Japan’s Foreign Lawyer Law: Disparate Views

Leonardo Ciano^* and Drew Martin^** 

…Difference of opinion leads to inquiry, and inquiry leads to truth.     

Thomas Jefferson    

Copyright © 2001 Leonardo Ciano and Drew Martin

International Business Law Journal

http://www.wsu.edu/~legal/ijrnl/articles.htm

Cite as 1 ALSB INT'L BUS. L.J. 101

Japan’s Modern Foreign Lawyer Law | The Role of Foreign Lawyers in Japan | Survey of Foreign Companies | Discussion | Conclusion

Over the last several decades, a wide array of global services has proliferated in the international marketplace. According to the World Trade Organization, world exports of commercial services totaled $1.3 trillion in 1998.¹ While the future appears to be bright for increased trade in international services, the General Agreement on Trade in Services (GATS) only applies when foreign companies have been allowed to provide a service in a host country. When host countries have limited market access, free trade is still an issue of contention.

Japan has been criticized as a closed shop to foreigners that provide intellectual services.² One example is the ongoing discussions about the liberalization of foreign legal services. Since the 1970s, foreign lawyers have sought greater access to the Japanese legal services market. Japan’s foreign lawyer law, Gaikoku Bengoshi ni Yoru Horitsu Jimu no Toriatsukai ni Kansuru Tokubetsu Sochi Ho 66, 1986 (Special Measures Law Concerning the Handling of Legal Business by Foreign Lawyers, (Law No. 66 of 1986)) (hereinafter Law 66) in large part limits the role of foreign attorneys to assisting Japanese businesses that wish to internationalize their operations. Implicitly, the law allows foreign legal professionals to fulfill an important role in helping Japanese companies navigate foreign legal systems and markets. Some Japanese legal experts, however, fear that the presence and style of practice of foreign attorneys pose a threat to Japan’s legal system and culture.

Gaikokuho jimu bengoshi (licensed foreign lawyers in Japan) and many governments argue that foreign legal services provide valuable market entry assistance to foreign businesses. As such, restrictions placed on foreign legal services are just another trade barrier imposed by the Japanese.³ Recent regulations have broadened the range of services that foreign attorneys can provide in Japan. Arguably, the new guidelines are beneficial to all clients. On the surface, the estimated 139 registered foreign lawyers in Japan suggests that deregulation may be improving market access for foreign attorneys.

There is a wide range of views on the role of foreign lawyers in Japan. At one extreme, staffing a foreign law office is viewed as a promotional tool rather than a serious attempt to provide international services.⁴ (Given the high cost of opening and operating an overseas office in Tokyo, the notion an overseas office as a loss leader is not popular among foreign firms.⁵) Others suggest that foreign lawyers are responding to the increasing globalization of business.⁶ Law firms expand internationally in order to serve domestic clients abroad as well as incoming foreign clients. Furthermore, there is the view that international law practioners serve as facilitators of commerce. Foreign lawyers also can serve as advisors for international finance, tax planning, corporate and securities law, franchising, licensing, distribution and commercial agency, joint ventures, competition law, arbitration and general international law.⁷

While the transaction support role of foreign lawyers is addressed in the literature, little is known about the effectiveness of foreign legal services in serving clients and the public interest.⁸ In light of the historical intent of Law 66, there is a need to examine this issue. Three main questions will be addressed in following analysis. First, do foreign and local customers equally understand how the recent changes in the foreign lawyer law affect them? A gap in awareness suggests the intended beneficiaries of the changes may not be using them to their best advantage. Second, do customers have similar attitudes about uses of legal services in Japan? A larger pool of legal service providers has questionable value to customers if they have limited use for them. Finally, does it make sense to further expand the role of foreign attorneys in Japan? A more open market for legal services may lead to greater market access by all businesses or, it may have unintended negative consequences.

Japan’s Modern Foreign Lawyer Law

Law 66 went into effect on April 1, 1987. Ostensibly, Law 66 was enacted to aid international business both inside and outside Japan. Other stakeholders that pressed Japanese lawmakers to liberalize the foreign lawyers’ law include the American Bar Association, other U.S. bar associations and the U.S. Trade Representative. In addition to outlining registration requirements for foreign lawyers, Law 66 regulates foreign lawyers’ rights of association with Japanese lawyers, scope of practice, and form of business organization.

