Local singing sensation Psy may have grabbed the headlines with his chart-topping single “Gangnam Style” in recent times, but several other events also have hit the news in South Korea. Firstly, Korea’s free trade agreements (FTAs) with the EU and the U.S. have been enacted, opening up the legal sector to international firms. About 20 have already applied to set up shop, many of them keen to offer corporate expertise to the large Korean companies rapidly expanding abroad. A rise in litigation and antitrust matters has created ample legal work, with many growing domestic companies finding themselves on the receiving end of several lawsuits and investigations. Full integration for foreign law firms is still five years away, but the legal community is cautiously gauging how the shifting dynamics between local and foreign firms will shape the future of Korea’s legal sector. Secondly, the country’s elections in December will have a strong bearing on economic policy and resulting legal work.
South Korea – Asia’s fourth-largest economy – has weathered the global financial crisis reasonably well. It has reined in unemployment and the International Monetary Fund forecasts 2.7 percent growth for 2012. However, the country has not escaped unscathed, as the global economic turmoil resulted in a drop in exports and M&A activity. Nonetheless, the signing of separate FTAs with the EU and the U.S. is likely to bolster Korea’s slowing economy. The Korean and U.S. governments expect their FTA to boost bilateral trade by billions of dollars and create tens of thousands of jobs, while the Korea Institute for International Economic Policy estimates that exports to the U.S. will rise by 12 percent per year.
Opening the floo dgates
Along with stimulating foreign direct investment in Korea, the FTAs are expected to heighten competition in industry, including the legal sector. Law firms from the U.S. and the UK have not masked their intent, with as many as 20 firms from these two countries applying to open offices in Seoul. Of these, nine have already set up: Cleary Gottlieb Steen & Hamilton, Paul Hastings, Clifford Chance, Sheppard, Mullin, Richter & Hampton, Ropes & Gray, Simpson Thacher & Bartlett, McDermott Will & Emery, Squire Sanders and Cohen & Gresser.
Historically, only a handful of international firms have had a noticeable presence in South Korea. Few in the legal community therefore expected foreign firms to apply in great numbers. “I was very surprised,” says Yong Guk Lee, a partner in Cleary Gottlieb Steen & Hamilton’s recently established Seoul office. “We didn’t anticipate that the opening of the market would attract so many law firms. It is an important market, but it’s not a huge market, so the notion that 20 law firms can open an office here and expect to thrive seems a bit improbable.”
The Korean Ministry of Justice estimates that about 25 firms will open in Seoul by the end of 2013. This raises the question of whether there is really enough work for so many firms on the ground in Seoul, and if some foreign firms are prepared to accept the fees that Korean companies want to pay, says Benjamin Hughes, senior foreign attorney and co-chair of the international dispute resolution group at Shin & Kim. “Korean companies are very cost-sensitive and very eager to limit their exposure. Some of these cases end up being not necessarily lucrative for a firm with a large overhead like a U.S. firm,” states Hughes.
Several of the firms that have applied do not boast a large book of business in Korea, and are strategically intending to sell their litigation capability in the U.S. The firms that have been operating their Korea practice solely out of the U.S. tend to focus on areas like intellectual property, litigation and a few aspects of corporate law, says Jinduk Han, a partner at Cleary Gottlieb Steen & Hamilton who is currently based in Hong Kong.
Intellectual property, outbound M&A, and international arbitration will be the most coveted areas sought by foreign firms, says Sai Ree Yun, managing partner at Yulchon. “I predict half of them may leave the country in the next five years or so, and an equal number of law firms may decide to come to Korea. This has happened in countries like Japan and Singapore in the past,” Yun adds.
Certainly, the influx of new legal market entrants will enrich the opportunity and choice for new and existing Korean clients. While the larger Korean conglomerates have enjoyed long-standing relationships with their domestic and international counsel, the smaller enterprises may face a tough task in deciding which law firms to retain. “For people who don’t currently have international lawyers, or want to do something overseas and are looking to hire a foreign law firm for the first time, I am a little concerned because you have firms claiming that they can do everything from A to Z,” says Lee of Cleary Gottlieb. “It’s not going to be easy for a brand new Korean corporate client to necessarily be able to make a distinction among the law firms.”
At the same time, Lee acknowledges that many Korean companies are becoming quite sophisticated, possessing strong in-house capabilities.
The key to success for the incoming firms will be whether their lawyers have established relationships on the ground, and can build on those connections. Although the EU signed its FTA with Korea before the U.S., the UK firms were not able to take advantage of the head start in getting into the Korean market. “The UK firms had very few Korean speakers that they could slot into that position as managing partner,” says Hughes, adding that most of the bilingual lawyers are U.S.-qualified and not UK or European-qualified. As a result, only three of the firms that have expressed interest in opening up in Korea are from the UK.
