Why Did My Lawyer Quit?

Commenting on Latham & Watkins’s withdrawal from representing the Chinese company Wahaha, I kept looking for the reason(s) for the withdrawal. I knew that there had to be some legitimate reason(s); otherwise, the withdrawal would be unethical under the American Bar Association’s Model Rule on Professional Ethics. My mind also led me to wonder how the Chinese law and legal ethics deal with the same issue. Bearing in mind that this post might be a bit technical, I will try to stick to simplicity and help people understand the differences between the two regimes of legal ethics, and how they protect clients’ interests when lawyers decide to quit.

First off, the ABA contemplates two types of withdrawals—permissible and mandatory. A lawyer must withdraw under the following conditions:

1. The lawyer’s physical or mental condition materially impairs the lawyer’s ability to represent the client;
2. The lawyer is discharged;
3. When the lawyer learns of a client’s crime or fraud, and the lawyer fails to dissuade the client from continuing such crime or fraud (Actual knowledge required, mere suspicion not enough). See In re American Continental Corp.

Under ABA Rule 1.16, a lawyer may withdraw if the following conditions are met:

4. The withdrawal will have no material adverse effect on the interests of the client; see Gilles v. Wiley, Malehorn & Sirota
5. The lawyer reasonably believes that the client is doing something criminal or fraudulent;
6. The client has used the client’s service to perpetrate fraud or a crime;
7. The client insists on doing stuff repugnant to the lawyer, and with which the lawyer has a fundamental disagreement;
8. Client fails to perform substantially under contract (paying fees);
9. The representation will result in an unreasonable financial burden on the lawyer or has been rendered unreasonably difficult by the client;
10. The representation will result in a violation of ethical rules or other law; or
11. Other good cause as deemed appropriate by a sitting judge.

Latham & Watkins’s withdrawal from representing Wahaha in the Los Angeles case has to be based on one of the above 11 causes. Once a lawyer decides to withdraw, she has to obtain permission from the court in a litigation case, and the court will examine the reason(s) given by the lawyer to determine whether the facts warrant a withdrawal. Of course, since the case is in California, Latham & Watkins’s lawyers in the local office have to follow California ethical rules, which might differ from the ABA Rules. Because I am not very knowledgeable about the California rules, I will just use the ABA Rules for illustration purposes.(In reality, the California rules and ABA Rules should be substantially similar with respect to terminating representation.)

Compared to the ABA Rules on withdrawal, the Chinese counterpart is far less specific. Currently, two documents provide guidance on the subject of terminating legal representation—the Lawyer’s Law of China (2007) and the Code of Conduct for Practicing Lawyers (2004 Provisional).

The Lawyer’s Law states that lawyers have the right to refuse or terminate representation in the following situations (similar to mandatory withdrawal):

1. the matter to be undertaken by the lawyer violates the law;
2. the client uses the lawyer’s service to violate the law;
3. the client purposefully withhold material facts from the lawyer.
See Lawyer’s Law (2007 Amended), Article 32, paragraph 2.

The Code of Conduct for Practicing Lawyers forbids terminating representation without appropriate cause, see Article 65; but it allows withdrawal when:

4. the lawyer learns of a present conflict of interest between her client and another existing client, (withdraw from representing the client who signed the contract but has not paid fees) see Article 85;

5. the lawyer is suddenly stricken with illness or disease and cannot physically continue the representation, see Article 89; [prompt notice to and agreement from client required before withdrawal]

6. the lawyer has changed her job and needs to move away, see Article 89 [prompt notice to and agreement from client required before withdrawal].

A simple and literal comparison of the American and Chinese rules may lead one to conclude the following:
1. Both rules mandate withdrawal when clients engage in fraud and/or crime, but the American rule requires the lawyer’s subjective knowledge, while the Chinese rule is less transparent on whether knowledge or suspicion is required for terminating the representation.

2. Where withdrawal is permissible, both rules require proper cause. The ABA Rules list six detailed and one general cause, whereas the Chinese rule provides three detailed causes for withdrawal, making the Code of Conduct much less instructive than its American counterpart. But, this is probably typical of statutes and rules in a civil law jurisdiction, where minute and exhaustive provisions on certain topics are less common than in the common law jurisdictions.

3. Overall, from a legal ethics perspective, clients with American lawyers should be able to enjoy more protection under the ABA Rules than they might under the Chinese rules. Under the ABA Rules, a client, at least, pretty much knows why her lawyer quit by way of eliminating the possibilities. But the Chinese rules leave so much room for generality that it might be hard to figure out why her lawyer terminated.

