Ever since Japan opened its legal market to FLFs in 1987, relations between the domestic and international counterparts have been firmly based on cooperation. Rather than competing for each other’s market share, a clear division has existed between what belonged to each. FLFs advised on international law and their international clients on entering the Japanese market, while DLFs advised domestic clients on their operations both in Japan and overseas. If a matter called for either specialist international or domestic advice, the firm involved would refer the matter to a DLF or FLF of their choosing, thus creating intricate and lucrative networks of referral agreements.
However, regulatory change, law firm consolidation and economic shifts over the past few years have all acted to undermine this once quiet consensus. DLFs and FLFs are now beginning, ever so slightly, to encroach on each others’ turf and this is most apparent in relation to the big ticket items in Japan: transactional work and M&A.
“Domestic law firms have started to move directly into competition with foreign firms in these areas of late,” says Ken Siegel, managing partner of Morrison & Foerster’s Tokyo office. “When foreign firms entered Japan back in the late 80s these areas were almost their exclusive domain, but what we are seeing now, either through the establishment of international desks, international law departments or the hiring of gaiben [foreign attorneys] is that domestic firms are making a real end-run in this area.”
Bonnie Dixon and Daniel Hounslow of local firm Atsumi & Partners are two such gaiben – the first foreign lawyers to be elevated to partnership at a DLF in Japan. For Dixon the bubbling competition between domestic and foreign law firms has been dented somewhat by the onset of the global economic crisis. “Prior to the recent financial crisis I would have said that foreign firms are strong competitors for securitisation work, but that is not relevant now [the market for securitisation in Japan is at its lowest point in 15 years, according to the latest Thomson Reuters statistics]. Foreign firms may still maintain a competitive edge over domestic firms for private equity and fund formation work.”
But according to Darrel Holstein, Tokyo managing partner at US firm Milbank, it’s not so much a case of DLFs competing with international law firms, nor all FLFs making a charge for a greater share of the domestic market. It’s a specific type of FLF that is shaking up the status quo.
“The international firms with large numbers of bengoshi of those in joint ventures or alliances with substantial local firms present the biggest threat to large independent domestic firms because they compete directly with them for domestic law transactional work ,” he says.
However, as Holstein’s colleague and fellow partner Gary Wigmore is quick to point out, the service offered by integrated or JV firms is not always equal to that offered by independents like the Big Four.
“The large independent domestic firms offer depth and quality of service on Japanese law matters. Some of the JV firms have had success in developing domestic law practices, but most are not at the same level of the big four. I think the joint venture strategy can only work long term if you are offering something special and unique,” he says.
Holstein and Wigmore go on to note that when they need to bring a local firm on board they rarely look outside the top four or five firms in the market and even more rarely to a joint venture firm.
MoFo’s Siegel, however, disagrees with those who question the long term viability of the joint law venture model or those foreign firms who have chosen to establish a critical mass of bengoshi within their ranks.
“Our Tokyo operations have been extremely successful and if there is any sign that this model, that is, the development of Japanese law capability, is not feasible in the long run I have not seen any indication of it. We have some 110 lawyers here and all are extremely busy. We not only act for international clients but some of the largest companies in Japan are also regular clients,” he says.
And it is not only Siegel singing the praises of his firm’s model, domestic lawyers firms also single out MoFo’s Tokyo office as one of its most profitable worldwide.