Tuesday, February 18, 2014

The Rise and Rise of Micro-Law

(thanks to endtimeinfo.com)

This post is prompted by the news that three Freshfields partners have quit the firm to form a new arbitration boutique law firm. A London partner along with one from Paris have linked with Jan Paulsson, who used to be a partner. The reason this move is remarkable is that it continues a trend I have noticed since around 2010 when I wrote about the rise of the boutiques.

This came back to me as I was reading Brian Inkster's review of George Beaton's book on NewLaw. (Both are good reads.) Beaton's argument is that the traditional law firm model predicated around Big Law is no longer sustainable. Most of the alternatives, however, are based on technology with intensive outsourcing, the kinds of developments we see with Axiom and Radiant Law. But they aren't the only way of organising the delivery of legal services.

There are many problems with Big Law which I won't reiterate here (read Beaton's book). Maybe one of the difficulties inherent in Big Law is within its name. It's big. Rather like the National Health Service, the largest employer in the UK, large organisations are hard to change. There is resistance from those who like the status quo and there are many barriers to getting the change message to everyone in the organisation. There are often games of Chinese whispers that confuse and set factions against each other. For more see Larry Ribstein's essay on Big Law's death.

A key dilemma with Big Law is that in essence it is a set of interlocking networks that both vie and compete with each other. The result is that fission is common, and fusion is less so. Its main form of remuneration--profits per equity partner--enforces short termism and low thresholds of loyalty. See Sida Liu's critique. Even the moves from traditional partnership to more bureaucratic forms of partnership are failing to solve the problem.

So we have the rise of the boutique or micro law as a way of resolving some the issues. A small group of elite lawyers hive off and start their own firm, usually specialising in one aspect of law practice. The reasons for doing this are easy to identify. Strong among them is a resurgence of collegiality which is now absent from Big Law. Starbuck's essay on Wachtell Lipton showed this to be very important. (For those not convinced read Starbuck here.) Decisions can be made quickly without bureaucratic overload. Conflicts issues are reduced and simplified. And remuneration should be easier to decide--note my conditional here though....

Micro law is a return to the law practices of the 19th century when the "big" City of London law firms held sway throughout the world. With three or so partners but many managing clerks they were involved in policy making, lobbying, litigation and transactions. They helped build the City into the financial global centre it has become.

Yet these 19th century firms were still generalist. The new Micro Law is specialist and targeted on one area such as litigation, international arbitration, white collar crime, crofting law or intellectual property. Because of this it has a different style of practice. Micro law is selective both of client and business.

A preferable analogue may be the Bar. Small groups of lawyers in small offices depending largely on referrals from other lawyers. And this is what Micro Law can do: cases can be referred to it without fear of poaching clients and conflicts conundrums can be outsourced. Most importantly the client will be dealing with the key lawyer not a junior associate being trained at the cost of the client.

The case for the Bar analogue is strong. Litigation is the largest segment of Micro Law showing a demand for skilled dispute resolution (and, query, a rising reliance on third party litigation funding?).

There is no end to lawyers. We will always need lawyers. No society could function without them and no they can't all be killed. Lawyers are bad at organising themselves and have created their own Leviathan which they seem to be unable to slaughter. Nor is technology the answer, although it is tremendously helpful. Lawyers need to get back to doing what they do best. The law?


Tuesday, February 04, 2014

Russian Oligarchs and Globalized Law Firms....Be Careful Out There.....

Russian oligarchs are popular in the UK, especially London. They buy our football teams, newspapers, and most importantly they use our uber-friendly Commercial Court for their litigation. Barristers' clerks refer to the "Russian premium".

The kick off last year was between Abramovich and Berezosvsky which resulted in a big win for the Chelsea owner and suicide for the loser. More cases are filed for hearing, however.

This is excellent news for the big law firms, but only if you are aware of what your different offices are doing. White & Case have just been conflicted out of a lucrative $2 billion case between Ukranians Pinchuk and Kolomoisky & Bogolyubov. The judgment is here.

It seems White & Case have form here. The parties in the case were investors in metals and ferroalloy companies. David Goldberg, a White & Case partner in London and Moscow, acted for Pinchuk in a dispute against Kolomoisky & Bogolyubov in 2010.

In 2011 one of the companies, Optima, instructed Colin Diamond, a New York partner of White & Case, to act in a corporate restructuring that would result in an American IPO for the company. Diamond ran a conflicts check and discovered Goldberg's activities. Diamond sent his conflict enquiry on a bank holiday weekend and Goldberg didn't remember reading the attached documents. Nevertheless, Goldberg told Diamond the matter had settled and there was no further conflict.

Diamond acted for Optima and during his work White & Case learned much about the company and Kolomoisky & Bogolyubov. He earned over $900,000 in fees on the matter. White & Case worked through to 2013 in this matter.

In 2012 Pinchuk came back to Goldberg to act against Kolomoisky & Bogolyubov again. Goldberg ran no conflict checks or he would have found the restructuring work. When the matter was officially opened a conflict check was ran and the other work became apparent. Goldberg discussed the apparent conflict with White & Case's general counsel who opined there was no conflict. How?

The General Counsel decided there should be ethical screens between Pinchuk's case and the restructuring team. This was monitored by a 30 strong worldwide compliance team. But the claimants weren't told about the screen as they should.

I'm not going into dense detail on this but there ensued proceedings in the London Court of International Arbitration and claims in the US District Court of South Florida. As a result of these Optima's general counsel learned of the case against Kolomoisky & Bogolyubov. He wrote to White & Case about their conflicts and his complaint was dismissed as frivolous.

White & Case eventually withdrew their participation for Pinchuk in the LCIA arbitration but wanted to continue in the Commercial Court case. In all their London, Moscow, New York, Washington DC, and Miami offices had worked on various aspects of the case.

The Commercial Court judge applied the test in Bolkiah v KPMG (1992). In this case KPMG had been the auditors of Brunei Investment Authority during which time they accepted assurances from Prince Jefri about payments out of Brunei. Afterwards KPMG worked for Jefri and learned much about his assets and wealth. When later the Brunei government hired KPMG to investigate payments out of Brunei (which would include to Jefri), KPMG was compelled to create a system of then "Chinese Walls" or ethical screens. The court held that screens needed to be part of the institutional establishment and not created on an ad hoc basis. Here there was too much risk of information leakage.

The Commercial Court followed Bolkiah and said that White & Case owed an unqualified duty to the claimants not to disclose information and the risk of some form disclosure was too great. White & Case's ethical screens were not part of the organisational structure and therefore complete separation had not been achieved.

Pinchuk was mostly excluded from the case and is now left without his lawyers.

What is also of interest is that none of the US Model Rules of Professional Conduct concerning conflicts of interest with past and concurrent clients were considered by the court, at least with respect to the New York lawyers and those of other US White & Case offices. The extent to which these conflicts were waivable is questionable.

Clearly all global law firms are going to have to review their screening and conflicts policies extremely carefully to avoid disasters like this in the future.

Expect an appeal for Russian (and Ukranian) oligarchs love to spend money in the English legal system.