Law 66 did not resolve all the important issues from both the American’s and the European Union’s perspectives. In particular, the U.S. was on the offensive to broaden the scope of Law 66. On April 28, 1989, less than two years after the effective date of its enforcement, the U.S. Trade Representative submitted the "Report on Barriers to Japanese Trade" to the U.S. Congress.⁹ Conclusions in the report state that the restrictions on foreign lawyers in Japan constitute a barrier to trade. The U.S. Trade Representative sought the following amendments on behalf of American (and other foreign) lawyers to allow foreign lawyers: (1) to enter into partnerships with bengoshi (Japanese attorneys); (2) to hire bengoshi; (3) to practice in Japan under their home country firm names (without using the name of the individual gaikokuho jimu bengoshi); (4) to count non-home country experience in the calculation of the five years of experience needed to be licensed in Japan; and (5) to represent clients in international arbitration proceedings held in Japan (concerning all areas of law, including cases governed by the laws of Japan).

Following lengthy bilateral (Japan-U.S.) and multinational (European Union, Japan, and U.S.) negotiations, Law 66 was amended in June 1994 (in effect as of January 1, 1995 and hereinafter Special Measures Law 1994).¹⁰ The negotiations culminated in an agreement reached in the context of the GATT Uruguay Round of trade negotiations. Amendments under Special Measures Law 1994 provide the following changes: (1) eased reciprocity and professional experience requirements; (2) allowed firms to use their own names rather than the senior partner’s; and (3) introduced the Tokutei Kyodo Jigyo (Specific Joint Enterprise), a restricted type of relationship between gaikokuho jimu bengoshi and bengoshi.¹¹ The law was further amended in June 1996 (in effect as of September 1, 1996 and hereinafter Special Measures Law 1996).¹² Special Measures Law 1996 allows foreign lawyers and gaikokuho jimu bengoshi to represent their clients in international arbitration held in Japan. As a result, foreign lawyers may participate as arbitrators or representatives of parties to international proceedings held in Japan. This new role for foreign lawyers is not restricted by the governing law of the arbitration (even if the law of Japan governs), or whether the attorney is registered as a gaikokuho jimu bengoshi. In May 1998, the law was amended again (hereinafter Special Measures Law 1998).¹³ The amendments under Special Measures Law 1998 further liberalized the professional experience requirement and increased the scope of practice of the Specific Joint Enterprise.¹⁴

The Role of Foreign Lawyers in Japan

The liberalization of Japan’s foreign lawyer regulations has been a drawn-out process.¹⁵ Some legal scholars argue that the unique nature of Japanese legal culture and its legal system requires that legal advisors be trained in Japan. Lawyers not trained in Japan should be allowed only limited access. At the other extreme, other legal scholars do not see major differences between Japan’s legal culture and that of other countries. In addressing this issue, the comparative literature on Japan’s legal environment has three main branches.

First, there is the Consciousness school, which assumes that the legal environment of Japan is radically different than that of the West. Consciousness theorists argue that the Japanese prefer to resolve disputes through mutual understanding and accommodation rather than litigation.¹⁶ In the realm of contracts, Kawashima’s seminal work holds that the legal consciousness of the Japanese does not conform to Western conceptions of contract.¹⁷ Instead, the Japanese are said to prefer wakai (compromise) rather than conflict. The strong desire for wakai is a primary reason for the dearth of contract litigation in Japan. In a similar vein, Sawada’s¹⁸ analysis of contractual agreements finds that Japanese business people have a negative attitude towards the observance of the accepted rules of contract law.¹⁹ One commentator has even declared, "We Japanese do not go so far as to consider a breach of contract to be a virtue but we are certainly not very serious about honoring contracts."²⁰

Western commentators have made comparable observations. For example, Von Mehren suggests that Confucian thought and a desire to avoid conflict in human relations help explain the unique Japanese legal environment.²¹ Often western writers compare the overly litigious U.S. to Japan and base the contrast on widely divergent views regarding resort to the legal system to resolve disputes. In one case, Galanter writes: "Japan appears in contrast [to the U.S.] as a peaceful garden that has remained uncorrupted by the worm of litigation."²²

The Consciousness school holds that the Japanese are more concerned with the preservation of wa (harmony) than standing on their rights. The foundation of consciousness theory is consistent with work in other disciplines (e.g., business) that conclude Japan’s culture is unique. Thus despite importing elements of French and German law in the latter 19th and early 20th century, as well as aspects of US law after 1945, there is still some question as to whether these influences had much effect on Japanese legal consciousness. Japanese modern law may be merely a "veneer" behind which the traditional ways of acting and living are perpetuated.²³

On the other hand, some legal scholars argue that the non-litigious environment in Japan is a myth.²⁴ Haley, for example, states that the Japanese have historically been quite litigious, and that any hesitation to litigate is based on a rational cost-benefit analysis, not a particular legal consciousness.²⁵ Haley’s analysis forms part of what is known as the Institutional school.

