With the recent influx of foreign firms into Seoul showing no signs of stopping, questions are being raised as to whether the market has reached saturation point and which firms will win the race for Korea’s most prestigious clients.
Paul Hastings and Covington & Burling became the most recent firms to open new offices in South Korea, both at the beginning of November. Since ratification of foreign trade agreements (FTAs) between Korea and the EU in July 2011 and the US in February 2012, 17 firms from the LB Global 100 have either opened an office, applied for a licence or have expressed an interest in opening in Seoul.
But South Korea is already saturated with foreign firms, according to Cleary Gottlieb Steen & Hamilton partner Yong Guk Lee. ‘Frankly, I am quite surprised that there are so many law firms that have decided to open an office in Seoul – 17 is too many,’ he said. ‘Many don’t have enough experience with Korean clients and the market is not large enough to support that many foreign law firms.’
Those that do have the experience will need to build up their expertise in Seoul as much as possible, which will lead to a spate of lateral hires. ‘There are a whole lot of people running around with the relevant credentials and experience, and it’s essential for any firm to have this,’ said Lee. ‘That’s why we’re seeing a lot of firms who did not have this local expertise reach out and hire people from other places – such as in-house positions and retired partners,’ he said. ‘For foreign firms, the problems with opening in South Korea are not procedural, it’s really about them finding the right people.’
‘The market is not large enough to support 17 foreign law firms.’
Yong Guk Lee, Cleary Gottlieb Steen & Hamilton
Lee, who is Korean-American, said he is regularly headhunted for positions at rival firms. Cleary, whose clients include South Korean giants Samsung, SK Group, LG Group, and POSCO, opened its Seoul office in October and is one of a handful of foreign firms that established a Korean desk in Hong Kong or New York during the past 20 years.
Lee added that the market would be particularly challenging for complete newcomers, especially second-tier firms looking to establish a foothold in the market.
But competition is also building among the established international players over which will win and hold on to treasured Korean clients. The ‘Chaebol’ are the 11 global South Korean multinational companies, such as Samsung and Hyundai, that are heavily dependent on exports and advice from external law firms.
The good news for international firms is that Korean companies have rapidly expanded their global footprint over the last five years and have therefore become embroiled in complex issues, often involving international cross-border litigation. A recent example of this was Samsung’s titanic court battle with Apple, which crossed 30 jurisdictions and provided a bonanza of fees for the law firms involved. US government court records show that Samsung’s lawyers, Quinn Emanuel Urquhart & Sullivan, averaged $592 per hour, with partners notching up a cool $821 per hour.
Kim Jones, a consultant at legal recruitment specialists JLegal, said: ‘Chaebols have increased spending due to IP litigation, antitrust and international arbitration issues. Their in-house legal counsel can only do so much before they need external lawyers.’
She added that as the Chaebol are also expanding globally, there is a willingness to pay higher legal fees. ‘They do need good in-house lawyers to help them to navigate all the issues, but they still need outside counsel to help and it is usually cheaper to hire a firm to litigate a single matter in each country, rather than have a huge legal team of staff that they need to maintain,’ she said.
The other main issue that any foreign firm in South Korea will have to contend with is fees, said Jones. Korean companies tend to ask for set fees or capped fees, and will negotiate hard not to pay above what is agreed. She added that some of the work that South Korean companies will request their international law firms do will be far smaller than these firms are used to doing, which may surprise them.
Another difficulty foreign firms could face is office location in Seoul, particularly in the most sought-after addresses in the popular Gangnam district, where real estate is scarce and rents are very high.
Then there is a potential backlash from domestic Korean firms. Amid the scramble for clients and under the FTAs, foreign firms are forbidden from practising Korean law or hiring Korean lawyers for five years and are thus confined solely to doing outbound work. Korean domestic firms doing inbound work will remain essentially protected from competition from the foreign firms until 2017.
Despite this, Kyu Dong Kim, tax counsel at Yulchon, one of South Korea’s biggest firms, said that the sudden influx of foreign players into Seoul over the past year could vex domestic firms. ‘In international tax, I cannot see any changes, but for those doing IP and cross-border M&A, they may feel threatened by newcomers,’ he said.
He acknowledged that foreign firms’ services are limited right now as they are obliged to base their service on foreign law and are focused only on outbound investment and cross-border M&A transactions involving Korean companies.
‘I think it will take some time for them to win the battle in Korea,’ he said. ‘They cannot hire Korean lawyers and there are lots of restrictions but this will all change in five years.’