Legal December 2012

Raising the Bar

Ken Kurosu

After 25 years back in Japan, foreign law firms still have mixed feelings

• Positive changes lauded, but more to do
• Some 360 overseas law firms here
• Parts of legal system are criticised
• Foreign law firms get only one office
• Some rules’ logic, fairness questioned
• Govt talks often vague, lack urgency

December marks an important anniversary for the legal profession in Japan, with foreign law firms celebrating a quarter of a century since they were permitted once again to practice in this jurisdiction.

There have been vast changes in Japan’s legal landscape over those 25 years, as well as in the advice that foreign law firms are allowed to provide. While specialists in business law agree that most of the changes have been broadly positive and in line with the needs of modern international businesses, they believe there are still areas of the Japanese legal system that lag behind those of other advanced nations.

Some point to a lack of transparency on how regulations are made; others say the rules should be rewritten to allow young, foreign lawyers to start and fully develop their careers here, instead of being required to work elsewhere for two years. Another bone of contention is the ban preventing foreign law firms from having more than one office in Japan.

However, there is optimism that improvements are coming since, in recent years, Japan’s Ministry of Justice has instituted changes. One of the improvements that was, arguably, most overdue came after authorities here finally realised that Japan was suffering from a dire shortage of lawyers. Consequently, it permitted many more law students to pass the annual bar examination.

“In general, a lot of the big battles have already been fought in many areas, although some work remains to be done”, said Ken Kurosu, managing partner at global legal practice Squire Sanders.

“These sorts of things are often more effective at the government-to-government level, rather than in working-level talks”, Kurosu explained.

One of the very first US law firms to set up shop in Asia, Squire Sanders’ predecessor firm, Graham & James LLP, had a presence in Tokyo as early as 1955. To operate, it took advantage of a loophole in the rules at the time, which permitted lawyers to work if they had been here in the immediate aftermath of WWII.

Squire Sanders’ roots may be in Cleveland, Ohio, but its largest office is in London, while the Tokyo practice reopened in 1988, after the ban on foreign law firms was relaxed.

“Government-to-government talks on issues can be a bit vague and lack a sense of urgency”, Kurosu told BCCJ ACUMEN. “The American Chamber of Commerce in Japan has been quite active in pursuing these matters, while the British Chamber of Commerce in Japan is also involved through the European Business Council in Japan. That is where we see most of the movement and approaches that tend to be the most effective”.

As Japan emerged from years of isolation to embrace foreign ideas, it was initially drawn to European legal systems. The nation’s rulers in the Meiji Era (1868–1912) adopted laws based on those of Germany and, to a lesser extent, France, the UK and the US.

The Commercial Code, a set of laws designed to regulate commerce, was adopted in 1899. The current corporate law is based on that code but is undergoing numerous revisions, the most recent going into force on 30 December, 2005.

After the end of the war, the legal system underwent a number of major revisions by the Occupation authorities and, inevitably, was strongly influenced by US law, with a dash of British law added.

However, the changes did not make it easy for foreign legal firms to open offices in Japan. Initially, such firms were given special status to assist in the post-war trials or aid the Occupation authorities. Then in 1954, rules were instituted banning any more overseas firms from offering their services here.

The shutters remained down until the 1980s, which were a tense time for Japan’s trade relations. Restrictions were placed on imports of everything from French skis—because Japanese snow was claimed to be different to that of France—to US cars. Under huge pressure, primarily from Washington D.C., legal services were one area in which Japan gave way, and foreign firms were allowed to provide their expertise.

Today, there are some 360 foreign legal firms registered in Japan, some 200 from the US and 70 from the UK, with numerous unregistered junior lawyers assisting them. The remaining legal firms have been set up by businesses in other nations although, in recent years, there has been a sharp increase in the number of Chinese lawyers practicing here.

Overseas legal firms are represented as a bloc by the Foreign Lawyers’ Association of Japan, which works with the legal services sections of foreign chambers of commerce and the EBC to encourage changes in Japan’s laws.

James Lawden

The EBC’s Legal Services Committee, chaired by James Lawden, a partner with the Tokyo office of Freshfields Bruckhaus Deringer LLP, contributes a section to the EBC’s annual white paper on the status of changes in the industry. The 2012 report made for uncomfortable reading.

The optimism expressed two years earlier had been severely diluted in terms of both the moves by the Ministry of Justice to streamline the application process for foreign lawyers, and a report by the Foreign Lawyers System Study Group on foreign law firms possibly being permitted to establish bengoshi houjin (lawyers’ corporations) and, thus, operate more than one branch in Japan.

While an attempt by the Japan Federation of Bar Associations to reverse the streamlining efforts appears to have failed, the white paper points out, the legislation regarding corporations met opposition from the Association of Japanese Patent Attorneys “for no obvious reason”.

“It seems the relevant legislation, when enacted, will permit law firms—in Japan and comprised solely of foreign lawyers—to establish a corporation and, so, open a branch. But those [firms] composed of both foreign and Japanese lawyers will not be able to do so”, according to the report.

“The distinction has no rational basis and will reduce the already limited usefulness of the new measures”, it adds.

