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With three new foreign law firms entering the market, J@pan Inc looks at the changing dynamics of the legal industry in Japan.

By Peter Harris

On April 1 1987, the Japanese government started to allow foreign lawyers to practice in Japan, provided that their business was limited to advising on law from different jurisdictions and international law. Immediately, major firms such as Morrison Forrester and White & Case opened Tokyo offices and by 1994, 48 foreign firms had opened in Japan. As the economy went through more turbulent times, some of the firms left the market, for example, Brown & Platt in 1995 and Macfarlanes in 1997. Recently however, the number of new openings appears to be on the up with three firms, Quinn Emanuel, Norton Rose and Ropes & Gray having been granted licenses by the Ministry of Justice within the last 12 months. Off the record, some other firms have also told us that they have plans to open a Tokyo office in the near future.

The new wave
In some ways this is a predictable development. On the international side, there has been a renewal of interest in the Japanese economy, and from Japan, more companies are getting involved in larger scale cross border projects. Chris Viner, a partner at Norton Rose’s new Tokyo office explained that as a firm with particularly strong experience in the energy and power sectors in Africa, the Middle East and Southeast Asia, he feels the practice is now well placed to help Japanese corporations as they “begin to see that it is a strategic imperative to get involved in projects in developing countries, especially related to energy and power.”

Norton Rose has been involved in various high profile energy deals on the African continent such as the Sinopec joint venture with Sonangol in Angola—a massive project that won the ‘African Oil & Gas Deal of the Year’ from Project Finance magazine. Jeremy Gibb, a partner who worked on that deal is now also helping set up the Tokyo office and hoping to get involved in similar projects with Japanese corporations. He tells us, “One of the most interesting areas is the outbound business of Japanese companies in some of the developing countries around not only the Asian region but also in Africa. It would be great to share our expertise with Japanese companies in this field.”

Ryan GoldsteinRyan Goldstein, Partner, Quinn Emanuel -- Image courtesy of Quinn Emanuel

Another newcomer, Quinn Emanuel, has a very different focus. This LA-based firm is a litigation specialist outfit that is catering to the demand from Japanese companies for litigation and arbitration lawyers for actions brought against them in the US. One of the partners in the Tokyo office, Ryan Goldstein, remarks that “any company working in the US faces a strong likelihood of getting drawn into a lawsuit.” A fair chunk of this relates to intellectual property and the firm has been able to really tap into this through the hiring of Henry Koda, a litigation lawyer with particular expertise in IP and who has an established Japanese client base. Among the companies it has worked with are Sony, Isuzu and Marubeni.

The other law firm to enter the market is US outfit Ropes & Gray, established in 1865 but opening its first international office in Japan this year. According to partner Steve Baughman, the firm “was able to open a Tokyo office in 2007 because our existing clients asked us to be here—in particular our Japanese clients with significant matters requiring expertise in US patent litigation and transactional issues, and our private equity clients focusing on opportunities in Japan and Asia.” This seems to bear some resemblance to Quinn Emanuel’s motivation and undoubtedly IP is a focus. As this publication has previously commented on (J@pan Inc Issue 73), Japan’s drive to protect its inventions via the Patent Prosecution Highway has seen a sharp rise in patent applications and IP-related litigation issues. Regulatory changes such as the London Agreement have also further encouraged Japanese firms to apply for patents and trademarks in Europe. Thus, self-consciousness about protecting IP, business plans taking Japanese companies abroad and a more open attitude towards litigation, are providing fertile ground for legal services providers.

Keeping busy
Given the current market conditions, it is interesting that the legal services industry is experiencing growth. The trouble that we read about at some of the world’s biggest banks and the knock-on effects this has had on multinational corporations seems to have been water off a duck’s back to these expansionist law firms. That said, the industry has not been isolated from tremors. Cleary, Gotlieb, Steen & Hamilton, the first US firm to open in Japan in 1987, closed its Tokyo office back in 2005 while simultaneously opening one in Beijing, exhibiting a common theme of abandoning Japan in favor of the sexier growth prospects of China. This year, Simmons & Simmons has had to lay off three of its Tokyo staff after two of its partners went to rival British firm Lovells. The future of its practice in Japan thus hangs in the balance.

"The credit crunch has slowed down liquidity but on the project finance side, the energy boom is massive"
Aled Davies, Managing Partner, Allen & Overy

For other firms, many have seen a drop in their capital markets activities but as most of the international firms here have diverse capabilities, they have been kept busy in other areas. We spoke to Managing Partner of Allen & Overy’s Tokyo office, Aled Davies who observes, “The credit crunch has slowed down liquidity but on the project finance side, the energy boom is massive—we’ve not been busier in all the 12 years I have been here and are working on some fantastic projects. On the M&A side we have also been involved in very high profile deals and private equity firms are definitely looking for opportunities; we’ve also started working on some interesting leveraged finance transactions.” The firm, which opened in Tokyo in 1988, has recently expanded having set up a Japanese domestic capability comprising of four partners and almost 20 bengoshi (Japanese lawyers). It also played a lead role in the deal announced in June that saw Sumitomo Mitsui Banking Corporation (SMBC) make a £500 million strategic investment in Barclays.

