A law intern's look at China and Chinese law.

Here it is

Copyright 2005 ALM Properties, Inc.
All Rights Reserved
The American Lawyer
November 2005
SECTION: FEATURE Vol. 26
LENGTH: 2004 words

HEADLINE: The Bamboo Dynasty;

A few elite Chinese firms are emerging from the shadows. How scared should their Western competitors be?

BYLINE: Michael D. Goldhaber

In 1989, as a young Shanghai associate for the Chicago firm Lord, Bissell & Brook, Edward Lehman could afford a driver, a cook, and a maid. Then came the Tiananmen Square student protests and the Communist regime's violent crackdown. Many Western firms withdrew from China, including Lord, Bissell. Lehman, who was born and bred in Chicago, had options elsewhere, but he stubbornly believed that China and its law firms would one day claim their proper role in the world. He signed on at a state office known as "No. 4 Law Firm," for $100 a month, plus a shoe--box apartment with a bathroom down the hall. "My parents thought I should be hospitalized," says Lehman.

It took a long time, but Lehman's leap of faith is looking less crazy. In 1989 China was just beginning to experiment with non--state--run law firms, and in 1992, as soon as he completed the three years' experience needed to apply for alicense, Lehman left "No. 4" to cofound one of China's first dozen private law firms. It's now known as Lehman, Lee & Xu. Foreign lawyers are not allowed to practice Chinese law or to own equity in a Chinese law firm--but no rule prohibits foreigners from serving as managers, and Lehman jumped through that loophole. The firm started in a dorm room at Beijing University, and as its first capital investment, Lehman bought a typewriter. Now his firm files high--tech patents for the likes of Motorola, Inc., and Sun Microsystems, Inc., with six offices and more than 100 Chinese lawyers.

The dramatic growth of Lehman, Lee & Xu is typical of Chinese law firms--and so is its reliance on a leader whoknows the American model. The standard bearer for China's firms is King & Wood's managing partner, Handel Lee, who spent 15 years at Vinson & Elkins and Skadden, Arps, Slate, Meagher & Flom. His goal is as simple as it is audacious."In ten years," Lee says, "we aim to be a high--quality provider of international legal services, at the same level as V&E or Skadden."

An emerging group of local firms, dominated by foreign--trained lawyers, aims to challenge the Western legal establishment in servicing the legal needs of international clients in China. One Asian magazine has dubbed them "The Red Circle," in an allusion to the top--tier London law firms that serve as their role models. Perhaps it would be more apt to call China's law firm elite "The Bamboo Circle," because bamboo, capable of shooting up a meter a day, is known for its astonishing rate of growth.

Lehman, Lee & Xu is well respected within the IP world. But three firms in particular are blossoming into full--service shops based on Western models: AllBright Law Offices, King & Wood, and Jun He Law Offices [see chart, page 91]. Shanghai's AllBright has mushroomed from zero to 250 lawyers in six years. King &Wood has nearly doubled in less than four years, from 200 lawyers in four offices to 375 lawyers in eight offices. It has opened in Palo Alto, Tokyo, and Hong Kong, and hopes to have branches in New York and Washington, D.C., within three years. Jun He is comparatively staid, with 200 lawyers in six offices. It dates to the first batch of private firms that were licensed in 1989, and branched out to New York way back in 1993. It has recently averaged annual growth of 20 percent in both head count and revenue, and plans to maintain that pace.

Such growth is all the more impressive given that it started from a virtual standstill at the end of the Cultural Revolution. Since then, the number of law schools in China has risen from two to more than 300. According to Chinese Lawyer magazine, China now has 140,000 lawyers in private practice, with 20,000 law graduates entering the market each year. Perhaps more significant are the numbers of Chinese law students supplementing their educations overseas. Harvard Law School alone graduates about ten law students from mainland China each year (eight with LLM degrees and two with J.D. degrees). The top performers cut their teeth at the home base of a Western law firm, and then head back to China, either to a Western branch office, or, increasingly, a native law firm. These returnees are known as "sea turtles," in a pun on the Mandarin word for return.

Sea turtles abound in the founding generation of Chinese law firms, and they're eager to produce turtle cubs. Lehman estimates that 60 percent of the lawyers at his firm have spent time studying and working abroad. At Jun He, 70 percent of the partners have overseas degrees, and 40 percent have foreign work experience. AllBright founder John Huang is a sea turtle, as are 40 percent of his partners. Each of these firms heavily subsidize LLM degrees for midlevel associates, as does King & Wood. AllBright's program is the most generous, offering a full scholarship, and asking only that graduates repay the money if they don't rejoin the firm. "It's gutsy, because you lose a lot of them," says Huang. "But if people leave, that's fine. They'll still be building our society."

Those turtles who choose to crawl back ashore at Chinese law firms are apt to work in one of two practices. Initial public offerings of Chinese companies, on any stock exchange, contain a significant Chinese law component. This forms a lucrative--and protected--market for Chinese firms. While Jun He and King & Wood get their fair share of this booty, leading securities lawyers at U.S. and U.K. firms in Hong Kong usually cite a trio of boutiques as equally important players: Haiwen & Partners, Jingtian & Gongcheng, and Commerce & Finance Law Offices. According to Asian Legal Business magazine, Jingtian advised on 15 IPOs in Singapore during the 12 months ending June 2005, leading all firms active in the Singapore capital markets.

