China's Crackdown On Foreign Law Firms -- The Heat We Get/The Heat We Generate

Last week, I turned over to the China Confidential blog a memorandum from the Shanghai Bar Association, alleging (in strong terms) legal violations by foreign law firms operating in China. China Confidential did a post on this subject and, within minutes, I was getting e-mails and phone calls either complaining about the inaccuracy of the memorandum or congratulating us for having revealed it.  Many asked why China Law Blog had not broken the story on our own blog so I wrote a post explaining why:

China Law Blog was given this memorandum and we, in turn, turned it over to China Confidential to blog on. We did this because we believe such an important issue (and one so close to us) should be handled by a professional and disinterested journalist (not lawyers) and because we wanted to see a journalistic investigation conducted.

The mainstream media and other blogs have since picked up on the story and the e-mails and phone calls keep coming.

Interfax China just wrote on this in its "Top Feature" story, entitled, "Foreign law firms face potential crackdown in China, legal fallout could follow."  The writer of this article, Eric Dahl, interviewed our own Steve Dickinson, who was able to add some information from having talked with Chinese lawyers only days earlier.

"My understanding is that it's bad enough that some [foreign law] firms could be shut down," Steve Dickinson, a lawyer with Harris & Moure, who made the memorandum public on his website China Law Blog ( said.

The most worrisome allegation made in the memorandum is foreign firms hiring Chinese-licensed lawyers and using legal assistants to provide legal services, such as drafting and interpreting contracts, project investigation, or providing interpretations and opinions of Chinese laws.

Many legal documents, such as opinions on how Chinese law applies to a transaction, can only be rendered by a Chinese attorney, which foreign law firms are prohibited from employing.

Potentially, all transactions that have taken place to date, including contracts, financing agreements and IPOs, that have used documents drafted by foreign law firms as their legal basis could be declared null and void by the government on the grounds that the firms lacked the authorization to issue such documents, said Dickinson.

Interfax contacted "several foreign law firms," but they all "declined to comment on the possibility of a crackdown."

Steve also discussed additional information given him by Shanghai lawyers regarding possible sanctions against China's foreign law firms allegeding operating illegally: 

Dickinson said foreign firms should be worried about a government crackdown and, while it is unlikely agreements will be voided, it's possible a couple of firms could be shutdown and made an example in order to send a message.

The current situation has a historical basis. When foreign firms began operating in China, there weren't any domestic firms that were capable of providing the services required by foreign firms in China and local firms were too immature to challenge the actions of foreign firms.

As the capabilities of domestic firms have strengthened, they are now pushing for their fair share of the work and demanding foreign firms comply with the law, said Dickinson.

The Shanghai Bar Association urged the government to take "powerful measures" against foreign firms in the memorandum and has already begun urging lawyers and the public to report illegal activities to the Shanghai Justice Bureau. Vice Secretary Liu Yungeng of the Shanghai Municipal Committee initiated an investigation into representative offices on March 17, and has
required the Shanghai Bar Association to make proposals regarding the problem, according to the memorandum.

Steve went on to say that "[t]his is far more organized and severe than anything I've seen before, but it doesn't mean anything will happen."

The Associated Press also wrote a story on this (without any attribution, as though they themselves broke the story). The AP story is interesting because it appears to incorporate interviews with unnamed foreign lawyers in China so it is able to provide their perspective as well:

Foreign lawyers long have chafed at laws limiting them mainly to providing consulting businesses regarding laws in their own countries and international treaties and acting as liaisons between foreign companies and local law firms.

But like many Chinese laws, restrictions are vague. Foreign law firms are allowed to provide information about China's legal environment, but not to interpret the "applicability of Chinese laws," the memorandum says.

The AP also interviewed local Shanghai lawyers who "said they were aware of the document and supported stronger enforcement of the restrictions, meant to protect the fledgling local legal services industry:"

"They are doing business which they are not authorized to do in China so of course that affects the business of local law firms," said Wei Zengming, a member of the Shanghai Bar Association.

"The Ministry of Justice and our bar association should do something to clean up the legal services market," he said. "If foreign firms are violating the rules, of course they should be punished."

The What About Clients Blog, written by California litigator, Dan Hull, compared China's laws on foreign lawyers to California's laws and saw distinct similarities:

However, I agree with Dan [Harris of the China Law Blog] that it's not all that remarkable. China is no more insular, territorial and medieval toward "foreign" business lawyers than the 50 states are toward China lawyers. Moreover, several American states in particular are arguably more backward and restrictive than China. For example, California, one of four jurisdictions where I am licensed, is supposedly a progressive state with a huge and vibrant economy. But it still has a non-reciprocity bar admission policy with respect to licensing out-of-state lawyers--as if it refuses to recognize that business is done across both state and international borders. Massachusetts' Alan Dershowitz would have to take the 2-day "lawyers" California bar exam--a world-class waste of time and money--along side hundreds of 25-year-olds named Justin, Brandon and Brittany to argue more than one appellate case a year here. So would Florida's Roy Black and New York's David Boies in the trial courts. So China and California (and other non-reciprocity states) are about even on the anti-business and general madness meters.

