Risk Update

Verein Pain — Conflicts Challenge and Commentator Analyses of Recent Verein Terrain

Posted Dan Bressler

“‘One Firm’ or Separate Entities? Vereins’ Growth Bumps Into Conflicts, Liability Concerns” —

  • “A venue dispute in a malpractice case against global firm Baker McKenzie has put the structure of Swiss vereins in the spotlight, with many commentators highlighting the existence of unanswered questions about the liability of these entities when a member firm faces malpractice allegations.”
  • “Last week’s ruling from an Illinois appeals court defied Baker McKenzie’s request that a case levied by a former client should be relocated overseas where, as the firm stated, ‘witnesses and evidence reside.’ The judges found the plaintiffs supported their allegations regarding the ‘legal unity of liability of defendants’ sufficiently to allow the case to be heard in the state where the firm was founded in 1949.”
  • “The case recalls Dentons’ litigation with former client RevoLaze in 2020, when the firm was accused of malpractice for representing the plaintiff in a patent infringement case despite an alleged client-related conflict of interest. At the time, the firm argued that under its verein structure, its U.S. and Canadian offices were separate entities, though, the argument was rejected, with the judge noting that the firm ‘holds itself out to the public as a single firm.'”
  • “In Baker McKenzie’s case, the firm is accused of failing to ‘disclose several conflicts of interest’ to a client. Among its defenses is that the client, investment firm Lehram Capital, engaged the firm’s Russian entity Baker & McKenzie CIS-Limited and not the wider firm. Since the suit was filed in 2018, Baker McKenzie’s Russian operations have relaunched as an independent firm in the wake of Russia’s invasion of Ukraine.”
  • “In Baker McKenzie’s case, the firm is accused of failing to “disclose several conflicts of interest” to a client. Among its defenses is that the client, investment firm Lehram Capital, engaged the firm’s Russian entity Baker & McKenzie CIS-Limited and not the wider firm. Since the suit was filed in 2018, Baker McKenzie’s Russian operations have relaunched as an independent firm in the wake of Russia’s invasion of Ukraine.”
  • “In times of conflict, like the malpractice claim, this model has proven to be ‘a smart way of navigating conflict while keeping work under one roof,’ according to Fort Stratford Partners co-founder Jonathan Fort. ‘A conflict is a huge problem for any international firm regardless of the structure and some clients aren’t going to like that but in a structural way vereins are a smart move,’ Fort said.”
  • “Michael McCabe, a D.C.-based managing partner of McCabe Ali and expert witness in malpractice cases, said he doesn’t see a disproportionate number of verein lawyers accused of malpractice or conflicts. In fact, he said vereins ‘bring something to the table’ with talent and global reach.”
  • “Yet the Baker McKenzie case suggests a maturation of the verein structure for law firms, as questions about whether liability can be imputed to a parent company have frequently surfaced in corporate law but not in global law firms, at least not prior to emergence of law firms’ use of the verein structure, Robertson [Cassandra Burke Robertson, a law professor at Case Western Reserve School of Law] said”
  • “Marketing speak can make the issue a little more fraught, often undermining the divided structure of these entities. Commentators, as well as courts, have noted some vereins send conflicting messages to the market. ‘This is because they present themselves as one unit while legally acting as separate entities,’ explained consultant Tony Williams, a principal with Jomati Consultants.”
  • “Baker McKenzie defended against its former client’s claim of legal malpractice, which emerged out of a deal in Russia in 2013, by contending that the client engaged the firm’s Russia-based entity, not the LLP as a whole and the claim had no merit in the U.S. because none its attorneys “in Chicago or anywhere else in the U.S. participated in the Russian litigation regarding the mine.”
  • “‘You still see courts that are struggling with the concept of one law firm versus multiple law firms,” McCabe said. ‘Is Baker McKenzie, for example, one gigantic law firm, or is it a dozen or so smaller geographically centric separately created entities that are all within the same overarching family within the Baker & McKenzie brand?'”
  • “‘You can’t be a global law firm and say you have 4,000 global lawyers on one hand, but on the other hand [say], ‘We’re not so global and we operate separately even though we are under the same umbrella,’’ McCabe said. ‘There aren’t many cases that talk about this matter.'”
  • “A firm’s growth in scale is attended by the higher risk of conflicts, McCabe said, since every client engagement is a potential source of a conflict. This problem is magnified by the global nature of the clients served by global firms, often with complex structures of subsidiaries and joint ventures of their own.”
    “McCabe said vereins need to have a robust conflict checking system because they are ‘convenient targets’ for malpractice claims brought by dissatisfied clients.”
  • “‘The benefits of being a Swiss verein or LLP are far more limited these days. I think it won’t be long before people say they are complicated and become limited companies. This would of course come with its own challenges but forward-looking firms might look to move to a different structure,’ said one head of a professional services firm.”

“US court says Baker & McKenzie LLP can face malpractice suit in Chicago” —

  • “The lawsuit, amounting to US$200 million, was filed by overseas clients attempting to reclaim ownership of a Siberian coal mine, challenging the firm’s handling of the case. By a majority of 2-1, the appellate court rejected the motion to dismiss the case based on the doctrine of forum non conveniens, allowing courts to decline cases that might be more appropriately or conveniently tried elsewhere. Although the alleged misconduct occurred in Russia, the court determined that legal proceedings could not be conducted there, making Chicago – a major operational base for Baker & McKenzie LLP – a suitable venue for the trial.”
  • “At the heart of the dispute is whether Baker & McKenzie LLP, headquartered in Chicago, can be held accountable for the actions of its Moscow branch, Baker & McKenzie CIS-Limited. The plaintiffs argue that the firm’s organizational structure – a Swiss verein comprising legally independent entities sharing a brand and certain management functions – does not exempt the Chicago office from liability for the Moscow office’s alleged malpractice.”
  • “The claimants, Lehram Capital Investments and its principal shareholder, Daniel Rodriguez, had sought Baker & McKenzie’s services following the detention of a Lehram official by Russian authorities in 2013, shortly after acquiring the coal mine. The lawsuit contends that Baker & McKenzie CIS-Limited’s mishandling of the legal proceedings, including filing in an inappropriate court with a shorter statute of limitations and exposing Rodriguez to dangerous negotiations, led to the loss of the mine.”
  • “Baker & McKenzie LLP had proposed London as a more appropriate venue for the case, given the involvement of its London office in the initial review and referral of the coal mine case. However, the plaintiffs maintain that all entities under the Baker & McKenzie brand operate as a single unit, making the Chicago office equally responsible.”