Parlez-vous governance? Sprechen Sie Lawsuit?
from
July/August 2002
by Sasha Issenberg
At John Lynch’s old office it was not uncommon for lunch to be a sandwich or a cup of soup, eaten at the desk from the paper bag or styrofoam container in which it arrived. Lynch was a Chicago trial lawyer at a firm where people thought little of beginning the workday at 7 a.m., ending it at 7 p.m., and taking no time to leave the office to eat. Since October 1, he has been based in a city where lunch breaks are traditionally more luxurious: three or four courses drawn out over a couple of hours, at the type of place where sole meunière or gigot d’agneau is on the menu, and where it is customary to have a few glasses of wine with a meal. Lynch occasionally partakes of this pleasure, but still often eats at his desk. You might think of him as a bridge of sorts between two cultures. But he is also a foot soldier in a new battle for international clout in the legal industry.
Back in Chicago Lynch was a partner at Latham & Watkins, and he remains one. But in mid-September the firm completed a merger with the Paris office of the French firm Stibbe, and Latham & Watkins suddenly found itself with more than 90 lawyers in an elegant five-story building on Paris’s Left Bank, equidistant from the steel trusses of the Eiffel Tower and Napoleon’s embalmed corpse at Les Invalides. The 60-year-old Lynch—who had spent his entire career in Chicago, including 20 years at Latham—was sent to France to help integrate the new office into the firm’s growing international network. It is a multi-year commitment, so Lynch and his wife have found an apartment and settled in. His high-school French helps him get around.
The factors that brought Lynch to Paris—commerce and regulation that increasingly disregard national borders—are serving to recast law firms into vast, multifaceted networks often as complicated as the corporations they represent. There is a new archetype for the law firm: a full-service operation that can serve clients’ needs in any jurisdiction where their activities may take them. Among other advantages, this gives directors easier access to the legal information they need for fulfilling governance responsibilities whose nuances shift abruptly from nation to nation. For example, U.S. boards can adopt takeover defenses on their own, but France and Canada demand that directors take the decision to shareholders for approval. And while boards operating under the laws of a state like Delaware have a fiduciary duty only to maximize shareholder value, in many European countries, such as Germany and the Netherlands, boards are often obligated to act in the best interests of employees and the community as well.
The quickest way for a firm to establish a presence in a foreign city is to merge with an already-existing outfit. Since the beginning of 2001, England’s Linklaters has been a party to five different mergers, with firms in Germany, Sweden, Poland, Belgium, and the Czech Republic. In the past three years, Latham & Watkins has merged not only with a French firm but with another based in Germany; Latham now has 1,450 lawyers around the world. “Every day I must hear 15 merger rumors of law firms,” says Lynch.
With the rush to globalization, the number of lawyers at the world’s 50 largest firms increased by 39% in the four years preceding 2001, according to that year’s edition of Global Law 100 , compiled by The American Lawyer and the British publication Legal Business. The total revenue of these firms grew by 61% over three years. At the beginning of 2001, Clifford Chance, born of a 1987 merger between two midsize British firms, merged with New York’s Rogers & Wells and Frankfurt-based Pünder Volhard Weber & Axster. The resulting company, which bears the name Clifford Chance, has more than 2,868 lawyers, 80% of whom are outside the United Kingdom. Last year Clifford Chance did more than $1.4 billion in annual business. It is the largest law firm in the world.
“I am a great believer in the one-stop-shop, single-service firm,” says Clifford partner Jason Fry, whose peripatetic career—he was born in England, grew up in New Zealand, studied law in both countries, and has practiced in Auckland, London, Brussels, and Paris—is emblematic of the new generation of nomad attorneys. “It should be full-service across the board: tax advice, securities, corporate, commercial, antitrust, and litigation. An in-house counsel should be able to go to one firm and one lawyer within that firm and say, ‘We would like you to coordinate with every office and provide us with advice that covers all aspects of this matter and all relevant jurisdictions.’ You can’t do that if you’re cherry-picking counsel in different countries from different firms.”
Under the old model, an in-house counsel retained local firms wherever a company wanted to do business, or did so through a hometown firm. This was fine for companies whose forays into international law were few. But today most major corporations can’t practice legal isolationism, and every new jurisdiction in which they do business brings with it a unique regime of laws. A global firm removes the need to rely on strangers—who may have different styles, values, approaches, and billing practices—to cooperate across borders and cultural divides; the work is instead done by colleagues.
“We had a case recently where a client needed advice on complicated issues of French, German, and New York law in a short period of time,” says Fry, whose firm has 101 partners in New York and 116 in its four German offices. “I know our people in New York, in Germany. It slows the process down if I have to call someone I don’t know in another firm who may have quite different work methods. You don’t have the same leverage, and sometimes you don’t get the same quality of output.”
When legal issues are less complicated, there can also be benefits in using a global firm. For example, if a company needs a contract for use in several countries, a global outfit can do the major strategic work once and then rely on its local offices to translate and adapt the documents for use in individual jurisdictions. Indeed, hiring one of these firms can be like carrying a passport and working papers for every country where you want to do business. You get the efficiency of never needing to slow down while crossing borders, and also immediate access to the local marketplace.
American firms seeking to open offices abroad have traditionally looked first to London and Paris, in part because those were cities in which U.S. lawyers wanted to live. Now the Continent draws because it is where the action is—the site of major remapping of the legal terrain. “One of the most important developments in the global legal business is the integration of Europe,” says Eric Schwartz, a partner in the international law firm Freshfields Bruckhaus Deringer.
