Excerpt from CCH Hong Kong’s Article: A Brewing Revolution Against Foreign Law Firms in China

[Editor's Note: None but the most perspicacious non-lawyer is aware that the legal industry remains faithful to the ideas embodied in the medieval guild. A guild attempts to construct barriers to competition, keeping prices and sometimes standards of quality high. One method is to limit entry into the guild. American lawyers, while maintaining a strong semblance of these hallowed guild practices -- accredited qualifications, in-house training, seven years of "indentured servitude," etc. -- haven't been particularly successful in limiting entry. The law schools -- the variable the American guild can not really control -- have generated far more talent than the field can practically absorb. Neither, evidently has the Chinese equivalent of the lawyer's guild been successful in policing its sphere of control, until very recently. We are grateful to CCH Hong Kong Limited, and especially to Elaine Wong, its Publishing Manager, and Mia Prieur for this excerpt of Mia's report on the reaction of one guild to the apparent advances on its territory of another.]
The Shot Heard ‘Round the World: A Brewing Revolution Against Foreign Law Firms in China?

— Including Exclusive Interviews with Richard Wang and Martin Hu of the Shanghai Bar Association

Mia Prieur
Another hot summer is preparing to descend on Shanghai and slow down this fast paced city. But even as some are planning their vacations, others are preparing for a battle. The first shot was fired by the Shanghai Bar Association (“SBA”) on 17 April when it posted a memorandum on its website entitled The Situation of Illegal Business Activities Practised by the Foreign Law Firms in Shanghai is Severe (“Memorandum”). The Memorandum broadly accused foreign law firms of unauthorized practice of law. Rumours quickly circulated that the Memorandum was part of a government effort to reign in or even eliminate foreign law firms. The only facts available on the record are that the Memorandum was approved unanimously by the SBA’s Special Committee on Foreign Affairs and that it was approved by at least one high ranking official at the Shanghai Bureau of Justice (“Shanghai BOJ”) who was present at the time of the meeting.
To understand more about the background leading up to the Memorandum’s posting and what it means, China Legal Watch (“CLW”) talked to Richard Wang and Martin Hu. Wang is the Vice-chairman of the SBA and Chairman of the SBA Special Committee on Foreign Affairs that initiated the Memorandum while Hu is Vice-chairman of the Committee. This is the first time they have accepted interviews from the foreign press since the issue of the Memorandum. For these interviews, both speak in their SBA capacity.
Interview with Richard Wang
CLW: Why did the SBA post the Memorandum now?
Wang: The dissatisfaction with what is going on in the legal community has been building up over many years. This issue of foreign law firms giving Chinese legal advice to their foreign clients has continued for too long and gone too far — it has reached a boiling point. There has to be a movement in order to achieve changes in this community. Members of the bar: we need dramatic change in the foreign legal community; we need a revolution.
CLW: How did things reach this state?
Wang: It is due to the lack of supervision over the foreign law firms from the Shanghai BOJ and [its superior organ] the Ministry of Justice (“MOJ”). The foreign firms are openly violating the regulations, and very little is done about it. There seems to be no partnership anymore between the local and foreign law firms. The local government received complaints from the local firms but has done very little about it.
CLW: Does the Memorandum represent the members of SBA or the government?
Wang: Yes. When the Memorandum was circulated among the leaders of the SBA, there was no dissenting opinion written, and a unanimous decision was reached by the Committee. One of the Shanghai BOJ chiefs approved it as well. He was present when the Memorandum was discussed and he expressly approved it.
The SBA took that as a signal from the MOJ to act on this matter.
CLW: How should foreign firms view the Memorandum?
Wang: The Memorandum should be considered a warning notice to the foreign law firms that they cannot continue their illegal activities.
CLW: There are statements that one of the prime factors behind the Memorandum was the economic pressure local firms feel from competition and, especially, the competition for young lawyers. Is this true?
Wang: The Memorandum is not about business, it is about the professional bar — judicial matters, not individual matters. Foreign law firms must act according to the Administration of Representative Offices of Foreign Law Firms in China Regulations (“Regulations”). Local law firms do feel some economic pressure from paying more money to associates to keep them from leaving for foreign law firms. However, employment is not a big issue behind the
Memorandum.
CLW: What do you think the Shanghai BOJ will do?
Wang: According to an official at the Shanghai BOJ, they have already found evidence of wrongdoing, and they are considering taking action on these foreign law firms. Foreign law firms cannot carry on with the violation of the Regulations if they intend to continue working in the Shanghai legal community.

