The number one destination for U.S. law firms looking to expand overseas is not Asia, the emerging Gulf emirates, nor anywhere in Continental Europe. Rather, it remains London. In an ironic reversal of ‘The British Are Coming’, during the past decade, over half of new foreign law firm transplants in London have been U.S. firms, and the trend continues to grow.
While the practice of law in ‘the colonies’ certainly has its compliance issues, even greater compliance challenges await those firms looking to grab a piece of the action in the financial and investment hub of Europe. In particular, adherence to data protection regulation must be carefully monitored to full compliance, a part of the EU regulatory regime that has even created a headache for native practitioners. We will examine just what sort of compliance hurdles these immigrant practitioners face.
Adding On the Pounds
In 2021, U.S.-based law firms accounted for an amazing 42 percent of all commercial space rented in London by law firms. That figure becomes all the more significant when viewed against a background of UK firms either maintaining their current real estate footprint or even reducing it. And it is not just in terms of rental space that U.S.-based law firms are expanding, but also in terms of revenue. According to revenue figures released for that same year, Latham & Watkins was the number one U.S.-based law firm in London in 2021 (with Kirkland & Ellis in the number two spot), heading up the list of 48 U.S. firms that increased their UK revenue. Furthermore, out of that revenue roster, 34 U.S.-based firms achieved double-digit revenue gains.
The growth of U.S.-based law firms in the UK has not just been measured in square meterage of rental space, nor revenue alone, but also in terms of hiring. While the number of US-based firms opening London offices increased 29% since 2000, the number of attorney hires in those offices during that time has skyrocketed by 415%. Such an aggressive growth strategy has clearly impacted the local legal market and has made it the biggest legal market for U.S.-based law firms outside of the U.S.
Not Just a Big Law Undertaking
Although most U.S.-based law firms that are expanding overseas fit the description of Big Law firms, mid-sized firms are also participating in overseas expansion to developan international practice. However, mid-size firms that are hesitant to make a move typically cite the perceived prohibitive costs and other regulatory, tax, and compliance issues as barriers to cross-border expansion.
While there is no doubt that international expansion can be risky, when done for the right reasons and pursuant to a sound plan, the move can yield exceptional rewards, not the least of which is serving as a hedge against an economic downturn in one market while seizing upon an economic boom in another. Among the reasons not to expand overseas is the ‘vanity’ motive of gaining the bragging rights of ‘an overseas branch’ or an ‘international practice’, when form might eclipse function. But the move makes much sense when undertaken for the right reasons—to gain a foothold in an ever-expanding, profitable market or to serve a global client better. With the proper goal in mind, the next question becomes how to navigate such a move.
What Sort of Presence?
In today’s interconnected-office structure, lawyers no longer have to sit where they practice law. However, that doesn’t mean that they don’t have to first sit for the bar in the overseas jurisdiction. One of the simplest ways to expand overseas is to hire local attorneys already qualified in the foreign jurisdiction. Or merge with an established UK firm. A few years ago, law journal headlines were filled with the breaking news of a ‘Magic Circle’ firm (read: UK top five) merging with a U.S.-based law firm. U.S.-UK cross-border mergers still occur, but due to a recent change in UK licensing laws, it has become easier for overseas lawyers to qualify on their own as UK solicitors.
As of last September 2021, foreign lawyers who wish to qualify in England can sit for the Solicitors Qualifying Examination (SQE). The SQE allows a lawyer to qualify as a solicitor by taking the same exam as domestic candidates. The first examinations took place in November 2021. In contrast to the previous system, the new SQE arrangement allows greater flexibility and more convenient opportunities for overseas lawyers looking to qualify in England, with most requirements being those you can meet from abroad.
Beware the Cross-Border Data Breach
Cross-border data transfer is critical for any law firm doing business between their U.S. and UK offices. Globally, the digital economy naturally relies on vast zettabytes of data being transferred around the planet every second. But that convenient and essential mechanism also exposes law firms to enormous compliance risk. The EU was one of the first to adopt a highly aggressive and strictly enforced regulatory regime regarding data transfer. The General Data Protection Regulation (GDPR) is the EU’s law on data protection and privacy covering the EU and the European Economic Area and is considered a major component of EU privacy and cybersecurity law. Even your firm’s (or your client’s) cookies and tracking methods can expose you to GDPR violation penalties, including severe fines.
From the U.S. side, among the compliance pitfalls that a firm or client can run afoul of is the transfer of private health data (Protected Health Information, or PHI), whether that of employees, ERISA participants, or data included in litigation discovery. The Health Insurance Portability and Accountability Act (HIPAA) governs the transfer of PHI, and even innocent transfers by covered entities can trigger the statute’s sanctions.
As to financial and other accounting data, SOC2 (System and Organization Controls) is a set of reporting controls defined by the American Institute of Certified Public Accountants (AICPA) to validate internal information system reports. SOC2 specifies how customer data is to be managed and employs ‘Trust Services Criteria’ elements regarding security, availability, processing integrity, confidentiality, and privacy. Failure to maintain adequate cybersecurity measures can trigger SOC2 as well as GDPR compliance offenses.
Due Diligence in Expansion
The foregoing examples merely scratch the surface of the compliance issues facing law firms— and their clients—when undertaking cross-border expansion. While no commercial law firm contemplating global expansion can afford to ignore the opportunities offered by foreign markets, neither can they afford to relate casually to the inherent compliance requirements and risks. Accordingly, thorough Due Diligence of compliance issues must be a primary factor in evaluating risk management related to global expansion.
Executive Summary
The Issue
How to expand your practice cross-border without running afoul of regulatory and licensing compliance protocols.
The Gravamen
Overseas expansion is taking place at an unprecedented level, with tremendous advantages for participants who plan wisely.
The Path Forward
Analyze the reasons for your contemplated overseas expansion and decide what type of overseas presence best suits your needs.
Action
1. Motivation Analysis:
Your expansion to an overseas location should be motivated by market opportunity, superior client servicing, or as a hedge against differing economic conditions, but not for vanity considerations.
2. Licensure Compliance:
Will your compliance with local licensing requirements best be met via a merger with an existing firm, direct local hires, or qualifying your present staff for foreign bar acceptance?
3. Data Transfer:
Conduct a thorough Due Diligence review as to what sort of data your cross-border practice will be transferring and what regulatory regimens—both U.S. and foreign—govern such transfers.
4. Cybersecurity:
Regardless of your area of practice, all data transfers, even those deemed ‘in-house’, must comply with the highest cybersecurity measures in order to avoid sanctions and penalties.
Further Reading
- https://www.lawjournalnewsletters.com/sites/lawjournalnewsletters/2004/09/02/expanding-law-firm-operations-globally/
- https://www.legalfutures.co.uk/latest-news/pioneering-us-law-firm-opens-in-london
- https://www.thetimes.co.uk/article/us-law-firms-clean-up-in-london-p7ndp8qcr
- https://warwickplace.com/the-global-market-for-legal-services-is-staying-out-an-option/
- https://www.law.com/legalnewswire/post-detail/london-legal-market-remains-at-the- forefront-of-global-expansion-strategies-of-us-firms-according-to-alm-report/
- https://news.bloomberglaw.com/business-and-practice/wake-up-call-latham-climbs- past-kirkland-for-revenue-in-london
