Closing the gap: when is a law firm not a law firm?

ARTICLE BY MARK HUSBAND, MANAGING DIRECTOR AT COGENCE SEARCH

It's in your jeans

Dentons Canada acted for clothing retailer, The Gap, for many years. BUT… Dentons US engaged in litigation on behalf of RevoLaze against, amongst others, The Gap for alleged infringement of its copyright on methods of using lasers to distress denim products. The substantive litigation was heard in the United States International Trade Commission (ITC) “In the Matter of Certain Abraded Denim Garments, case number 337-TA-930”.

The Gap applied in those proceedings for an order that Dentons US be disqualified from continuing to represent Revolaze inter alia on the grounds that they were conflicted. Dentons US argued that they are a verein and that Dentons Canada is a separate legal entity and legal practice. Judge Bullock hearing the matter concluded that “If you represent yourself to the public as Dentons, then you will be held accountable as Dentons whether you have a Swiss verein structure or not.”

To paraphrase, one cannot dance around the ABA (or any equivalent) conflict rules if you choose to sail under the same flag. Respectfully, this is an odd finding and would seem to confuse branding with legal identity particularly given that the “Legal Notices” section of the Dentons website says:

“Dentons is a global legal practice providing client services worldwide through its member firms and affiliates, including Dentons Canada, Dentons Europe, Dentons Hong Kong, Dentons Rodyk & Davidson, Dentons UKMEA, Dentons US, 大成, and their subsidiaries and affiliates, each of which is its own Legal Practice. Dacheng Salans FMC SNR Denton Group (a Swiss Verein) does not itself provide legal or other client services.”

Dentons appealed against their disqualification and argued in doing so that its interest in appealing an order implicating its business, finances and reputation “could not be more acute”. Annoyingly the ITC decided to duck the issue on 12 April this year (http://bit.ly/1qPqDsV), arguing that the underlying patent dispute had been resolved and the conflict question should be left to another court on another day.

Now in RevoLaze vs. Dentons US, a case to be heard in the Court of Common Pleas in Cuyahoga County, Ohio; RevoLase seek damages against Dentons US for legal fees paid to Dentons, the cost of instructing alternate counsel and, a little more remotely, damages for funding and then compromising their litigation on disadvantageous terms. Rather uncharitably it has been suggested that Dentons’ decision not to settle the matter is evidence of poor management. The reality is probably closer to their stated position in the ITC, i.e. this is a very important “acute” issue that needs to be resolved and while a cheque for a few million dollars could make this claim go away the issue will not.

Vereins: born of client demand bumping into reality

Law firms excel at finding innovative solutions to real world problems and at meeting the needs of their clients. In an increasingly globalised world international clients want law firms to be global but in reality this is impossible because of:

  • Regulatory restrictions on foreign firms
  • Cost
  • Management burdens
  • Cultural differences
  • Regional rates and remuneration
  • Politics

A network of referral partners or best friends is not a viable solution because: -

  • Clients have Chambers and Legal 500 and can google local firms when needed
  • No one really believes in them. No control on service delivery. No control on client relationships. No control on fees. No reciprocity. No profit. No thanks.

The solution was the “Verein Structure” (first used in a professional services context by the “Big Four” accountancy firms): not a one firm solution; not a network; but an association and Swiss, no less. A Verein structure allows the licensing firm to:

  • License the brand to “local” firms around the globe to allow the firm to become global
  • Encourage local firms engage with the verein for access to clients and to be “global”
  • Charge locals for central administration and marketing costs + a rake on fees while leaving them responsible for their own P & L
  • Drop the local partner like a hot brick if they go bust, get sued, fall apart or otherwise become a liability
  • Institutionalise client relationships
  • Capture a greater proportion of client legal spend
  • Deliver what the client market wants

The verein was the perfect “real world” solution to meet the clients demand for integrated global legal services while also providing a commercial and financial benefit to the licensing firm.

I can imagine that the need for clarity on inter-verein conflicts is, in fact, acute. I would expect that clients would be concerned; that qualified staff within member firms are concerned; and that many international regulatory bodies are very concerned indeed about this topic. Assuming that the Dentons’ position that the verein structure avoids issues of conflict between members of the verein is not correct, many thousands of lawyers working in verein structures globally could be unwittingly in breach of their Bar or Law Society rules.

Having described Judge Bullock’s finding as odd and having been a little mean about the ITC ducking out of making a decision it is probably right to recognise that this issue is unlikely to turn on a strict point of law and the ITC is probably not the right place to consider the issue in any event.

Whether a verein ought to be considered as one firm for conflict purposes or not will almost certainly turn on more abstract concepts - such as the legitimate expectations of clients that when they say that X are “our lawyers”, the accuracy of that statement does not vary by jurisdiction: the public perception of the Legal profession and a definition of what constitutes a law firm, its DNA, or genes if you prefer.

Do shared branding, I.T., administration, etc. together with client and public perception of a firm trump the very real separation of legal identities of the members of a verein?  If they do, does this stop at the issue of conflicts or extend into group liability for the debts and negligence of the members of a verein structure?

Whichever way this issue is resolved it does need to be resolved swiftly so that clients can know where they stand and lawyers within member firms need not worry that they may find that they have offended against the rules of their governing bar or law society.   

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