Interview with Martin Hu
CLW: What triggered the posting of the Memorandum?
Hu: There were two main factors. The SBA notices deep concern among Chinese law firms about the foreign firms’ increasing non-compliance with the Regulations. Complaints in this regard about foreign law firms from Chinese law firms and both Chinese and foreign companies have increased. There simply has been no effort made on either side, Chinese or foreign, to draw the line on activities that violate the Regulations.
Another reason is to protect the clients and maintain the professional reputation of the legal profession, Chinese and foreign. It is just so ridiculous that some foreign law firms on one hand give so-called “qualified” legal opinions or draft contracts under Chinese law with the disclaimer that they are not allowed to interpret Chinese law, but on the other hand charge clients full-fledged fees and act as if they are Chinese law experts. As time goes by, this becomes very misleading to the clients, which is very irresponsible on the part of the foreign firms. This causes harm to the clients and the profession and therefore should be changed.
CLW: Is that why the Memorandum takes such a strong tone?
Hu: The purpose of writing the Memorandum in this tone is to make the public pay attention to what is going on. There is abundant evidence that some foreign law firms have crossed the line and are still pushing as if the line does not exist. The situation is indeed severe, and is harming the Chinese law firms, the clients and the reputation of the entire legal profession. The SBA needs to let the public know how serious this situation is in China. The foreign law firms must comply with the WTO agreement, and the regulations of the State Council and MOJ while practising law in China.
CLW: Law firms are businesses too. Is this about business and profits in the legal industry?
Hu: Lawyers are not business people. Lawyers have a responsibility to educate the public to be lawful citizens. Lawyers must play a positive role in building a rule of law society. My hope is that some day China will become a more democratic, rule of law country. But with that said, the Chinese legal community must be given a fair chance to grow in order to play a role in the future changes in the society and in the growth of this country. It would be difficult
to imagine that a rule of law society could be successfully built in China without a strong Chinese legal community.
CLW: There are charges that the Memorandum is about protecting local lawyers from competition, and not about protecting the public or the clients. What is your reaction to those charges?
Hu: That is not the case. Of course there are economic issues. But as I said before, the purpose of the Memorandum is to first respect the law, and second to protect the clients and maintain the professional reputation of the entire legal profession, Chinese and foreign. As Shanghai further develops into an international financial centre and as the government opens up more sectors to foreign investment, investors are pouring in. There is enough business for all of us.
I’m concerned about such charges because they are diverting the issue here. The public and the clients will be better protected if the foreign law firms abide by the Regulations and work with Chinese law firms in a more cooperative way. In fact there are federal regulations in the US for publicly listed companies stipulating that public companies may not hire lawyers who do not follow the law of the jurisdictions where they practise. The unauthorized practice of law by some foreign law firms is putting their clients at compliance risk. I also believe that some foreign law firms engaging in the unauthorized practice of law are in violation of the bar association rules in their home countries.
CLW: What is the goal of the Memorandum?
Hu: The goal here is to set the course in the right direction so that a win-win environment can be achieved for both sides to work together. The foreign law firms have the responsibility to inform their foreign clients, and bring awareness to their foreign clients and professional insurance providers about the regulations of this country. They need to draw the line and respect the rule of law. Furthermore, they should set examples in this legal community by informing their clients that they should not be treated as Chinese law experts or practitioners
and that they would work with Chinese lawyers to better serve the clients.

