temporary, illusory ' the market is moving very fast,' said Landon Prieur, who headed Coudert Brothers' Shanghai office and is now with Orrick, Herrington & Sutcliffe. 'We have an extra 10 years of expertise to do something more sophisticated. They're moving into our old digs, and we're rubbing elbows.'

Xia, whose office at Littler is on the 20th floor of a high-rise that houses Google and Elizabeth Arden as well as monthly happy hours, is among those welcoming all those rubbing elbows.

She is hopeful the influx of foreign firms will quicken China's development, helping it smooth some of the country's cumbersome red tape on issues such as obtaining foreign work permits.

'By working in an international environment, we get advanced information from overseas, and it helps China as well,' she explained. 'China is very open. But it has been waking up very slowly.'