Leaders of the pack

Notwithstanding debates regarding the business models of international firms, referral agreements and increased competition, the consensus is that DLFs still dominate the legal sector in Japan. A glance at the empirical evidence seems to support such a view. After 22 years it is DLFs who are the largest, who have the greatest pulling power for domestic clients and local graduates and, arguably, are the most profitable.Dixon says this is due to size and age-old issues like fees and legal costs. “The bulk of nternational work for the last several years in Japan has been inbound; hence domestic lawyers are key to serving clients. Many transactions require large numbers of attorneys – merger due diligence, large scale securitisations; few foreign firms have sufficient numbers of Japanese attorneys in a sufficient variety of fields to provide full service for these large transactions,” she says.

A theme running through this decade has been large-scale consolidation among DLFs most of which have sought critical mass to maintain their competitive advantage over each other and the threat of foreign firms. It started with Nagashima Ohno’s merger with Tsunematsu Yanase & Sekine back in 2000, and was followed by others involving the present big four, such as Anderson Mori’s combination with Tomotsune & Kimura, and Mori Sogo’s merger with Hamada & Matsumoto. The result, when including the latest merger of Asahi Koma & Nishimura & Partners, is that each of the Big Four now boast in excess of 300 lawyers. Fees are another area where DLFs still hold sway. “Foreign firms are rather expensive,” Dixon says, “with hourly rates for junior associates matching the hourly rates of very
senior attorneys in Japanese law firms. Although some foreign firms charge a lower rate for their Japanese lawyers compared to their non-Japanese lawyers in order to remain somewhat competitive with local firms, they rarely match the market completely.”

They are also unable to match the local firms in terms of their ability to attract the nation’s best and brightest lawyers. “Japanese lawyers remain very independent,” Ishiguro says. “When they finish university, they look to come and work at one the Big Four firms – this has been a trend of the last decade and it will continue in the future, not least of all because of some of the difficulties that international firms are facing in their US and UK headquarters. Domestic firms are the preferred choice because of this and the high quality work we can offer.”

Hara also notes that despite the international appeal some FLFs operating in Tokyo may have, DLFs continue to attract young Japanese lawyers because of their ability to offer the same high calibre international work as their foreign counterparts. “Although many Japanese law firms have been handling a lot of domestic work lately, we still offer our lawyers the ability to work on complex cross-border transactions and allow them to get the international exposure that is considered important that way,” he says.

“In choosing to come to a domestic firm they can see a clear path to partnership and progression – this is not always clear in international firms.” However, lawyers at FLFs said that even if young lawyers wanted to come on board, there would be no guarantee that international firms would employ them with one partner stating that the technical ability and English language proficiency of some Japanese graduates is not comparable to that of US or UK law school graduates.

An unsuccessful venture?

The observation that foreign firms appear to have not been as successful in Japan as they have in other
liberalised legal markets across the region appears to be borne out by the unusually high number of FLFs that have abandoned their offices in Tokyo, either due to economic hardship or to take up the opportunities on offer in the boom Chinese market. However, according to many lawyers at FLFs,
such an assertion would be erroneous. “There may be a perception that foreign firms have not been successful in penetrating the legal market in Japan but that is misconceived,” says Wigmore adding that those who hold such a view use size as a measure of success and operate on the assumption that FLFs and DLFs operate in the same sphere.

“Comparing international and domestic firms on the basis of the size and strength of their Japanese
law practices is meaningful only if the goal if the goal is to compete head to head with Japanese domestic firms. Holstein concurs adding that this is not the strategy employed by many international firms in Japan including his own. “Many foreign law firms have made the strategic decision not to compete in the domestic law market. We and most of our peer US firms have chosen instead to focus on international law practices and play to our strengths: outbound investments, financing and high-end cross border deals where we work collaborartively with the big four domestic firms. This model has been successful for us.”

And it is not only Milbank that has a successful practice. The likes of Skadden, MoFo, Paul Hastings and
Linklaters are known as firms who are making solid, profitable inroads in the market. Even so, the general market perception is that some other firms are struggling, especially the second or third tier international firms, and some lawyers believe there may be significant movement at the lower end of the market.

Siegel says that any such activity is likely to occur quietly and it is likely that even those with their ears to the ground in Tokyo won’t hear much about it.“I don’t think there will be many new foreign firms opening offices in Japan this year, but there will almost certainly be some closures,” he says. “But we are unlikely to hear about this, these will most likely take the form of global firms ‘merging’ with small local practices – looking to pull out their ex-pat attorneys in this way to reduce costs and save face.” ALB

This is a HTML version of the ALB Special Report: Japan 09 feature in April issue.

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