Market liberalization keeps law firms on their toes

As South Korea is set to enter the third stage of its opening of the local legal industry, the legal circle here remains split over the impact, with some viewing it as a chance to hone local players’ competence, while others cite rigid regulations that would hem in any drastic change.

In early August, the Ministry of Justice submitted a revised draft of the Foreign Legal Consultant Act to implement what would be the final stage of the legal market liberalization under the free trade agreements.

Under the revised bill, Korea will be fully open to European and American law firms in July 2016 and March 2017, respectively, allowing them to set up joint ventures with Korean counterparts, hire Korean lawyers and partially practice domestic law as the final step.

The plan will also allow “fly-in fly-out” work practices, enabling foreign 
lawyers to temporarily stay in Korea to handle cases requiring international mediation.

The gradual opening of the legal sector has come since Korea signed a free trade agreement with the EU in July 2011 and with the U.S. in March 2012.

Foreign law firms were allowed to set up representative offices in Korea immediately after the trade pact took effect, but their roles were limited to providing consulting services on international law as the first step.

The second stage, which began two years after the agreements, permitted foreign law firms to split fees with Korean partners.

Currently, 25 law firms from the U.S. and the U.K. operate in Korea, with most of them focused on offering consulting services for mergers and acquisitions, intellectual property fair trade, initial public offerings and cross-border litigation for mostly Korean and multinational corporate clients.

But the government’s deregulation plan still restricts the foreign law offices from representing clients in Korean courtrooms and handling domestic cases related to inheritance, government affairs and intellectual property, among other fields.

On top of that, the foreign law firms that wish to establish a joint operation with Korean counterparts are required to retain at least five lawyers with more than five years of experience and have done business for more than three years.

The government has also added a clause banning foreign law firms from owning more than a 49 percent stake in the joint venture “to protect the Korean legal market” from being taken over by foreign legal giants.

The Korean Bar Association voiced its concerns over the opening of the legal market, but welcomed the measure to prevent foreign firms from taking control of the joint ventures. “The opening of the market is nothing new anyway,” its spokesperson said.

The Korean legal circle remains divided over the impact of the market liberalization, with some expressing concerns over the ever-intensifying competition in the market and others hailing it as a chance to sharpen Korean law firms’ competitiveness.

“The entry of foreign firms into the local market will lead to economies of scale, which means it will not be as much a threat to large local firms as expected but will take a toll on small ones,” Kim Sang-kyum, a law professor at Dongguk University, told The Korea Herald.

“Big-scale joint ventures between foreign firms and local counterparts will end up monopolizing the best-quality domestic lawyers and big corporate clients in the local market, reducing the room for small and medium-sized local firms to grow.”

According to sources in the legal community, South Korea’s legal market is estimated to be worth around 3 trillion won ($2.5 billion), though the official figure is not available.

But others in the legal industry said that the opening of the market could be an opportunity for Korea’s small and medium-sized law firms to gain a competitive edge to confront the escalating market competition.

“The small and medium-sized law firms have long lagged behind large firms in terms of their consulting skills and influence,” an official from a law firm told The Korea Herald, wishing to remain anonymous. “If the small firms enter a joint venture with foreign giants, they could complement their lack of networks, clout and consulting skills.”

He also played down the likelihood of foreign firms dominating the Korean legal market. “The final stage of opening the market will still not allow foreign law firms to fully take domestic cases, meaning that the opening will not drastically change the legal landscape,” he said.

But he said the competition would inevitably heat up when more foreign firms make headway into the nation on the back of the eased regulations.

Foreign law firms have already solidified their position in offering legal advice to big corporate clients since the trade agreement came into force, occupying an estimated half of the legal consulting market.

For large local firms, the years-long gradual opening of the market has prepared them to improve their competitiveness by scaling up their size, hiring more English-speaking lawyers and breaking into the foreign market to forge global networks, according to the legal community.

“Big Korean law firms now have the capability to survive independently amid the fierce competition,” said the source, who said that his company had no plans to form a joint operation with foreign firms for the very reason.

Lee Won-il, a head lawyer at Barun, one of the nation’s big law firms, also believes that the market liberalization will be a chance to upgrade his company and the local legal market as a whole.

“It is premature to expect any outcome for now, but the opening will be a stepping stone for us to face off against global law firms to broaden our clout in the local market,” Lee told The Korea Herald.

The foreign firms’ entry into the Korean market also seems to heighten expectations for young local lawyers equipped with overseas experience and English fluency.

“The Korean law firms seem saturated, creating fewer jobs for young lawyers,” said Choi Jung-min, who newly became a lawyer earlier this year. ”I expect that more jobs will be generated as foreign firms take root here.”

Defying concerns over the impact of the foreign law firms’ entry in the local market, however, the U.S. and British law firms here seemed to remain lukewarm on entering into joint ventures with Korean counterparts.

“We don’t have a plan to set up a joint venture in Korea or recruit local lawyers for the time being,” a spokesperson for U.S. law firm Ropes & Gray told The Korea Herald. “We are focusing on consulting clients on the U.S., British and Hong Kong law.”

As of last December, eight out of 21 foreign law firms confirmed that they were not considering forming a joint practice with Korean partners, according to a survey.

Instead, foreign law firms said they would continue to specialize in their role providing consulting services on foreign laws here, downplaying the idea of being heavily engaged with domestic legal cases. 

But behind their hesitancy are “tough restrictions” imposed by the government on scope of their work in the domestic market, local sources said.

“When the discussion began over the opening of the Korean legal market years ago, foreign firms had expected that they could hire Korean lawyers as well as represent Korean clients in Korean courtrooms,” a source said.

Such expectations were quelled when the government presented a revised bill to impose some limits on their business rights.

“The restriction might deter foreign firms from advancing into the market due to low profitability as their activities in Korea will be largely limited,” he speculated.

The United States Trade Representatives residing in Korea officially raised a complaint about the restrictions mapped out by the government, saying such heavy restrictions are in violation of the free trade pact. The American Chamber of commerce in Korea also expressed disappointment about what it called “excessive” regulations.

The Korean government, however, made it clear that the upcoming plan for the opening of the sector is only “partial,” not completely “final,” hinting at additional measures for further opening in tandem with “changes in the legal market.”

The law professor Kim said the partial opening would ultimately lead the market to be completely open for foreign firms in phases, whether local players like it or not.

“The size of the Korean legal market itself is small and demand for legal services is limited, so Korean law firms, whether big or small, should more actively eye global expansion and strengthen their competitiveness,” Kim noted.

By Ock Hyun-ju (laeticia.ock@heraldcorp.com)