Representing Chinese Companies: We See Some Light

China product innovation

Had a nice meeting last week with one of my law firm’s few Chinese clients.

Though the bulk of my law firm’s work involves helping mostly US companies go overseas (especially to Asia, Spain and Latin America), we also help foreign companies enter into and conduct business in the United States. Our language and cultural capabilities mean most of that work should be done for Russian, Korean, Spanish/Latin American, and Chinese companies, but we have done disproportionally little for Chinese companies. There are many reasons for this, but the two chief reasons are money and culture.

Let me first digress by describing our history with Russian and Korean companies and then I will explain where we are with Chinese companies. The purpose of this history is to try to put Chinese companies in context as to where they are in becoming sophisticated consumers of legal services, which, in turn, directly reflects on their international sophistication writ large. For other service providers who have worked with Russian, Korean, or Chinese companies, this history will only be interesting because it will almost certainly be exactly the same as theirs.

Many years ago, my law firm started out representing American companies doing business in Russia and Korea and/or with Russian and Korean companies. Fairly soon after that, we started representing Korean-American and Russian-American businesses as well, mostly relating to their transactions with Russia and/or Korea. These Korean-American and Russian American businesses were, for the most part, run by Russians and Koreans who had been in the United States for at least five years. They had a good understanding of how business is conducted in the United States and their knowledge of how to use lawyers pretty much matched that of any other  domestic business.

Then the lawyers with whom we worked in Russia and Korea and the U.S.-based Russian and Korean companies started referring Russia-based and Korea-based companies to us. These Russian and Korean companies knew little of how the world operated outside their own countries and even less about the nature of US lawyer-client relationships.

Most of the time our fees precluded our representing these Russian and Korean companies at all. I cannot tell you how many times we would quote our hourly fee, get a long pause, and then a response along the lines of, “that’s for the entire project, right?”

Two main factors were leading to this disconnect on fees. One, our fees, denominated in dollars, were way high in relation to what things cost in Russia and in Korea, including lawyers. Two, these companies were shocked by the hours we were estimating to give them the answers or the resolution they sought. They would often insist to us that our finding the answer should consist of us simply reading the applicable code section and there was just no way doing that should take more than twenty minutes. They would stress that they would be more than willing to pay us a “reasonable” fee for us to answer their questions off the top of our heads, but our having to research the answers indicated to them that we did not know what we were doing. On top of this, the Korean and (even more so) Russian lawyers were charging a flat fee per project, not by the hour.

To try to solve the fee problem, we started quoting flat fees and we did start getting some business, mostly confined to those situations where the Russian or Korean company had virtually no choice but to retain a high level international attorney outside their home country. It was only then that we realized the fee problems would prove to be the least of our issues.

Once we started representing these companies we had to deal with cultural disconnects. Some of the (now) funnier stories from those days:

1. One of our international dispute resolution attorneys is in a packed U.S. courtroom representing one of Russia’s largest companies. Opposing counsel stands up and cites how our client had used the Russian Coast Guard and the threat of arms to seize his client’s ships while they were out fishing and then forced them at gunpoint to come to port in Russia so our client could seize them, all this in violation of the bankruptcy court’s stay order.

As the opposing lawyer is talking, we very quietly ask our client whether what the opposing lawyer is saying is true. Our client says it is, to which we ask why he had never told us, especially since we had asked a number of questions which by all rights should have elicited this information. Our client’s response was that he was worried that if we had known of this, we would not have represented his company “as zealously.”

2.   Having to deal with clients who ask us what the federal judge on their case earns per year from salary and from “other arrangements.” I always respond to this question by saying that United States federal judges earn a very good salary and that if “other arrangements” means bribes, the amount is unequivocally zero. They would then make me out to be a naif, to which I would usually unload on them by saying something like the following:

You were referred to me by Oleg (made up name). He is your lawyer in Russia. He is also who we use when our American clients have matters in Russia. We both use him because he is an excellent lawyer, right? He has referred you to me because he thinks I am an excellent lawyer, right? Why do you think your Russian lawyer tells you to use us in the United States and we tell our clients to use him in Russia? Because he knows that we are better equipped and better positioned to navigate the US court system than he ever will be. And I am telling you that American federal court judges do not take bribes and I am telling you that I have never bribed anyone in my life and I sure as hell am not going to do it now on your case. I’m just not.  And if you are going to persist in believing that bribing a judge is the way to go (which, by the way is crazy here because we can win this case on its merits) then you should go back to ____ and tell him you want to “do things the way they are done in Russia,” as you put it, and you want him to represent you here.

3. With the Korean companies, one of our biggest problems was how much they relied on us. Lawyers in Korea are hugely respected (think doctors in America in the 1950’s) and they would too often want us to make business decisions for them.