The Institutional school holds that the uniqueness of the Japanese legal environment is exaggerated. Instead, the Japanese aversion to litigation is due to institutional barriers. Invoking the institutional perspective, Haley concludes that the Japanese are less apprehensive about legal action than previously thought. His theory is that Japan’s weak legal influences are reinforced by strong extra-legal community controls. According to Haley there are three fundamental pillars of societal control: (1) administrative-based; (2) adjudicatory-based; and (3) community-based patterns of consensus. Haley suggests that in the absence of these controls, the Japanese are just as likely to seek a legal remedy as those from the allegedly more litigious Western cultures.²⁶ Examples of administrative-based controls include the official registry systems for family relationships and real property. As a result, a wide variety of issues such as divorce, adoption, succession and real property transfers often dealt with by courts in Western legal systems are beyond the ken of Japanese courts. Adjudicatory-based controls include such things as a lack of a jury system and a frequently transferred career judiciary. The concomitant greater certainty of result means potential litigants can more easily calculate the value of their claim and more readily decide whether to settle, thus avoiding the costs of litigation. Even the Japanese do not avoid litigation when it is financially advantageous.²⁷ Typically, litigation is avoided because of its high financial costs, long delays, and cumbersome procedures. Further institutional bars include a lack of viable class action and discovery systems and a general shortage of bengoshi.²⁸

One shortcoming of the Institutional school is its failure to explain why litigants decide to forgo formal legal proceedings when they do have something to gain.²⁹ Also, the Institutional school downplays the importance of the good faith principle in Japanese law.³⁰ Article 1(2) of the Japanese Civil Code creates an enforceable legal norm that underlies all contracts in Japan.³¹ It requires the exercise of rights and the performance of duties to be carried out according to the principles of good faith and trust. This legislation effectively precludes litigation by discouraging questionable behavior a court might later sanction.

The third approach is known as the Relational school. It combines the socio-cultural argument with economic rationality. Milhaupt proposes that Japanese corporate governance is influenced by both socio-cultural influences and efficiency rationales propounded by economists as well as the institutional factor school of legal culture.³² The Relational school suggests the legal environment in Japan is itself embedded in a larger historical social and political framework that includes both present and past relationships.

The Relational school posits that the Japanese legal environment has adapted to the current state of affairs while maintaining its historical underpinnings. For example, it supports the notion that the Japanese maintain their preference for long-term relationships rather than quick fixes to problems. Parties treat each other like a marriage rather than a one-night stand.³³ The Japanese prefer a less adversarial process and are more willing to forego litigation in order to create a collective benefit, an atmosphere of wa and wakai.³⁴

One common theme in all three schools of thought is their aversion to litigation in the context of a long-term relationship.³⁵ The literature leaves legal scholars with a macro-environmental (institutional) versus micro-environmental (relational) debate for explaining Japanese legal culture. However, the debate is centered on litigation rates and does not examine other aspects of lawyer-client relations. One important step in understanding these relationships is to determine whether the needs and uses for lawyers are different in Japan than in the West.

Survey of Foreign Companies

Between 1996 and 1998, two mail surveys were conducted to determine businesses' needs and views of legal services in Japan. The first survey was in English. It was sent to 2000 foreign companies Japan. Companies were selected randomly from countries’ chambers of commerce or business association directories. Surveys that were undeliverable or incomplete reduced the sample size to 1830. A total of 316 (17%) of the first surveys were returned and usable. The second survey was translated into Japanese and back-translated into English to insure accuracy. It was sent to 2000 randomly selected Japanese companies listed in the first and second sections of the Tokyo Stock Exchange. A total of 476 (24%) usable surveys were returned. The overall return rate for both surveys was about 22%.

Corporate Japan’s View of the Role of the Foreign Lawyer

Respondents answered a series of questions pertaining to their attitudes about the needs and usefulness of foreign lawyers in Japan. A five-point scale (1 = "strongly disagree" to 5 = "strongly agree") rated their answers. Table 1, "Descriptive statistics," shows the aggregate responses for the various questions. Overall, the results suggest that foreign lawyers are considered valuable by both Japanese and foreign businesses.

