A Swiss structure that lets law firms affiliate to jointly market services is facing a second legal test in less than a year that threatens the viability of the model.
Baker McKenzie, the first major US law firm to adopt the Swiss verein structure, is accused of legal malpractice through an alleged Russian member of its network. London-based Lehram Capital Investments faults the law firm for its loss in ownership of a Siberian coal mine.
Baker contends that the Russian law firm that handled the mine matter, Baker & McKenzie-CIS Ltd., was a separate entity. A failure to prove that could have Baker facing tens of millions of dollars or more in damages.
The case shows that a key selling point of the verein structure—that affiliates are completely separate from one another on matters such as profits, pay and taxes—could be undermined when it comes to the critical matter of legal liability.
Verein issues are “front and center” in the Baker case, said Cassandra Burke Robertson, director of the center for professional ethics at Case Western Reserve University School of Law. “If the plaintiffs’ theory prevails here, I think it does create a risk for firms adopting a verein structure.”
The lawsuit, if pressed successfully, would mark the second legal finding in less than a year that works against the model. The Ohio Supreme Court in August declined to review a $32.3 million malpractice award against Dentons that was tied to the work of one of the firm’s verein affiliates.
The Ohio company that won that award, RevoLaze Inc., which uses lasers for denim products, argued that Dentons shouldn’t have represented the company in a 2015 patent case. That’s because the Dentons verein affiliate in Canada had represented Gap Inc., which RevoLaze had sued for patent infringement.
Daniel Konicek, Lehram’s attorney in the Baker case, said he closely followed the Dentons matter because he knew the Swiss verein model was important in his case. He said he consulted with attorney Jefferey Katz, who had represented RevoLaze in its case.
“From the beginning, we knew” vereins were going to be an issue, Konicek said. Damages for Lehram should be $200 million based on the output of the mine, he said.
Baker McKenzie said in a statement that Lehram’s claim “has no merit.”
“A foreign UK company and a Spanish citizen filing a claim in Cook County, Illinois to complain about work carried out in Moscow by Russian attorneys, arising out of a mining project in central Russia, in which none of the alleged events took place in the United States, constitutes forum shopping,” the firm said.
Baker says on its website that “the use of the name Baker McKenzie is for description purposes only and does not imply that the member firms are in a partnership or are part of a LLP.”
Swiss vereins, first used by sports clubs and non-profits, then accounting firms, allow operations in dozens of different locations to affiliate and jointly market their services under one brand. At least six major US firms adopted the model, starting with Baker in 2004. Others besides Dentons who adopted it include Littler Mendelson, Squire Patton Boggs, DLA Piper and Norton Rose Fulbright.
The 2018 lawsuit against Baker could have weighty implications for each of the verein-structured firms, Robertson said. If courts don’t recognize regulatory separation of Baker’s member firms, it increases the risks that conduct appropriate in one jurisdiction will be challenged in a different one, she said.
Lehram’s suit claims that in 2013, soon after it bought the Gramoteinskaya Mine, located in the Kemerovo region of the Russian Federation, its representative was thrown in a Russian jail over alleged passport issues. Lehram then lost control of the mine.
Baker has lost several venue-related motions in the case, most recently on Jan. 23. Cook County Circuit Court Associate Judge James Snyder threw out Baker’s motion that argued the case belonged in Russia’s courts instead of Chicago.
“Baker LLP argues in its briefs that, in fact, Lehram engaged ‘Baker & McKenzie CIS-Limited’ and not Baker LLP,” Snyder wrote. “For the purposes of this motion, the court considers the plaintiffs’ claims as they are stated, including the claim of a legal unity of liability of all the defendants.”
If not Russia, London would be a better locale for the matter, Baker had argued. Lehram lawyers said in court papers that Chicago makes sense as a trial venue in part because it’s Baker McKenzie’s “home base” and that it would be safer and more convenient for parties to meet there instead of Europe.
According to Konicek, Baker could appeal Snyder’s order regarding the case’s venue to the First District Appellate Court in Chicago, but if it loses there, it would face trial in Cook County.
Baker McKenzie said in its statement, “We are continuing to review our appellate options.”
The case is Lehram Capital Investment v. Baker & McKenzie, Ill. Cir. Ct. No. 2018-L-012318.
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