Editor’s Note: The author of this post is the founder and CEO of Legal Mosaic, a strategic consulting firm and a regular contributor to Big Law Business.

By Mark A. Cohen, Chief Executive Officer, Legalmosaic

It has been almost 40 years since the U.S. Supreme Court upheld the right of lawyers to advertise.

TheBatesCourt could have scarcely imagined that legal advertising — in the guise of websites, blogs, and a legion of other forms of communication spawned by the Internet — would afford lawyers a global advertising platform. And let’s not forget personal injury lawyers who, as is known by the insomniacs among us, sponsor those late night shows that are hard to remember the next morning and even more difficult to admit to having watched.

Legal advertising has a multiplicity of shapes and is a staple from solo practitioners in storefronts to the largest global law firms. And sometimes the content of lawyer advertising — how the firm represents itself to the public — can have significant consequences.

Dentons and The Swiss Verein Structure

Dentons has been in the news a great deal lately. The press usually focuses on its latest acquisition in a relentless expansion across the globe. In the span of a few years, Dentons — which will be the world’s largest law firm in headcount and number of countries with offices if it completes a proposed tie up with China’s Dacheng — has channeled the BigFour’s global strategy and has pulled off the legal equivalent of a roll up. It has done so with staggering speed, geographic breadth, and sheer number of deals. Just recently, Dentons announced that it has 21 additional NDA’s in place with new target firms across the globe. How has Dentons pulled this off?  Two key elements are its Swiss verein structure and global-minded leadership.

The Swiss verein enables member firms operating under the Dentons brand to maintain their own finances while tapping into the global brand’s robust sales and marketing machine and technology. The structure also facilitates the firm’s rapid entry into new markets, helping it to circumnavigate potential regulatory roadblocks without seemingly breaking stride.

But there are also downsides to the Swiss verein — not just for Dentons but also for the other half-dozen behemoth firms that share the structure. For example, profits cannot be shared between constituent partnerships, a constraint that removes incentives for lawyers in member firms to share clients and work with attorneys in other member participants operating under the global brand. Most law firms operating as vereins combat this challenge by sharing costs in return for work referrals, which allows for the indirect sharing of profit.

The economic autonomy of members also militates against the global brand operating as an integrated firm, which is how Dentons and other vereins advertise themselves and which is a big selling point in their efforts to secure client work across the globe as well as vie for lucrative cross-border matters. Inherent in the autonomy of the individual member firms is a resistance to yield to conflicts with other member firms, because there is no financial incentive to do so. While this tension certainly exists at large law firms with a unified P&L, it is far more acute in the verein context where, from an economic perspective, “it’s every member for itself.”

Another Dentons News Item — ButNotan Acquisition 

Dentons stumbled recently when it was disqualified from representing an Ohio company in a patent suit against Gap, Inc., a current as well as long-time client.

Conflicts are a serious challenge foralllaw firms; they are the most common basis for legal malpractice claims. The larger and more geographically dispersed a firm becomes, the more serious the potential for conflicts and the more pressing the need for uniformly applied prophylactic measures to avoid them. So what makes the Dentons disqualification so noteworthy that it could have a chilling impact upon the Swiss verein structure for law firms?

Quick Overview of the Motion to Disqualify

The story arises out of the Dentons representation of Revolaze, LLC and Technolines, LLC in a patent infringement case against Gap, Inc. and several other defendants. Dentons — and its predecessors — had represented Gap in a significant number of matters over the course of more than two decades.

Gap was also an active Dentons client when the firm initiated the subject litigation against it, and one of those Gap matters — involving the Dentons Canada representation of Gap — is alleged to have afforded Dentons US access to confidential and privileged information to Gap’s detriment.  This sounds like a serious potential conflict situation; the procedural predicate in the disqualification motion filed by Gap gets worse.  Gap alleged that: (1) Dentons did not inform it of the conflict prior to initiating the adverse representation; (2) nor did it seek a waiver; (3) Dentons had a funding agreement with a litigation finance company to whom ithaddisclosed the conflict it declined to disclose to Gap; (4) Dentons entered into a partial contingency fee arrangement with Revolaze which gave the firm a heightened economic interest to maintain its position as trial counsel as well as a heightened financial incentive to resist withdrawal; and (5) Gap had negotiated with Dentons for several weeks to seek the firm’s voluntary withdrawal—which Dentons declined to do.

It is against this background that Charles E. Bullock, Chief Adminstrative Law Judge of the United States International Trade Commission, rendered his decision on Gap’s Motion to Disqualify Dentons from the Gap patent case.

