China Lawyers: Due Diligence is Required

Got an email today from someone who had contacted me months ago regarding a potential litigation matter against a Chinese company. The case was not terribly complicated and so I recommended this person secure local Chinese counsel, particularly since this person spoke Mandarin. The new email was an update and the news was not good.

Seems this person is convinced his local Chinese attorney passed on secrets to the Chinese company he intended to sue. I cannot say whether this is true or not, but I can tell you this is at least the third time I have become aware of something similar and I have never heard a story like this involving an American lawyer. The other two instances involved American companies that had retained Chinese law firms for their trademark applications, only to have those (two different) law firms take forever to file for their trademarks and then report back that a Chinese competitor company had — in the meantime — beaten the American companies to the trademarks. Both companies were convinced (as was I) that their law firm had given an advance tip-off to their Chinese competitors and, no doubt, been paid nicely for having done so.

My firm has never experienced this problem with a Chinese lawyer, but I have experienced it with a Korean lawyer (it was actually in favor of my client in that instance) and I wrote about it in China Foreign Lawyer Ethics Rules.

Many years ago, I was meeting with the in-house international legal counsel for a very large Korean company, or chaebol. I was there representing the chaebol on one case, but the in-house counsel wanted to use our meeting as an opportunity to “pick my brain” about a fairly small, but somewhat complicated, multi-party case on which he was working. The case involved an alleged breach of contract and a number of American high tech companies. The case was pending in a Korean court and settlement talks had just begun. The in-house lawyer spent maybe ten minutes explaining the facts of the case and the various players to me and once I had reached a point where I felt I understood its overall outline, he handed me a two page letter to review.

The letter was written by an American attorney, on behalf of his American client, to the Korean lawyer representing the American company in Korea. The letter talked about how the American company wanted to settle the case for a million dollars, but they would be willing to take $600,000. The letter then instructed the Korean attorney to start settlement negotiations at $1.4 million.

Seeing as how my client had a copy of this letter, I initially assumed the American company whose settlement strategy was revealed in the letter was on the same side in the Korean case as was my Korean client, and I read the letter accordingly. I then read the letter again and then read it a third time. I was really confused and I had to confess as much to the Korean in-house lawyer. I told him I had thought the American company whose settlement strategies were being discussed was the American company suing the chaebol, but I obviously must have misunderstood the facts. The Korean in-house lawyer (who had an American legal degree) smiled and then explained.

The American company in the letter was on the opposite side of the chaebol and the letter setting forth the innermost workings of its settlement strategy directly involved its efforts to settle with the chaebol. My Korean client had been given this letter by the Korean attorney who was suing the chaebol on behalf of the American company, because this Korean lawyer had attended the same Korean law school as the in-house lawyer and had started law school a year or two later, making the in-house Korean lawyer his “big brother.” The opposing Korean lawyer would golf once or twice a year with the in-house Korean lawyer and had been trying to secure legal work from the chaebol for some time.

I went on to explain how we deal with this lack of a confidentiality guarantee:

I was young at the time and I was naive and I was appalled and I expressed my disbelief. The Korean lawyer laughed and explained to me that this was par for the course in Korea. To this day, I have no idea if this was or is really par for the course in Korea, but I have always acted as though it is, and I have always acted accordingly.

One of the ways I have handled this is by consistently using the same few lawyers in Korea for all of my firm’s clients. My thinking is that our providing so much work to these lawyers does two things. First, it creates a personal relationship between me and them and thus makes it that much more difficult for them to turn around and hurt me by hurting my client. Second, it takes away much of the incentive for the Korean lawyer to hurt my client because the Korean lawyer knows that if he (Korean lawyers are almost invariably men) does so, the regular stream of work my firm provides him will dry up. The way I see it, the foreign client who goes directly to the Korean lawyer in a one-off relationship is at far greater risk of a breached confidence. Despite all this, I am still far more circumspect in dealing with Korean lawyers who I use as local counsel than I would be in dealing with an American lawyer in Topeka.

The other way I handle this is to use American lawyers in Korea, of which I know many. I figure there is almost no way an American lawyer would risk his or her U.S. law license by engaging in such tactics.

We have done the same thing in China by choosing to work with only one or two Chinese law firms in each city so as to build up strong relationships and mutual trust.

Bottom Line: We are absolutely NOT saying all Chinese lawyers will violate your confidences because that is far from being true. But we are saying that you should not hire anyone as your lawyer in China unless and until you are sure you can trust them, because maybe you cannot.

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