Swiss Verein

Some initial thoughts on the Eversheds Sutherland and King Wood Mallesons ‘exclusive alliance’

Woke up this morning – Australia time – to news that had broken overnight that Eversheds Sutherland (ES) and King Wood Mallesons (KWM) had entered into an exclusive alliance, along with a whole lot of DMs (Direct Messages) in my LinkedIn box asked me what my initial thoughts were.

So here I go with some initial, off the cuff, thoughts about this:

  • With the closure of the 6 KWM offices across the UK, Europe and Middle East, the deal likely brings to a happy end KWM’s sad foray into those markets and puts final closure on the SJ Berwin story.
  • Both KWM Australia and KWM Hong Kong are not part of the deal. While this is good news for ES’s Hong Kong team – who I hold in very high regard – it seems very odd and shows possible cracks in the Swiss Verin model that is KWM (with KWM China being party to this arrangement). I’ll be very interested to see what this means for KWM Australia in particular.
  • The arrangement requires – subject to “client preference and conflict clearance” – KWM China to refer all outbound UK, Europe, Middle East, Africa and South America instructions to ES. I understand the “UK, Europe and Middle East”, but why include “Africa and South America” (noting that ES has offices in Africa but not South America that I can tell)? I think this could be particularly telling given both Africa and South America will be geographies in which KWM Australia plays and so there is the potential to see KWM Australia pitching for work against work that ES has been referred from KWM China.
  • Noting the deal is with “Eversheds International”, there is no mention of whether the consultancy arm of Eversheds is included in the arrangement. If it is, then KWM China has boosted it offering in this space significantly overnight (although there may well be some regulatory restrictions around that [consultancy] in China).

To me though, what will likely make or break this “formal cooperation agreement” however will be:

  • How are inbound/outbound referrals being tracked?
  • How are the referring partners being rewarded for the referrals?
  • And, what will the KWM Australia partners make of all this given access to a network of lawyers in one of their biggest overseas geographic locations, the UK, will be gone? Do they refer work to ES, even though they are not part of the deal? Or do they refer work to lawyers/mates in other law firms who compete with ES in the UK – including, interestingly US firms with news earlier this week that: “Nearly half of the UK’s largest law firms are US-headquartered”.

I guess we will have to wait and watch this space, but my three big observations are:

(1) Not sure what Eversheds is getting out of this deal – do KWM China refer that much work into UK, EMEA and South America?

(2) Looks to be a great deal for KWM China.

(3) Are KWM Australia being left in the wilderness?

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Where to next for the Swiss Verein law firm business model?

In a case that appears to have gone largely unreported outside of the US, last week (31 August 2022 – reported on Bloomberg’s website) Ohio’s Supreme Court rejected an appeal by international law firm Dentons to a relatively long running case that could, possibly, shake-up the accepted business model of many similarly structured international law firms – including some with a presence here in Australia, such as: DLA Piper, Squire Patton Boggs, Baker McKenzie, Norton Rose Fulbright and King Wood Mallesons.

‌So what is this all about?
Core to this case was an actually or potential conflict of interest, with a specific twist on the way law firms are structured under the Swiss Verein business model.

Before we jump into why this might be an issue though: What the Hell is a Swiss Verein?

The Swiss Verein business model

Wikipedia – which anyone who knows me well will be able to tell you I do not see as being the font of all knowledge, does a good job in this case of defining a ‘Swiss Verein‘:

“The association can also be used as a legal form for a business organization consisting of a number of independent offices, each of which has limited liability vis-à-vis the others. The form is often used by multinational professional firms so they can operate globally under one brand whilst maintaining separate profit pools (and ring-fencing liability) in each country in which they operate.

Pretty cool, but how can a problem arise now 20 years after Baker & McKenzie became the first major law firm to use the Swiss Verein structure in 2004?

Well, let’s take a look at the issues in this matter…

At the heart of this matter..

Core to this whole dispute was that:

RevoLaze argued that Dentons shouldn’t have taken on the company’s patent case in 2015 because one of the firm’s Swiss verein affiliates in Canada had represented Gap Inc., which RevoLaze sued for patent infringement.

…so what?

Well:

The verein structure lets law operations affiliate to market services under one brand while avoiding a full-on merger. Affiliates limit liability between offices and keep separate on matters such as profits, pay and taxes.

Okay, so now I’m starting to see why this might be an issue.

But who really cares?

As the Bloomberg article states:

The RevoLaze case tests whether firms using the Swiss verein model must do conflicts checks with all affiliates in their networks before deciding to take on a client.

Can you imagine that – over a 24 hour global time line! What would an “urgent” conflict check look like?

Or, maybe, get an integrated conflict check system – but that goes against the Swiss Verein model, so how about we take on board this (in the Bloomberg article):

Verein firms risk losing business if they’re required to disclose conflicts related to affiliates’ work. Existing clients may balk at other representations, and potential clients could decide to go elsewhere.

So what does the future hold for the Swiss Verein?

The answer – I have no idea. It’s one court decision – pretty influential though.

On the other hand, how long is it going to take to unwind any Swiss Verein structured law firm – in my view a project that will likely take 10 years!

As usual, comments are my own.

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Image credit to Ronnie Schmutz on Unsplash.com