Sub Rosa
So far, it looks like the Memorandum will be the only shot fired in the revolution — foreign law firms have remained resolutely silent about the matter, apparently as part of a unified strategy. Foreign law firms are relying on the Shanghai BOJ’s realpolitik to balance the interests of local lawyers with those of the members of the foreign investment community, most of whom will not rest easy if they cannot choose their own advisors. But even the Shanghai BOJ seems to be bowing to the forces that the SBA has unleashed and the criticism made against it. The SBA says that the matter has reached such a critical state due to the lack of supervision from the Shanghai BOJ and MOJ.
Speaking anonymously, foreign lawyers in Shanghai expressed their view on this matter. “The foreign firms want to understand the purpose behind this Memorandum,” said one partner of a foreign law firm. “Any comments made should be in a constructive manner,” said the partner. “To cause further problems in this community and start a confrontation does not solve anything. Reaction to the Memorandum will reflect on the foreign law community and on how we solve problems. It is always more efficient to first try to understand what is at hand.”
To date, there has been no official response from the Shanghai BOJ. It is widely understood that an investigation is proceeding and universally said that at least one or two foreign law firms will be disciplined. The rumour mongers claim that the BOJ will “kill a monkey to make an example”. The severity of the punishment will serve as an example to other would-be transgressors.
In response to a CLW inquiry, an officer of the MOJ in Beijing stated that he had not heard about the Memorandum, but invited CLW to make a formal written query. The Shanghai BOJ was aware of the Memorandum but had no comment for the press, indicating that they would only respond to inquiries from governmental entities. The BOJ in fact referred CLW to the SBA itself and then asked what the SBA had said in the interviews.
The natural allies for foreign law firms are the foreign investors that they represent in China. But so far there has been no reaction from investors or either the American, European or other chamber of commerce. The silence is odd given the high stakes involved and the shared interests of multinational corporations (“MNCs”) and foreign firms. It is easy to imagine the outcry that would result if MNCs were told that they could not consult advisors of their own choosing.
As one foreign lawyer points out, the US Ambassador to China was himself a foreign lawyer who headed a foreign firm’s China practice before his appointment. Ambassador Randt would no doubt have a unique insight and interest in the issue. But so far, the silence from the foreign firms has kept the matter from becoming political. Given the long and hard negotiations on legal services that China experienced as part of its discussions on the WTO accession, the silence could give the Shanghai BOJ some flexibility to handle the matter on its own.
Flip Side of the Coin
In the interviews, Wang and Hu spoke with genuine passion about a lack of enforcement by the authorities. They pointed to a newspaper report citing an employee of a US law firm at the Shanghai Kerry Center who asserted that 70% to 80% of the firm’s practice was illegal and to the administrative warning given to Coudert Brothers for a blatant violation by its Beijing Chief Representative to show that the situation is out of control. Nevertheless, the SBA may only be seeing one side of the coin. The employee cited in the newspaper report had only worked at the firm for three weeks and might not have a good understanding of what the firm really does. In Beijing, Coudert Brothers removed the Chief Representative within days of the warning from the authorities and he was obliged to leave for an English firm that recently opened its Beijing office. Clearly, foreign firms do observe some limits and do cooperate constructively with Chinese law firms. One partner at a foreign law firm said that his firm used 10 different local law firms for China legal matters in the past year. A local lawyer confirmed that “he worked closely with a foreign law firm on Chinese matters.”
Role Play
According to Hu, the purpose of the Memorandum is to have a dialogue with the foreign law firms to address the issues and roles played by foreign and domestic law firms. However, foreign firms actually see themselves as unequal partners in any dialogue. They face a complete termination of their business and the loss of many years and dollars invested in Shanghai — and they already know that the SBA will be decidedly unsympathetic. The Memorandum is clearly very hostile in its tone. According to an SBA member and partner of a mid-sized local law firm, “the Memorandum would not help relationships with the foreign law firms, let alone strengthen it.” In fact, he fears that it could have the opposite effect.
He is certainly correct. The coverage of this matter in both domestic and foreign press is expanding; and the tone of reporting, especially in the local press, is becoming increasingly strident. Instead of dying in the summer heat, the issue threatens to flare up in a very ugly way. So far, the foreign law firms and foreign investment community have been silent and played a waiting game. In the current environment, they cannot afford to remain silent for much longer. For better or for worse, the SBA has already taken a highly confrontational approach. If the relations between the law firms are to be salvaged, the response of the foreign side will have to be both considered and mature. As one local lawyer said, “The important aspect of this is that Shanghai wants to stay on track to be an international financial centre to the world at large and will do everything to protect that from being destroyed.” Ironically, the SBA has now left it to the foreign firms to exercise moderation, preserve relations among law firms, prevent politicization of the issue and safeguard this local interest.
The above is an excerpt of an article from China Legal Watch, a monthly journal on China law published by CCH. The full article is available at the China Legal Watch website.

The Excerpt from CCH Hong Kong’s Article: A Brewing Revolution Against Foreign Law Firms in China by AsiaBizBlog, unless otherwise expressly stated, is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License.