Original Story: newsweek.com
Trademark lawsuits can be a little dry, but a California case in the fall has drawn attention not only because it involved John Wayne and a whiskey named “Duke,” but also because it highlights a growing tussle over legal ethics.
At the heart of the issue is this: American ethic rules ban a lawyer from representing a client who is battling a company or person represented by another lawyer in the same firm. When law firms were small, that was no big deal, but now that the business is dominated by global behemoths, it gets complicated.
In October, a California federal judge tossed out a trademark lawsuit brought by the heirs to Wayne’s estate, John Wayne Enterprises, against Duke University over the elite school’s legal objections to the use of Wayne’s “Duke” nickname to market its “Duke Kentucky Straight Bourbon Whiskey.” While the case was dismissed on jurisdictional grounds, it exposed new questions about the nature of an increasingly common company structure employed by many law firms called a verein.
A verein (pronounced fair-INE) is a quirky, centuries-old Swiss structure that takes its name from a German word meaning association, club or network. It has long been widely used by Swiss organizations ranging from social clubs and civic leagues to FIFA, the governing body of international soccer. Giant Swiss insurer Zurich Insurance began life in in 1872 as a verein, and some reading salons in Enlightenment France called themselves vereins. A similar type of structure in Germany with the same name houses everything from major soccer leagues to techno-dance clubs.
Of the seven law vereins in the world that have emerged since 2004, several in the past two years, six are predominantly American. At the top is Baker & McKenzie International, now the world’s largest law firm, with 11,000 employees. The others are DLA Piper, Hogan Lovells, Norton Rose Fulbright, Squire Patton Boggs and Dentons. All these firms were born when their core U.S.-based firms attached themselves to competitors and smaller boutique firms.
The appeal of becoming a verein: bragging rights. “The power of being an international powerhouse is valuable, and vereins market the hell out of it,” says Ed Wesemann, a consultant to law firms on governance and strategy issues.
But there are also pitfalls.
In the Duke case, lawyers for John Wayne Enterprises argued in court documents last August that Norton Rose Fulbright, the verein law firm in which legacy firm Fulbright & Jaworski represented Duke University, was playing both sides of the fence—an ethical no-no.
Specifically, the Wayne lawyers asserted, Norton Rose, which formed the verein with Fulbright in mid-2013, had previously represented the distillery producing the Duke-branded bourbon in unrelated matters. Fulbright lawyers denied any conflict of interest, saying in court papers that verein “member firms do not share privileged information with other member firms unless they are retained by and working together for a client on the same matter.” The judge did not address either side’s assertion.
A spokesman for Fulbright & Jaworski, the American mothership of the Norton Rose Fulbright verein, says, “Our law firm complies with rules applicable to fees.”
Lawyers may spend a lot of time worrying about such things, but corporate clients tend not to know much or even care about how vereins work. Citing a recent study, a Baker & McKenzie spokesman said that 90 percent of buyers of legal services said it was irrelevant how a law firm is structured. Three quarters of those asked had never heard the term verein. The spokesman added that being a verein gave the giant law firm “operational flexibility.”
What that actually means is hard to pin down. The inner workings of vereins “are going to be tested in courts, because someone’s going to be very unhappy,” says Edwin Reeser, a former managing partner at prominent law firm Sonnenschein Nath & Rosenthal LLP, who is now in private practice.
Switzerland, the world’s leading offshore tax haven, is historically known for its (illegal, in the United States and many European countries) tax-evasion schemes sold by Swiss banks to wealthy American investors. But while vereins funnel all profits to each member firm, and thus also have the “stateless” quality seen in profit-shifting by Apple, Google and other multinationals through offshore tax havens, they aren’t used by member firms to evade taxes.
Still, the relative financial and operational opacity of vereins is the subject of increasing debate in legal circles. Peter Kalis, the chairman and global managing partner of non-verein K&L Gates, a major law firm, tells Newsweek, “The business model for vereins is not yet proven.” Kalis has variously compared the mega-firms to a platypus (i.e. a freak of nature), a kaleidoscope, a “grand illusion” and a Potemkin village.
Vereins are not a merger—an often messy, protracted, expensive (for the investment bankers and outside lawyers involved) drama fraught with the nightmare of blending different corporate cultures. The core original U.S. parts of the giant firms are still registered and incorporated in the United States, but far-flung law offices in Qatar, Istanbul, Moscow, Sao Paolo and elsewhere that are brought under the verein umbrella get to use the legacy firm’s brand, name and image, all while maintaining separate profit pools and avoiding the messy task of creating a common corporate culture.
One lure of vereins to the mothership-legacy firms that anchor them concerns bureaucratic paperwork. Verein members each handle the individual tax and legal ethics regulations in their own country. That contrasts with a non-verein international law firm, which must deal with such nightmares in each foreign country where it has an in-house office. Members of a verein pony up money annually to proportionally cover the verein’s marketing and branding costs—basically, a management fee—and when a referral fee is owed, it gets deducted from that pot.
The biggest lure of the verein structure is the chance for members to market themselves and jump-start new business via client referrals. Think of a law office in, say, New York, that sends an American client with Turkish legal issues to a new partner office in Istanbul. That’s certainly cheaper, and more expertise-laden, than having the New York lawyer fly to Turkey to try to sort out third-party counsel.
But this is where verein critics get fidgety.
U.S. professional ethics rules prohibit a U.S. law firm from accepting or making referrals to third-party firms, and from splitting fees with those third-party firms, unless the client is informed in writing.
As a verein member, the Istanbul office isn’t really a third-party firm to the verein, even though it’s still legally independent. Still, the Istanbul law office owes a referral fee, typically around 15 percent of the total revenues that new client provides, to the New York office.
“Law firms rushed into these network combinations because they sounded like a wonderful panacea” to the problem of expanding amid the post-2008 recession, Reeser says. “But the U.S. law firms are going to be the losers in these structures because of conflicts of interests and ethics rules on fee splitting.”
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