With 24 lawyers in Japan at present, London-based Freshfields Bruckhaus Deringer provides all the services required of a corporate law specialist—from the small print on M&As to financing, banking, litigation, intellectual property issues, patents, real estate transactions and competition law—but is only allowed to have a single office here.

“More than 200 Japanese firms have established themselves as legal corporations and, for example, Tokyo firms have opened offices in Osaka and Nagoya. But that status is not available to foreigners,” Lawden said. “And that is clear discrimination”.

Legislation currently going through the Diet, the Japanese parliamentary system, will allow foreign firms to become corporations—the catch being that a foreign firm is only eligible to do so if all its lawyers are foreign.

In the recommendation in its 2012 white paper, the EBC’s Legal Services Committee calls for abolition of the restriction on branches, on the grounds that it is “archaic and does not suit the needs of either domestic or international law firms”.

The rules on the eligibility of foreign lawyers is another key area of concern.

Toshi Arai

“We would like to see the cumbersome residency requirement abolished for non-Japanese lawyers”, said Toshi Arai, chair of the Tokyo office for US law firm Paul Hastings LLP.

Removing the obligation for a foreign lawyer to have three years of professional experience, of which two must be obtained outside Japan in his or her homeland, would make a huge difference to a firm that has been in Japan since 1988 and currently has 15 attorneys.

Managing partner for Morrison & Foerster LLP in Tokyo, Kenneth Siegel equally believes that young lawyers “should be allowed to start in Japan and develop their careers here, without the requirement of spending two years somewhere else, which is costly and damaging to their development”.

Changing the rules would also give client firms better access to the attorneys they are working with, he pointed out. And having over 10% of the firm’s attorneys in Japan demonstrates just how important this country is to the practice’s overall operations.

Working for one of the firms that opened up the Japanese legal industry to outsiders in 1987 and has 125 lawyers in Japan at present, Siegel is hopeful that better services might be made available for clients here.

“The biggest change we have seen in Japan has been the increased sophistication of the clients and the appetite for global services in Tokyo”, Siegel explained. “Japanese clients are very active around the world and understand the value of having their attorneys and advisors close at hand”.

However, there are major differences in doing business in Japan compared with the US, where Morrison & Foerster was set up in 1888 in San Francisco.

“For me, the most significant difference is the long-term nature of the attorney-client relationship”, he said. “It takes many years to develop a close relationship with clients in Japan, but they do tend to stay with the attorneys who support them effectively”.

Clifford Chance, which has had an office in Tokyo for 25 years, but has advised Japanese clients for far longer as a global firm, has seen some fundamental shifts in the legal work it has undertaken in this country.

“The nature of the work has changed, in line with changes seen in the Japanese and global economies”, said Eiichi Kanda, managing partner for the Tokyo office. “For example, since the recent economic crises, we have seen much less complex securitisation work, but have seen an increase in outbound M&As in recent years.

“In relation to work undertaken by foreign lawyers, we have seen an increase in foreign-qualified lawyers with strong Japanese language capabilities who provide foreign law services in Japanese and cater specifically to Japanese clients”.

Headquartered in London, Clifford Chance has 35 offices in 25 countries, and some 3,400 legal advisers. Of these, 400 lawyers are based in the Asia-Pacific region. This year, the Tokyo office marks 25 years in business.

Another legal player marking a quarter of a century in Japan is White & Case LLP. The global law firm has its roots in New York, but 90 legal professionals in Tokyo and, from the outset, has been active in lobbying for further reforms to the Japanese legal system.

“The post-Lehman period has seen a decline in work available in the area of financial and capital markets here in Japan, as also in many other jurisdictions. But recent years have been marked by a fairly dramatic uptick in outbound M&As, and investment by Japanese corporates”, said Brian Strawn, executive partner for the firm here.

The increase in outbound M&As can be attributed to a number of factors, Strawn believes, ranging from Japanese firms having “a lot of dry powder”, the strong yen, domestic firms looking for new markets as the home market matures and shrinks, and a shake-up in various industries—in particular the electronics sector—as Japanese firms become less competitive.

Kurosu added that another big change Squire Sanders has noted in Japan is the amount of time that is now spent on compliance and attention to the legal issues “in a very serious way”.

“In the past, Japanese companies’ legal departments were not very strong at all and there was no focus on compliance as a driver of decision-making”, he said. “But now it is a factor in every decision that is made”.

In terms of its clients’ actions, Squire Sanders is “not seeing the kind of bubble-era, irresponsible business where firms were buying everything and anything they could get their hands on”, he said. “Now they are going through the proper steps, and Japanese firms are operating according to global standards and in a more responsible manner”.

They are, however, becoming more litigious. This is partly due to the fact that they are present in so many jurisdictions and there is an increasing recognition of the importance of intellectual property rights. This is causing Japanese firms to resort to the courts to protect their rights.

The EBC white paper suggests that the 25th anniversary of the foreign lawyer law going into effect offers an opportunity for Japan to consider how legislation might be developed to fit the types of law firms that are now establishing themselves in Japan and benefit both internationally minded clients here and the entire legal profession of Japan.