Vote for China Law Blog

Editors of the American Bar Association Journal have norminated China Law Blog as one of the best blogs in its kind---"Black Letter Law" in a vote.

Readers, please vote for China Law Blog, one of the best law blogs out there, and certainly one of the most authoritative on Chinese law and business.

Click here to vote.

Blogroll Addition

Check out Romain Guerel's blog: China and I.

He blogs on a host of interesting topics, and he posts an assortment of videos & audios. The following are just a few examples:

The battle for oil: China vs US oil companies

Powering China: Roundtable with Three-time Pulitzer winner Thomas L. Friedman

As the French President Sarkozy visits China with his delegation of business persons, lots of big contracts have been signed during the visit. Be sure to check Romain's blog for his take on the visit and its impact on both countries.

Move Over, Administrative Regulations!

Mr. Ma wanted to tour some of the most beautiful places in central China with his son. He always wanted to visit those places himself, and he longed for his son to tag along so that he may appreciate the natural and historical beauty of these places too. The only time to go is, of course, during the week long May Day holiday when the entire country travels and vacations. Mr. Ma knew that the trip would be expensive, tiresome, and crowded, but he did not care, because he really wanted to go and figured this year would be the year. So, he called a traveling agency and booked the tour for two. Upon paying the necessary amount to and signing a contract with the traveling company, Mr. Ma was pregnant with excitement about touring the sites with his son, despite the inconveniences that he foresaw.

The tour lived up to its hype for the most part, and Mr. Ma enjoyed almost all the sites he visited, except for two. His tour guide, an agent of the traveling agency—Shanghai Chunqiu Huangpu Traveling Agency, had decided that visits to those two sites would be replaced by a shopping trip instead. When Mr. Ma confronted the agent and the agency about skipping the two sites, they pretty much thumbed their noses at him, telling him that a distant glance at those two places would be just as gratifying as walking through them with thousands of people. Mr. Ma insisted that those two sites were included in the contract, but to no avail.

Mr. Ma was outraged and decided to sue under the contract for damages. But the real issue was what laws/regulations should apply to determine the appropriate amount of damage. The plaintiff argued the Contract Law of China should apply since the parties had a valid contract governing their relationship, while the defendant averred that the Standards for Compensation on Traveling Quality Guarantee (Provisional) (“Compensation Standards”), issued by the National Tourism Administration in 1997.

Plaintiff pleaded for specific performance of the contract, i.e. tour of the sites skipped by the defendant. In the alternative, he asked for monetary damages in the amount of 5,890 Yuan (amount that it would cost the plaintiff to travel to those sites in an alternative tour), in addition to attorney’s fees totaling 4,000 Yuan. The defendant, on the other hand, answered that the proper damage under the Compensation Standards should be 280 Yuan, the value of admissions to the two sites plus relevant compensation.

The Court ruled in favor of Mr. Ma, but denied all that he desired. It held that the Contract Law should apply, and the defendant should compensate Mr. Ma for the economic damages resulting from the breach of contract. Specific performance of the contract, given the nature of the contract and the circumstances, is not the proper remedy. Rather, the defendant should pay Mr. Ma 2,400 Yuan, on account of the contractual provisions regarding transportation, admission tickets, lodging, and tour guide fees. And the Court specifically pointed out that it came out with the amount because the parties did not stipulate the method and amount of damages in case of breach by either party.

That is the story, but it does not end here.

Although insignificant in the amount of damages, this case is very significant in a few aspects:

1. The Court refused to apply the Compensation Standards even though they were directly applicable to the facts of this case. So, it can be inferred that in case of a direct conflict between the Contract Law and an administrative regulation the former prevails. Theoretically, it has always been the case, but it is less obvious in reality. The Court made the theory alive, which entitles the Court a pat on the back.

2. More consumers are choosing to exercise their legal rights and are not afraid of doing so in courts. Mr. Ma represents one of those individuals that do not let a wrongdoer walk free without putting up a fight. His attorney’s fees are probably more than the compensation he received. But that is kinda beside the point here.

3. The Court was very competent in reaching its decision. It looked at the plain language of the contract, excluded force majeure as an excuse for the breach, and reached an equitable decision for lack of contractual provisions on damages.

Remember that China currently has more than 10,000 regulations of various hues? If Chinese courts start to follow the example of this Shanghai court, those regulations that conflict with Chinese laws might have to really MOVE OVER. And that might not be a bad thing at all.