The UK firms may increase their activity down the road, however, once foreign firms are allowed to hire Korean attorneys. Under the agreements, the liberalisation of the legal sector will occur in three stages – the first phase has already happened; in two years’ time, international firms can set up joint ventures with Korean counterparts, and will be allowed to practise Korean law and hire local attorneys after five years. One thing is certain: the future looks bright for Korean lawyers, as they will be highly sought after by both domestic and international firms. Many attorneys at Korean firms will be looking at opportunities that may develop for them down the road, says Hughes.
Careful co nsolidation
It is not just individuals that are sizing up their future prospects. Some small and mid-sized firms already have begun to weigh the possibility of merging with domestic or international counterparts.
“There are a lot of smaller firms now – a lot more than there used to be – and in fact there has been some consolidation already over the past several years,” says Lee, who adds that some foreign firms might consider absorbing an entire practice or law firm once it becomes possible to practice Korean law. “However, that is not something we would do. Traditionally, we’ve never acquired whole practices, and we’ve never merged with other law firms. We’ve hired lateral partners very selectively, and in Korea I don’t think we will follow a different strategy,” asserts Lee.
For his part, Yulchon’s Yun believes that consolidation is an unlikely outcome. “Consolidation between top-tier domestic firms will result in a lot of conflict, which reduces the slice of market share for both,” he says. “The sum of the two may be less than the mere addition of the two.”
“In the future, discussions could take place. But I believe, at least in the medium-term, no major Korean firms will consider that possibility,” agrees Jae Hoon Kim, a partner at Lee & Ko.
The boutique era?
Besides market consolidation, a developing legal market could open the doors for boutique firms. Dominated by a handful of local firms, the South Korean legal environment does not seem hospitable for boutique law firms. But there may be breathing space for them now. “This is what happens in developed markets, and it’s happening already,” says Shin & Kim’s Hughes. “There are some good IP boutiques, and there is a very good maritime boutique. There are not that many, but I think the number will increase because this is a function of the diversification of the Korean legal market, which is happening anyway.”
Indeed, boutique firms with a specialisation could be a lucrative option for larger law firms looking to procure practice-specific expertise. Acquiring a boutique arm may be a viable and less conflicted proposition for international firms that are looking to enter the market after five years. “I think you will see a proliferation of boutique firms leading up to the five-year mark – when they can hire local attorneys – and then you will probably see a drop in the number as they merge into the foreign firms,” predicts Hughes.
“I don’t think you can discount the possibility of boutique firms trying to carve out their own niche, and perhaps looking to merge with an international firm when that becomes possible. But I think it is speculative at this point,” notes Han.
Still, there is some debate amongst lawyers on whether boutique firms will find a foothold in the crowded legal market.
“There are some boutique firms in Korea, and they are suffering. It is not very likely, particularly if foreign firms are coming in. Their room for opportunity is more limited than before,” adds Yun.
While there may be greater competition for firms, and especially for boutiques, there is no shortage of work. Large Korean companies have rapidly increased their spending on legal fees over the past several years, as their growing market share and global ambitions have embroiled them in complex legal issues. This has created a steady stream of demand for work involving M&A, litigation and antitrust matters.
Wars of attrition
As Korean companies continue to raise their global profile, competition has never been fiercer. In today’s market, time is of the essence as companies worldwide churn out new ideas and technologies at breakneck speed. The scramble to innovate has added to corporate IP portfolios, and there has been little hesitation to spend big money on legal fees to protect their interests. “To survive in a tough business environment, patent owners are filing patent litigations against competitors to dominate their market,” says Lee & Ko’s Kim.
In the past, important patent disputes were not litigated in Korea because new technology developers did not file in the country, and therefore possessed a relatively weak portfolio. But things have changed. Many U.S. companies now have a strong portfolio in the region – as well as considerable power – and are choosing to litigate in Korea. According to the Korean Intellectual Property Protection Association, the number of international patent lawsuits involving Korean firms has increased by over 80 percent from 154 in 2009 to 278 last year, reports The Korea Times.
Many of Korea’s prominent standard-bearers – such as Samsung and LG – are now battling with multinationals on home soil. Most notably, arch rivals Apple and Samsung are locked in patent disputes in 10 countries, as they vie for market dominance in the thriving mobile industry. In one of the most recent high-profile battles in the U.S., Apple emerged victorious after the jury found that its Korean competitor had copied key features of the iPhone. Apple was awarded $1.05 billion in damages – a hefty blow to Samsung.
However, the pendulum has recently swung in Samsung’s favour. In October, Britain’s Court of Appeal
upheld the country’s High Court judgment that, despite some similarities, Samsung’s Galaxy tablet did not infringe Apple’s designs, in part because its products were “not as cool,” Reuters reported. The decision is valid throughout Europe and should bar further legal disputes between the two companies
over the design of tablets in the region.