^{The results indicate an awareness gap exists between Japanese and foreign businesses on changes in the foreign lawyer law. The first question asks whether recent law changes have affected the ability of foreign attorneys to provide legal services.36 The T-test results in Table 2 support this proposition (t = -5.69, p<.001). As in the first question, a perception gap is apparent pertaining to the advantages of increasing foreign lawyer’s scope of activities. Japanese respondents rated this question higher. Also, this difference in attitude is statistically significant (t=-3.70, p<.001).}

^{Next, differences in opinion about the legal environment were tested. For the question pertaining to the limited need for legal services in Japan, the overall response was neutral or in slight disagreement. The attitudes of both foreign and Japanese respondents were about the same, no statistically significant difference. More than 60% of respondents indicated that a Japanese lawyer is preferred because of his/her local knowledge. Interestingly, there was no statistical difference in how foreign versus Japanese companies feel about this statement.}

^{Finally, specific regulatory changes were examined. For attitudes about the service benefits of allowing foreign lawyers to hire bengoshi, most respondents gave this question a "neutral" rating. Comparing Japanese to foreign companies, no statistical difference was found for the attitude ratings. When asked about the importance of bicultural legal advice, 65% of the companies responded favorably to this statement. As would be expected, foreign businesses regard bicultural legal advice as being more important than Japanese firms do (t=4.47, p<.001). Over 78% of respondents responded favorably to a statement that deregulation of legal services is a good idea. This result indicates that most companies support the proposition of legal service deregulation. Comparing Japanese to foreign companies, the latter more strongly support the need for deregulation (t=6.65, p<.001).}

^Discussion

^{The results show interesting differences in respondent awareness and opinions regarding legal services. At the same time, respondent attitudes about the uses for legal services are not significantly different between Japanese and foreign businesses. On the surface, it appears that either the Consciousness or Institutional schools provide reasonable foundations for understanding the relationship between legal service providers and their clients. Closer examination, however, suggests that each school of thought is akin to the story of the blind men describing an elephant. The most compelling explanation seems to come from the Relational school.}

^{Regarding the expanded role of foreign lawyers, Japanese companies responded more favorably. Awareness of regulatory changes in the law provides some evidence that foreign legal services are needed in Japan. Both foreign and Japanese businesses find the recent regulatory changes improve the range of legal services; however, the latter responded more favorably. This finding is surprising because the legislative intent of the law is to allow foreign attorneys to better serve foreign businesses.}

^{Despite changes in the Foreign Lawyer law, Japanese firms still seem to have a greater need for foreign lawyers. The Consciousness school’s interpretation might be that Japanese society is unique and foreign providers cannot provide some specialized services. Foreign attorneys will still be considered "outsiders" regardless of how the law is changed. Given the Japanese preference for conciliation in domestic disputes, it seems probable that Japanese companies primarily use foreign attorneys for overseas activities.}

^{Overall, there seems to be a consensus that Japanese attorneys have important skills that their foreign counterparts lack. More than 60% of all respondents "agree" or "strongly agree" that Japanese lawyers are preferred because of their local knowledge. Comparing Japanese and foreign respondents, there is no statistically significant difference on this issue. All customers need Japanese attorneys because of their mastery of the language, culture, and business environment. This finding is consistent with Milhaupt’s conclusions about the Japanese legal environment.37 For example, a foreign respondent stated, "I regrettably have almost never found that foreigners in the service business provide the quality of service, or the depth of understanding of the business environment to handle the requirements of our company here." A Japanese respondent supported this line of thinking, "Overall, we feel comfortable with Japanese lawyers because of their deep knowledge of Japanese law and the fact that they understand the subtleties of the Japanese [human nature]."}

^{Thus far, the evidence suggests that cultural differences help to explain the findings. While the socio-cultural argument does have its merits, the results do not uniformly support it. Instead, there are some inconsistencies that can be attributed to structural or systemic influences.}

^{First, the results fail to support the proposition that foreign and Japanese businesses have significantly different opinions regarding the need for legal services in Japan. Both foreign and Japanese respondents agree on the need for legal services in Japan. The finding does not support the proposition that Japanese are adverse to conflict and therefore keep litigation to a minimum. This line of thinking seems to support the proposition that the informal legal character of Japan is a myth.38 Essentially, the dispute resolution process seems to be more formalized than is documented in the literature. Also, other evidence supports this proposition. For example, a recent survey of large Japanese companies reports that 95% of them have been involved in legal disputes in the past.39}