Our Korean and Russian clients eventually gained enough familiarity with the US legal system and with lawyer-client relationships that our relationships with them are now, in all important respects, pretty much no different than our relationships with our American clients.

Now let’s talk about the current state of Chinese companies, generally:

  • My law firm’s hourly rates compare with the average monthly salary in China. Chinese companies have in-house lawyers paid less per week than we charge by the hour. If you don’t think this can be awkward, you have never been in this situation.
  • Chinese companies expect our lawyers to give them answers off the top of our heads to virtually all of their legal questions.
  • Chinese companies generally hire us only when they are facing a problem there is absolutely no way they can resolve without qualified legal assistance. We have tried to explain how they would actually reduce their legal fees if they paid us to assist them on a proactive basis, but they just are not interested.
  • Many of the Chinese companies that seek to hire us for one thing (let’s say, forming a US company) really have another goal in mind (let’s say getting visas for their families and getting their kids into U.S. schools). They do not tell us of their real goals until we are way into the project. This sometimes can make achieving their real goal more difficult and this oftentimes leads to us having to do more work.
  • Once Chinese companies hire us, they want to tell us exactly how we should be doing our jobs. We were retained for a Chinese company once to sue an American company which owed the Chinese company millions of dollars. Upon our hiring, we sent a memo to our Chinese client, explaining in detail our proposed course of action. After we had completed a few of the initial steps outlined in our memo, we received an e-mail from the Chinese non-lawyer client, setting forth the steps we should now follow, which steps made absolutely no sense at all in an American context. We told the client that it either had to trust our competency as lawyers or they should let us go and we would return all that they had already paid us. They let us go.

The above is typical, yet something else is starting to happen as well. We are getting hired by Chinese companies that have been doing business in the United States for a few years and who have seen how attorneys have helped some of the companies with whom they have done business. These companies are reticent to use American lawyers for cost reasons, but they do not have crazy cost expectations either.

Like every smart company, they simply do not want to get involved in a situation where costs might spin out of control. We understand this and we have been working with them to explain how things go in the United States and, when appropriate, we have been doing their work on a flat fee basis or with a dollar cap.  We emphasize how important it is that we stay in constant contact and to stress this, we oftentimes tell them we will not bill for client-attorney communications. Amazingly enough, some of these companies are now using us to go into Latin America as well.

Slowly but surely, these Chinese companies, who have been in the United States long enough to realize how different we are than China, are starting to want to learn how to better operate here and are starting to gain enough confidence to realize that their U.S. operations can handle a U.S. based cost structure.

What happened with Russian and Korean companies on the legal front was always being mirrored in other business arenas. And what is happening with Chinese companies on the legal front is no different from what is happening with Chinese companies on all fronts as they begin to expand into developed economies worldwide.

If you are a service provider looking to work with Chinese incoming clients, you will need to understand where your Chinese clients and potential clients are coming from and where they are going and you will need to show patience and an educator’s spirit to help them get there. It is going to take time, but my law firm’s experience with Russian and Korean companies tells me there is light at the end of the tunnel.

U.S. service providers, what are you seeing out there? Any light in your business?

6 responses to “Representing Chinese Companies: We See Some Light”

  1. We are a professional services firm having done business in China for over 20 years. While we have plenty of western clients wanting to enter or grow their business in China, we do not take on clients in China that want to do business in the U.S, even though we are qualified to perform the work. We do this for the very same reasons you indicate. Chinese firms do not want to pay the fee until they have some urgent requirement (which is rare). You are right on the money (so to speak) here.

  2. US Federal judges are clean. At the state or local levels sometimes strange things happen, but you really need someone local to tell you the situation.
    Also this works the other way. There are parts of the Chinese legal and political system which are clean, and I’ve gotten strange looks from people when I try to explain that.

  3. About the cost structure. Although I thought what you presented was quite an honest and forthright account, I do want to take a step back and think about this from a broader perspective. Americans (and Dan) seem to be of the assumption that a road going towards an American goal post is inevitable. I think it is not. I hope it doesn’t happen.
    The “cost structure” and added value of the U.S. legal system in my opinion continues to degrade and make less and less rational sense. If we take a look at the “undeveloped” expectations of the Chinese (and Koreans, Russians) about wanting a fixed-fee, simplified, effective legal system — can we really argue this shouldn’t be the more noble goal? As Dan has mentioned, cases in China often are settled in months. Oh my! That’s not even discovery in the U.S.
    The muli-year, huge legal fees so prevalent in the U.S. today only funnel wealth to a select few. Do businesses and consumers really gain from this structure?
    I hope we all devolve to a better “business model.”

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