Although IPOs justify premium rates, they form a risky base for an institutional firm, because they're cyclical, and the number of companies that need to be privatized is finite. Intellectual property offers an alternative work base for Chinese law firms. AllBright has grown its IP litigation department from two to 35 lawyers in 18 months, partly in collaboration with Finnegan, Henderson, Farabow, Garrett & Dunner of Washington, D.C. Since IP clients are often American, Finnegan handles the U.S. court angle, while AllBright covers the litigation in China. "It's a pretty defensive strategy," explains Huang. "Sooner or later the IPO work will dry up, and the big--ticket corporate work will go to the Western law firms. We'll keep the IP litigation work." King & Wood also leads in this area. Jun He aims to catch up, to spread its bets.
Lehman, Lee & Xu has made its name registering trademarks and prosecuting patents for a global clientele.

Whether a firm relies on securities or IP as its engine of growth may be less important to its long--term prospects than its organization. Jun He, AllBright, and King &Wood are unusual among Chinese firms for theirWestern--style structures. All have standardized associate tracks and generous in--house training. (One of Lee's first moves was to establish an 18-month course for new associates.) Associates have a fair chance to make partner, and those partnerships claim to be true ones, with shared profits and liabilities. Perhaps most importantly, all three firms claim to use a modified lockstep system of compensation. King's 70 equity partners top out at under $1 million, with the highest--paid making only five times more than the lowest--paid. By contrast, star partners at some Chinese corporate boutiques are reputed to earn more than any Western lawyer in China. Though it's more of a mid--size generalist shop, Lehman, Lee is also highly leveraged, with only seven equity partners in a firm of more than 100 lawyers. "I think it's a terrible way to build an institution," Lehman readily concedes. "We need to push equity down and around."

Although the best Chinese law firms mimic Western models, they do so selectively. Jun He, for example, demands only 1,400 billable hours from its lawyers. "We don't want people to work like machines," explains Ding Jianxiang, who spent a decade as a nonequity partner at Chadbourne & Parke and Vinson & Elkins before becoming a member of Jun He's management committee. "We consider our associates human beings. In this respect, we are quite a long way from the Western law firm model."

Other policies have yet to be worked out. For example, none of these young firms have yet grappled with retirement. Even at Jun He, which is China's most venerable firm, only one partner is older than early fifties.

As the Chinese firms grow and institutionalize, they find themselves on a collision course with the firms that generally serve as their models. Both groups market their services to the same international clients, and both groups aspire to expand their menu of services. The key question is whether the Chinese have more to fear from the Westerners, or whether the Westerners have more to fear from the Chinese. Lehman, who lived through the lean years after the Tiananmen Square shootings, believes that Chinese firms will be internationally competitive, yet he counsels patience. "People come and see the glaring lights and big cities and think systems are in place," he says. But less than 20 years ago, he would bicycle down Shanghai's Nanjing Road without encountering a car or a streetlight. "The Chinese are one foot out of the rice paddies," Lehman says. "It's easy for the lawyers who just arrived to lose sight of that."

How Chinese firms fare in the future largely depends on the regulation of legal practice. Under current rules, foreign lawyers are barred from practicing Chinese law, and foreign law firms are barred from hiring any lawyer to practice Chinese law. Under the framework of the World Trade Organization, the United States and the European Union have long lobbied China to change these rules. The WTO may someday call for freer trade in services, but the Chinese are apt to resist.

Chinese lawyers who have worked overseas have seen what can transpire after English and American law firms are given full market access. For instance, Xu Guojian saw the German office of Volker Triebel, where he trained, become part of Lovells. "What happened in Germany cannot happen in China," Xu says emphatically. "It's not allowed." As a founder of the 80--lawyer corporate firm Boss & Young, Xu has a keen interest in the dynamics of law firm competition. He, for one, cannot imagine that China will liberalize its market for legal services within ten years. Others suspect that China will yield to the WTO once its law firms have matured under the gentle wing of Chinese protectionism.

The best Chinese firms mostly serve international clients already, delivering either Chinese law services or international corporate services that transcend any national law. With a salary and billing structure that is one--third or one--half of Western rates, the Chinese firms can deliver value. Chinese firms have commoditized certain aspects of foreign direct investment, for example charging $5,000 to set up a "wholly foreign--owned enterprise," a popular vehicle for foreign investment that Western firms used to charge $50,000 to structure. As more Chinese lawyers return from overseas with LLM degrees and American law firm experience, the Chinese firms are expected to move steadily up the food chain.

"Mark my words," says Anthony Root of Milbank, Tweed, Hadley & McCloy in Hong Kong. "In a decade or less, Chinese law firms will have a substantial body of accomplished lawyers with a Wall Street background. Do not underestimate the ability of the Chinese to learn."