Third-Phase Opening of the Legal Services Market in South Korea: Liberalization or Protectionism?

President Park Geun-hye shakes hands with U.S. President Barack Obama following a joint press conference in the White House. Courtesy Culture and Information Service (Cheong Wa Dae)/Wikimedia.

President Park Geun-hye shakes hands with U.S. President Barack Obama following a joint press conference in the White House. Courtesy Culture and Information Service (Cheong Wa Dae)/Wikimedia.

The 2011 European Union-South Korea Free Trade Agreement (the “KOREU”) and the 2012 United States-South Korea Free Trade Agreement (the “KORUS”) have had, and will continue to have, a significant impact on the legal services industry in South Korea. Both agreements contain terms that indicate an intention to open up South Korea’s professional service sector by allowing U.S. and EU law firms to open offices in Korea. Pursuant to the KORUS, the “liberalization” of Korea’s legal services industry will be implemented in three phases:

  1. “U.S. firms may open offices in Korea, providing advice on U.S. and international law to Korean individuals and companies.
  2. Two years after the agreement enters into force, firms may form alliances with Korean firms or enter into cooperative agreements to provide advice on Korean law.
  3. After five years, U.S. firms may establish joint ventures with Korean firms and employ Korean lawyers qualified to practice Korean domestic law.”

Almost identical terms are found in the KOREU.

The five-year transition period for European law firms is set to come to an end in July 2016, as phase-three of the liberalization comes into effect. In anticipation, many prominent U.S. and UK firms have opened offices in Korea. As of March of this year, 26 foreign firms have opened offices, with Latham & Watkins set to become the 27th. The potential market for these firms is clearly significant, as evidenced by the rising revenues of their Korean offices. According to a report from the Ministry of Justice, Clifford Chance became the first international firm to accrue more than ten billion South Korean won (8.35 million USD) in 2014.

But the impending liberalization also means increasingly intense competition for the local legal service providers. Perhaps as a way to address these fears, the Ministry of Justice amended the Foreign Legal Consultant Act (the “FLCA”) on March 2. The FLCA, which was passed according to the provisions of KOREU and KORUS, will regulate the opening of the local legal market to foreign law firms. On the surface, the FLCA will “fully liberalize the Korean legal market to European law firms in July [2016] and to American firms in March 2017.” But the provisions of the FLCA impose harsh restrictions on foreign law firms. Before the proposed amendments were put to vote by the Legislation and Judiciary Committee in January of 2016, the “ambassadors from the European Union, United States, United Kingdom and Australia visited the committee chairman and strongly protested that the bill goes against the free trade agreements between those countries and Korea.” Specifically, the ambassadors referred to a clause in the bill prohibiting foreign law firms from owning a stake greater than 49% in a joint venture as one that would “unfairly protect Korean law firms.” In response to this opposition, an officer of the international legal affairs division at the Ministry of Justice stated that “according to the free trade agreements, the conditions of the Foreign Legal Consultant Act are set to be suggested by us,” and also noted that “[t]his opposition by ambassadors is exceptional and against diplomatic customs.”

Foreign lawyers argue that the problem with the provision limiting foreign law firms to a 49% stake in a joint venture is that, considering the lack of control of minority partners in the joint ventures, this requirement would force foreign law firms to take on unacceptable risks. But this is not the only clause that restricts foreign law firms. There are two other significant provisions which “create serious impediments to the successful implementations” of the third phase of liberalization. The FLCA also requires Korean firms to have been in existence for three years before they can form joint ventures with foreign firms. This prevents U.S. and European firms from hiring skilled Korean lawyers and forming joint ventures with them, since the type of lawyers that are sought are typically employed by a small number of Korean law firms that compete with foreign firms for international clients. This is also seen as a rule that protects major Korean law firms by making it harder for teams of talented Korean lawyers from defecting and creating joint-ventures with foreign firms. Lastly, Articles 24 and 35(19) of the FLCA prevent U.S. joint ventures—but not European joint ventures—from practicing in certain areas including labor, intellectual property, and real estate laws. This not only prevents U.S. law firms from engaging in certain practices, but it also disincentivizes Korean lawyers from forming or joining joint ventures by limiting the scope of law that they are allowed to practice—despite being fully qualified to do so. Ultimately, these restrictions under the FLCA will result in many foreign law firms choosing not to form joint ventures, but to collaborate with Korean law firms instead.

The KORUS and KOREU have broader visions of facilitating trade and increasing cross-border transactions, but many believe that the manner by which the “liberalization” of the legal services sector is being undertaken actually undermines the spirit of the agreements. The restrictions created by the FLCA limit the ability of foreign law firms to compete with local firms, and make them more reliant on Korean law firms to do business. As William Kim, the head of the Korea Office for Ropes & Gray said in the Financial Times, it is not clear “whether it’s liberalization or…actually handcuffing foreign firms.”

Joon Hwan Kim is currently a third-year law student at Columbia Law School and a notes editor for the Columbia Journal of Transnational Law.

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