Danone-Wahaha Dispute: No End in Sight

As the Danone-Wahaha dispute drags on, no end seems near for each party in their multi-country, multi-continent war. Lately, Danone has received some good news, whereas Wahaha is feeling the heat of loosing its original lawyers in the United States and some adverse judicial rulings against its off-shore assets.

By way of background, the following are the battle fronts:

1. Danone v. Wahaha in arbitration in Stockholm

2. Danone v. Wahaha, Zong Qinghou’s daughter and wife, Wahaha off-shore companies in a Los Angeles Superior court

3. Wahaha v. Danone in arbitration in Hangzhou, China

4. Danone v. Wahaha off-shore companies in a British Virgin Islands court

5. Danone v. Wahaha off-shore companies in an American Samoa court

6. Wahaha v. Danone in derivative action in Shenyang Intermediate People’s Court in China

Wahaha was shocked to learn that its litigation lawyers withdrew from the representation in the case pending in Los Angeles. Some speculate that Latham & Watkins withdrew because its client provided false testimony. In any international litigation, changing lawyers midstream always adds a strain to the case, in terms of finances, preparedness, and possibly momentum. Wahaha quickly found new lawyers for its case, and let’s hope that the new lawyers will get up to speed on the case for Wahaha. Because of the change, it will probably take more time for the parties to conduct discovery, thus pushing the trial to a later date if they do not settle.

Bad news also arrived for Wahaha from the courts in the British Virgin Islands and the American Samoa. Reportedly, both courts ruled in favor of Danone, freezing assets [in Chinese only] of Wahaha’s off-shore companies in both jurisdictions, respectively. The courts also appointed receivers for said companies. (I do not know Danone’s causes of action in these two courts, after some research.) Given the two rulings, Wahaha should be evaluating its overall strategies because it has been defending itself in multiple jurisdictions, with less than satisfactory results. It is unknown whether Wahaha will challenge these rulings.

In addition, final arbitral decisions are also pending in Stockholm and Hangzhou.

Overall, Wahaha has a pretty tough road ahead, while Danone is having the upper hand on the legal matters. Of course, Danone’s business prospect in China is a totally different matter, since winning in courts does not naturally and necessarily translate into winning consumers’ hearts in China. Wahaha is apparently preparing for the worse by using a brand new trademark—Qili 启力.

With no end in sight for this international dispute, both parties are probably feeling the battle fatigue, and the bite of their legal fees. Will they try to work things out with some kind of compromise on their own? Will they attempt to reach some kind of agreement with the French president as an intermediary (if he chose to intervene during his trip to China)? Or will they continue the knock-down, drag-out fight? As far as Danone is concerned, the last option seems most likely if Wahaha does not give up a few inches, because Danone currently stands in a very strong position.

“No Harm, No Foul”: China Wins Trade Dispute on Paper Exports

As reported by the New York Times, the United States International Trade Commission (USITC) handed a victory to the Chinese government and a few glossy paper exporters in their trade dispute with the U.S. government over “illegal subsidies.”

Notably, the USITC refused to endorse tariffs on Chinese glossy paper as requested by American producers, and it “threw out” duties on Chinese imports “authorized” by the Bush government. The reason for this ruling against the American parties is that the USITC found no “material injury” or “threat of material injury” to American manufacturers, despite allegations of illegal subsidies by the Chinese government.

Currently, industries such as steel and tire are also seeking relief, and of course the key to their success seems be to evidence of “material injury” or threat thereof.

China Hearsay looks beyond these trade cases and rulings, and sees glimpse of protectionism in the U.S. and the EU.

Maybe, the Chinese government and those Chinese glossy paper exporters will have something to be thankful for at this time of the year.

"China Hearsayworthy" and Signs of China JV Trouble

The always prolific and thoughtful China Hearsay came out with something quite entertaining, and with a bit of southern accent: You Know You’re [Your China JV Is] in Trouble When the . . .

[For a sampling:]

JV partners haven’t spoken to each other for 7 years.
CFO is the wife of the local partner.
Foreign investor has never visited the JV and forgot what city it’s in.
Local partner claims he is son of a PLA general.
Neither party can remember who was supposed to file the application docs.

Stan points out five more signs dooming a China joint venture. Of course, not all of these signs will be present in all JV failures, but some definitely are in the Danone-Wahaha joint venture fallout.