Apple was dealt another setback in the U.S. after an appeals court overturned a pre-trial sales ban against Samsung’s Galaxy Nexus smartphone.
While companies have been increasingly litigious in their utilisation of their IP portfolios, the global economic downturn has taken its toll on the number of patent and trademark filings in Korea. Kim highlights that Japan and Europe’s sluggish economies have led to a reduction in the number of Korean
filings from abroad. “In the near future, I think filings will decrease or maintain its level, but litigation will increase,” he says.
With the Korea-U.S. FTA taking effect in March 2012, a number of changes have been made to Korea’s intellectual property legislation. Amendments to the Korean Trademark Act include the introduction of non-visual – sound and smell – marks, changes to statutory damages in trademark infringement actions, and increased scrutiny of an applicant’s intent to genuinely use its registered trademark.
Staying afloat
Korea has weathered the global economic storm considerably well. While inbound M&A work has slowed greatly, substantial cross border outbound activity is a sign of the current strength of Korea’s corporations. “An increase in outbound M&A is visible, but that trend might change if the Korean companies are affected more by the downturn of the world economy, and feel less secure about the future of the economy. At the end of the day, you have to have some bright spots of business in the country in which you are investing,” says Yun.
As it stands, the economic prospect is not improving, and many practitioners do not expect any marked increase in the number of deals for the year ahead. Some lawyers note that there could be more work
to be found in fields involving distressed assets, or dispute-related work related to defaulting contracts and projects.
In an effort to encourage market growth, the Financial Services Commission submitted an amendment to the Financial Investment Services and Capital Markets Act to the National Assembly in June. The amendment includes the lowering of the equity capital requirement for securities and investment advisory firms, the consent for prime brokers to offer their services to a wider range of qualified institutional buyers, and reforms to the trust regulatory system.
Spotlight on antitrust
A lot of legal work has resulted from the push by the Korean Fair Trade Commission (FTC), the country’s antitrust watchdog, to tackle abuse of market-dominant positions by large conglomerates. Small and medium enterprises (SMEs) are suffering as the large Korean companies gobble up a growing slice of the pie. Over the past several years, the FTC has aimed to foster the growth of SMEs by implementing new policies restricting large companies, and have ramped up investigations and sanctions on companies deemed to be abusing their dominant position.
The regulator has also stepped up the monitoring of multinational corporations that are suspected of abusing their patents in Korea. The FTC reports a growing number of cases where MNCs abuse their intellectual property rights.
In another feud between the two technology giants, the FTC is investigating complaints filed by Apple that Samsung Electronics is unfairly competing in the market by abusing its dominant position in wireless technology patents, the FTC said to Reuters.
“For the past five years, the Korean Fair Trade Commission has acted to increase the free competition via cartel investigation or to direct large conglomerates to share and cooperate with the SMEs. That kind of direction could be maintained through the FTC under the coming new government,” says Kim.
A new leader
What lies ahead for the legal sector, now that a change of government is around the corner? December will mark the end of incumbent President Lee Myung-bak’s term and usher in a new leader. Like with any government election, the outcome will have an impact on the market and direct the nation’s course for the next few years. “There could be a significant change in economic policy, and a significant amount of legal work following to either defend or support the policy. For example, the competition law may be more forcefully enforced against many big companies,” says Yun.
While the three presidential candidates have battled one another, all have voiced their commitment to the de-monopolisation of Korea’s chaebols, or family-owned conglomerates, to nurture small and medium business, encourage healthy competition, reduce unemployment, and reduce income inequality. “The so-called ‘democratisation of the economy’, the buzz word for the presidential campaign, will bring about new regulation and matters which may have very complicated legal issues,” says Yun.
Hughes agrees: “I think what we’ll see is more breaking-up of the chaebols into different businesses. The way they are structured now, many of them are in basically every industry. For the sake of corporate governance and legal compliance, and the continued development of the Korean economy, I think they will have to be separated. They are already spinning things off, and each new entity will need its own corporate counsel. For law firms, the pie will get bigger as the companies get smaller.”
Watch and wait
There is no doubt that the road ahead will be an exciting one for South Korea. International firms are pouring in, and a lot can happen over the next five years before they are allowed to practice local law. This, coupled with a shroud of uncertainty surrounding the global economy, is prompting the legal community to adopt a cautious wait-and-see approach. One thing is for sure: South Korea is a lucrative prospect for economic growth and legal development. But, whether all the newest law firms on the block will reap rewards remains to be seen. “In the long term the entry of foreign firms into the Korean market will be a positive development. But in the short term the number of mouths to feed in terms of law firms may be growing faster than the pie,” says Hughes. “It will be interesting to see where this goes.”
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