^{Second, one would expect foreign companies to more strongly support a change in the regulation regarding the employment of bengoshi by foreign law firms. One would think that foreign law firms employing Japanese attorneys inherently would be attractive to foreign companies in Japan. While the overall response is slightly positive, there is no difference in opinion between Japanese and foreign firms. On the other hand, firms responded favorably to the availability of bicultural legal advice. In particular, foreign respondents are more inclined to want bicultural services. As this question does not control for the firm’s structure, it appears that foreign firms have found other ways to overcome the "cultural" barrier. For example, some legal service providers have entered into joint enterprise schemes to bridge the knowledge gap. These findings suggest that both foreign and Japanese companies are more concerned with the quality of advice and price than they are with the structure and scope of foreign lawyers’ practices.}

^{Finally, there is strong support for the deregulation of legal services in Japan. Not surprisingly, foreign businesses are more supportive of deregulation. Even Japanese businesses rated this question highest of all. This finding is consistent not only in the foreign business community, but also among the Keidanren, Japanese companies and some Japanese politicians. Also, deregulation became the watchword of the late 1990’s in Japan with both business and government actively pursuing such course.}

^{While the support for deregulation needs to be tempered with the fact that most respondents are from export-oriented or international companies, it does suggest that there may be some dissatisfaction with the current level of customer service from bengoshi.40 A number of Japanese firms noted that they would prefer to have one-stop shopping for their legal services rather than to visit a number of "specialists" to solve various legal problems. One respondent stated, "We should put an end to the monopolization of the licensed and start promoting and incorporation. Give out a license to a corporation practitioner who can provide a total legal service."41 Another respondent commented, "There are two things that we expect from foreign lawyers. One is based on service regarding foreign law. Another is for organic total service done with a Japanese lawyer."42 The opportunity for a company to use only one firm, and if possible, one lawyer to take care of all of its legal service needs appears to be an ideal many companies seek.}

^{One reason for this apparent discontent is that Japanese law firms tend to be too small to effectively handle large cases. The growing number of attorneys in Japan probably will affect this gap between legal service expectations and realities. In fact, the Japanese Federation of Bar Associations agrees that there should be an increase in the number of successful candidates writing the Japanese Bar examination.}

^{A problem with both Consciousness and Institutional arguments is the existence of the foreign lawyer regulations themselves. Why is there any need to have any restrictions on foreign legal service providers in Japan? If Japan’s society and legal system are truly unique, Japanese attorneys have nothing to fear from "outsiders." Foreigners will never be able to crack the market because they could not possibly learn the intimacies of Japanese legal culture. In other words, foreign legal services would be self-regulating by customers. Since the reason for retaining legal services is to successfully navigate corporate relationships and legal regulations, why would any rational person choose an inferior legal advisor?}

^{The bottom line is that both foreign and Japanese companies hire attorneys to protect their own self-interests. While elements of the Consciousness and Institutional schools help explain the results, the Relational school addresses the most important issue in the eyes of the customer - the outcome. Is not risk management the most important issue to the client? It seems rational to hire someone that offers the highest degree of protection. The results confirm this notion.}

^{Overall, respondents feel it is more important to have access to native Japanese rather than foreign lawyers. Both cultural and structural rationales help to explain facets of the respondents’ attitudes. From the structural perspective, Japanese attorneys can provide a wider array of services. For example, Japanese attorneys are permitted to hire foreign attorneys and conduct litigation; however, foreign firms cannot hire Japanese attorneys or appear before Japanese courts or administrative bodies. At the same time, language ability plays an important role in the effectiveness of an attorney. The Japanese language is complex and intimately intertwined with Japan's rich history. Native speakers of the language have a clear advantage in navigation through the Japanese legal and bureaucratic environment. This advantage suggests that clients stand a better chance of success by choosing a legal service provider that has the appropriate socio-cultural foundation.}

^Conclusion

^{From a reciprocal basis, Japan’s Foreign Lawyer Law looks quite progressive. For example, requiring only 3 years of experience and allowing practice of 3rd country law indeed equals or exceeds other jurisdictions. Nevertheless, the evidence does not support the contention that these changes have measurably improved the legal services in the eyes of clients. Both foreign and Japanese companies still prefer to use bengoshi.}

^{Many industrialized nations allow foreign and local lawyers to associate freely, while in Japan the Specified Joint Enterprise system remains burdensome and unwieldy with many unanswered issues outstanding. An artifact of protecting bengoshi from foreign competitors is that it harms both clients and the greater economic interests of Japan. Looking at cities like Paris, Geneva, London, and New York, one can see vigorous financial-legal centers. A common denominator among these examples is that their national governments allow foreign lawyers to associate freely with local lawyers. As Japan’s legal system becomes more international, perhaps it will also be added to this list of cosmopolitan nations.}

Copyright © 2001 Leonardo Ciano and Drew Martin