Judge Bullock ruled that Dentons should be disqualified. In so doing, he not only considered the procedural history above, but also rejected the Dentons contention that as a Swiss verein, its representation of Revolaze against Gap by its US member firm immunized it from conflict and access to Gap’s proprietary data resulting from the Dentons Canada representation of Gap.

Judge Bullock, citing the ABA Model Rules — and particularly Rule 1 related to law firms as well as Rule 1.7 dealing with Conflict of Interest with Current Clients — determined that the Swiss verein structure did not shield Dentons from the rules. The Judge reasoned that Dentons held itself out as an integrated firm and, so, could not “have it both ways” by marketing itself as a single firm for one purpose while simultaneously invoking the juridical separateness of its member firms to circumvent a conflict.

Translation: If you represent yourself to the public as Dentons, then you will be held accountable as Dentons whether you have a Swiss verein structure or not.

What Effect Will This Ruling Have on Swiss Verein Firms?

 There are no easy answers to this question. Conflicts go to the core of the lawyer-client relationship, and no matter what the structure of the firm, they must be avoided absent the exceptions carved out by the Model Rule 1.7.

Judge Bullock’s disqualification decision — which Dentons is seeking to intervene as an interested party and petition for rehearing — is a stark reminder of the challenges confronting law firm vereins, especially those which, like Dentons, have grown rapidly via mergers and acquisitions and across different geographies and cultures. With each member having its own financial incentives separate and apart from the global brand’s other “member firms,” and with different conflict standards across the globe and technology platforms that are likely not wholly interconnected, it places a heavier burden on the verein firms to manage conflicts as well as to preserve proprietary data free from disclosure to a member firm.

Conflicts are a challenge foralllaw firms, especially as they get larger and more geographically dispersed.

But those same conflicts are especially challenging to vereins because: (1) each “member” firm in the verein has its own P&L and, so, has a more entrenched, vested financial interest in representing its own clients since“firm clients” are really member clients for economic purposes; (2) differences exist between conflict rules of members operating in different countries (requiring the global brand to create and enforce a single standard for conflict resolution); (3) cultural differences exist between and among member firms, especially when they have become absorbed by the global brand and have little if any prior contact with other (potentially conflicting) verein members; (4) legacy technologies and the absence of a centralized technology for clearing conflicts makes the process cumbersome and subject to mishaps; (5) the “global firm” often lacks a shared approach to legal practice among its member firms as well as an identifiable and uniform firm ethos;  and (6) conflict resolution becomes more unwieldy unless there is a centralized decision maker whose rulings — given their direct financial impact on members—are particularly challenging and further strain brand cohesion.

The bottom line is there are inherent risks of conflicts and proprietary data disclosures endemic to the verein structure — risks which Judge Bullock’s decision makes clear cannot be avoided by asserting the legal separateness of member firms.

This does not mean that the verein structure is necessarily doomed or inimical for law firm adaptation. It does, however, underscore the far more onerous burden on Swiss verein firms to ensure that conflicts are avoided and that maintenance and protection of proprietary client data is not subject to compromiseeven between and among the individual member firms within the global brand.

That burden is made weightier — and more difficult to enforce — by the economic model upon which the verein is predicated. And we know that a law firm’s economic model is a driver of  its strategy and culture .

Conclusion

The globalization of legal services parallels the geographic expansion of other knowledge-based professional service based industries such as accounting, advertising, and consultancies.

The legal vertical has seen three principal approaches to global expansion and delivery: (1) elite law firms leveraging their brand, creating foreign subsidiaries, and retaining a  strong,  centralized management structure as well as a unified balance sheet; (2) Swiss vereins; and (3) networks or affiliated firms (such as Lex Mundi) that do not purport to be an integrated firm but, rather, a group of cooperating, pre-qualified alliance participants each maintaining its individual brand and advertising itself as such.

Each model is designed to  expand the breadth of the law firm’s reach and to fortify its ability to service and control client relationships. And each model has a different structure and economic model.  What they share is the requirement to advertise themselves to the public in a manner consistent with the way they operateand to be held to that representation when questions of conflict or proprietary client information are at issue.

Perhaps this is the key takeaway of the Dentons disqualification. If a law firm advertises itself as a unified entity, it cannot hide behind the verein structure and afford its individual members relief from conflicts or compromise of client information.  And no matter how large or small the firm, the public has a right to know the lawyers in that firm in whom they are placing their trust and expectation of confidentiality and loyalty. To paraphrase Freud’s famous take on the cigar, “Sometimes a conflict is just a conflict.”