Thus, while capital markets are quiet, there is a good deal of other activity. Two out of the three new firms have an IP/litigation focus and Norton Rose, and Ropes & Gray both have diverse corporate departments. Furthermore, as A&O’s Davies mentioned, there also appears to be a consensus that private equity funds are creating opportunities— Ropes & Gray have worked on Bain Capital’s tender offer to acquire Japan’s D&M Holdings as well as its attempted $2.2 billion acquisition of 3Com Corp. It seems likely that there will be more inbound M&A in the pipeline.

A crowded room?
With the overall legal industry trend being for expansion in Tokyo, it begs the question of how this will affect the way foreign firms compete amongst themselves, and with the domestic firms. Although some firms are coming to the market to cater for a specific practice or client needs, once established here it is only natural that they pursue opportunities for growth. For the already established foreign firms, they will be looking to strengthen their market position as well as becoming more competitive with domestic firms.

Related to the latter, there was an important change in the regulations concerning gaiben (registered foreign lawyers) that became effective in 2005. An amendment to the Special Measures Law Concerning the Handling of Legal Business by Foreign Lawyers allowed foreign law companies to directly employ bengoshi as associates and partners. Until then, firms had been dealing with the need to work with domestic lawyers via joint enterprise arrangements. This amendment led to immediate developments: Greenberg Traurig opened its Tokyo office, Linklaters hired over 20 bengoshi from Mitsui, Yasuda, Wani & Maeda, Clifford Chance dropped its Japanese partner firm’s name from its title and Baker & McKenzie merged with the Tokyo Aoyama Aoki Law Office, its previous partner in a joint enterprise arrangement.

This year A&O has also opened a department of over 20 bengoshi and Davies sees this as an important way in which the firm will prove difficult competition for the new players: “It’s much more appealing for clients to be able to use just one firm and without a Japanese capacity, other firms will be limited.” He would also be keen to see further deregulation that would allow more flexibility in the criteria for registering as a gaiben to allow foreign lawyers better career development prospects in Japan.

Aled DaviesAled Davies, Allen & Overy

However, most Japanese firms don’t seem too worried. There has essentially been a boom in demand for their services since the late 1990s when Japanese companies started to really adopt Western business culture and deregulation led to more M&A. Moreover, Japanese companies are less and less likely to perform certain legal activities, such as due diligence work, in-house. More foreign firms in the market does not necessarily mean that domestic firms lose out either. Indeed, in many ways, when it comes to new law firms opening who don’t have their own bengoshi, this can actually bring them business. Keith Suzuka, a lawyer at one of Japan’s largest firms, Nagashima, Ohno & Tsunematsu tells us that the firm has a good relationship with Quinn Emanuel, having helped them set up their Tokyo office and has also worked cooperatively with Ropes & Gray. However, when it comes to the foreign firms that are hiring bengoshi Suzuka is candid about the need to keep an eye out, “Most Japanese firms are not too worried currently because things are going well at the moment, but I am personally concerned about the future—crucially, we have to remain competitive in terms of recruitment. If foreign firms start to attract the best law graduates because of the international opportunities such firms can offer, that could be serious. For the propagation of quality, recruitment is everything.”

Japanese law firms tend not to have offices overseas, preferring to work through “best friend” or other similar relationship-based arrangements. This may make a career at a European or US firm seem more attractive as well as offering greater career development opportunities. Anderson, Mori & Tomotsune and Mori Hamada & Matsumoto are anomalous in having offices in China and while Nagashima, Ohno & Tsunematsu did have an office in Singapore, this closed in the late 1990s. If more of the foreign firms do start hiring bengoshi and encroaching onto the inbound/domestic business, this will no doubt force the Japanese firms to think carefully about their strategy.

For the new firms though, without having their own bengoshi there is arguably a lot of room for cooperation. Norton Rose partner Jeremy Gibb explains that at this stage, with the firm’s business being mainly advising Japanese clients on their overseas business, there is no immediate need to take on domestic lawyers. For Quinn Emanuel, the move to Japan happened largely because it was able to absorb a firm with existing business here and the previous founder of that firm, Henry Koda, is now joint head of the Tokyo office being registered as both a gaiben and previously as a benrishi (Japanese patent attorney). As they grow, these firms might face competition from the larger, more established outfi ts but if they stay within their niches and hold on to their existing clients, there is no reason to suggest that the market has become saturated. This perhaps illustrates a truth that smiles on the legal industry— whatever the market conditions, the need for lawyers remains constant and it looks like we can expect to see more and more of them in Tokyo. JI