The China Herald Blog, in its post, entitled, "What if Law Firms Ignore the Law," relayed its surprise at the "tone of indignation from foreign law firms, especially in Shanghai, who fear a crackdown"and noted that the "Chinese regulations and laws on law firms are strict but not that remarkable."  The China Herald asked how the foreign law firms can complain about "legitimate complaints about illegal activities" and concluded its post by asking "[w]ould you hire a law firm that is involved in illegal activities? Let's get real, I would say."

The Chinese Law Prof Blog criticized our post.  The Chinese Law Prof's comments are bulletted and indented, my responses to his comments are not.

�This is about protecting Shanghai lawyers from competition, not about protecting the public or the clients of the foreign lawyers. The memorandum does not even bother to pretend otherwise, and explicitly highlights the harm done to Shanghai lawyers. Remarkably, the memo does not ever claim that the foreign lawyers have actually given bad advice.

Why is that remarkable?  We criticize those who drive drunk yet make it home safely.  The Chinese Law Prof seems to view the harm alleged by the Chinese law firms as completely irrelevant, including the harm they allege is being caused them by foreign law firms securing unfair advantage through tax evasion.

� It is not quite accurate to suggest, as does the China Law Blog, that everyone does the same thing. The China Law Blog says, "Foreign lawyers are not allowed to practice in any of the 50 U.S. states." This is not accurate. LL.M. programs in the U.S. are heavily populated by foreign lawyers who, upon graduation, typically take the New York or California bar exams and then qualify to practice. By contrast, foreigners are not allowed to qualify as PRC lawyers.

The Chinese Law Prof is not being �quite accurate� as I never said "everyone does the same thing." I actually said the following:

It is important to note that China's legal practice laws relating to foreign lawyers are not draconian.  They are not too dissimilar from the laws in most other countries.  Foreign lawyers are not allowed to practice in any of the 50 U.S. states. Korea does not allow foreign law firms at all (I do not understand how this is not a WTO violation).  I have been told China's laws on this are actually quite similar to those in Japan. 

So I never said "everyone does the same thing," I merely sought to put China's practices in this area in the same ballpark with those of other countries and the Chinese Law Prof apparently cannot dispute that is indeed the case. When I said that �foreign lawyers are not allowed to practice in any of the 50 states� I thought it was clear I meant without first passing the state bar.  I now realize I could have been clearer on that and The Chinese Law Prof is correct that foreign lawyers can attend U.S. law schools for their LLM degrees and then sit for the New York and California bars and many do.  Foreign lawyers cannot sit for the Chinese bar, but since probably fewer than 20 foreign lawyers would have a chance at passing that bar, this really is not much of an issue.

� This is not a WTO issue. The China Law Blog posting wonders why South Korea's complete prohibition of foreign lawyers is not a WTO violation. The answer is simple: it's not a violation because the WTO agreements do not require you to allow foreign lawyers to practice. China, unlike South Korea, has made some specific promises about legal services (as part of its accession agreement), and those are set forth in its Services Schedule. I doubt that a crackdown would violate any of those promises.

The WTO does discuss foreign lawyer practices and it was my understanding (based entirely on statements made to me by Korean lawyers and foreign lawyers who work at Korean law firms) that Korea has reneged on its WTO commitments regarding foreign lawyers.  The Chinese Law Prof has informed me by e-mail that Korea has not made any WTO commitments regarding foreign lawyers. I agree with the Chinese Law Prof that a crackdown on foreign lawyers in China would not violate any WTO regulations, nor any Chinese WTO commitments. It is my understanding that the Chinese laws that would form the basis of the crackdown are in full compliance with the commitments China made to join the WTO.

� While lawyers in Shanghai and no doubt elsewhere are pushing for a crackdown, there are forces pushing in the other direction, and not just the foreign lawyers. Local bureaux of justice, for example, derive benefits from regulating foreign law firms that they would lose if the foreign firms were to be driven out or reduced in size. Thus, the struggle is not completely one-sided.

I completely agree with this. Right now, we understand that the Chinese Ministry of Justice has taken the lead in stepping up the policing of the foreign law firms.  But, this being China, some other government agency very well might step in and stop the whole process.  As Steve said in his Interfax interview, "it doesn't mean anything will happen."