The Brussels-based European Union has been actively regulating commerce, most visibly in the area of what Europeans call competition policy, which includes antitrust and merger control. The European Commission must now approve all mergers between companies that do a combined 5 million euros ($4.45 million, recently) of annual business in Europe, even if the companies are based elsewhere. Jack Welch, then General Electric’s boss, had to bow to the power of European regulators when his proposed merger with Honeywell was axed by European Commissioner Mario Monti on antitrust grounds, a rare setback for a deal already approved by U.S. authorities. Welch’s failure was made all the more embarrassing when he tried to rescue the deal by sending in corporate jets loaded with American lawyers instead of seeking out well-connected local talent.
Beyond the European Commission, as many as 80 national bodies worldwide wield antitrust or merger-control power—and a number of them are beginning to consider pooling resources and working together. “International cooperation,” says Monti, “is an imperative dictated by the facts, particularly in the area of mergers, where there has been this trend towards more and more megamergers, particularly of a transatlantic nature. It is a widely perceived need by the competition authorities, by business, by the legal profession, in Europe, the United States, and elsewhere, that there should be increasing multilateral dialogue among competition authorities.”
The legal terrain is trickier than ever. Companies have to submit merger plans to the European Commission, but they must still make individual submissions to many of the 15 countries within the European Union, each of which maintains its own rules, standards, and methods. As power has been consolidated, bureaucracy has not followed suit. The result is more work for lawyers. The most absurd example of this is in the area of patents, a source of ongoing debate in Brussels: Inventors have to submit only one application for a patent in all the European Union countries, but they must translate the document into the 11 languages used by EC nations.
The need for global legal strategies is particularly urgent for copyright-based industries like publishing, entertainment, and computer software; these are now the largest export sectors of the U.S. economy, according to a study by the International Intellectual Property Alliance. Companies must file individual applications for patents and trademarks in every country where they seek protection, according to Paul Salmon of the World Intellectual Property Organization, each of whose 177 member states has its own national authority to handle patent, trademark, and copyright regulations. Procter & Gamble, which holds over 27,000 patents, spends an average of $500,000 per product to obtain and maintain patent protection in key markets around the world, says Salmon.
Fiduciary obligations can be equally complex. Countries have their own regulations and case law on the individual responsibilities and potential liability of board members, even those whose companies are based in the U.S. “Directors need to be far more knowledgeable about the differences in laws and customs when they operate abroad,” says Lynch. Mark Gerstein, who specializes in corporate-director issues as a Latham & Watkins partner, says that directors must “understand what standard of care is expected and they are held to by the jurisdiction. Directors should go to counsel that is learned in the jurisdiction and ask them to outline their duties and potential sources of liability.”
You can become involved in a global dispute unwittingly. Doing business on the Internet can make you susceptible to foreign law. Having a European investor is sometimes enough to put an American company into another legal jurisdiction. “There are companies who thought they were dealing domestically, but it turns out the company down the street they were dealing with was actually an international company,” says Steven Gallagher of the American Arbitration Association. “There is so much cross-border ownership of companies. These days the odds are greater that the business on the next street is a subsidiary of a German company or a Japanese company. If their resources are in Japan, you have to go to Japan to get something enforced.”
In the last five years the number of international cases handled by the American Arbitration Association’s International Center for Dispute Resolution, the world’s leading forum for out-of-court negotiations, has increased by 103%. The past year saw a 26% jump. “Arbitration practice has grown tremendously over the past 20 years,” says Freshfields’s Eric Schwartz, formerly secretary general of the International Chamber of Commerce’s International Court of Arbitration. “It was a relatively small practice area, but the amount of international arbitration has increased multifold. This is in large measure a consequence of the increase in trans-border transactions; there are many more such transactions than before.”
Adds Matthew Secomb, counsel to the ICC arbitration court: “If there is a dispute between a Texas oil company and an investor in Europe, they’ll want their local Houston lawyer to deal with it. But let’s say the dispute is in Paris. If you have a big international law firm, you can have a lawyer in Houston and a lawyer in Paris both working on the case.”
The operations of global firms have become increasingly dependent on particularized knowledge or information—on merger-control practices in Egypt, say, or tax policy in Bulgaria. To coordinate this knowledge, the firms establish a variety of working groups organized around particular practice areas, such as arbitration, or around industries, such as petrochemicals. These networks—Clifford Chance’s Jason Fry calls them “know-how sharing groups”—contain dozens of lawyers at all levels, from partners to associates, whose communication options include intranets, videoconferencing, and internal newsletters. They pool their knowledge in an attempt to anticipate developments in the field and clients’ needs, rather than merely responding to them. Moreover, says Fry, “when we have big cases in Paris, for instance, or London, we can transfer people over quickly to work on them. The ability to shift resources and expertise is a tremendous advantage.”
During the 1980s, the rising power of in-house counsels was thought to work against one-stop shops. The expectation was that general counsel would use its clout as leverage over outside firms in negotiating services and fees, cherry-picking its legal representation in different geographical areas. Instead, global firms are getting bigger because corporate decision-makers are bringing them the business.
By using a global firm, you can “reduce search costs, especially if you buy a lot of different products,” says Marc Galanter, a professor of law at the University of Wisconsin and the London School of Economics who wrote Tournament of Lawyers , a book about the rise of large firms. More important, he suggests, an in-house counsel’s leverage increases if applied to a firm that handles all its business. “You get the best service that way,” says Galanter. “If you buy a pair of shoes in a shoe store, and you come back and say they don’t fit, maybe they’ll replace them and maybe they won’t. If you go to Marshall Field’s, they’ll go, ‘Don’t worry, here’s your refund.’ They will be much more generous about remedies if they’re worried about all your business across the board, not just about the shoes.”
In other words, clout is a language that the whole world understands.
