Economic Exits

From The Practice July/August 2022
Law firms leave Russian marketplace

Since Russia invaded Ukraine on February 24, 2022, more than 1,000 companies announced plans to curtail operations or trade with the global power. Many severed ties in the context of extensive sanction regimes: two days before the invasion, the European Union announced sanctions on Russian individuals and banks, as well as other trade restrictions. The United States, Japan, Australia, Taiwan, South Korea, the United Kingdom, Norway, Canada, and Singapore all quickly followed. In that first couple of days after the attacks began, more than 20 companies announced they would begin divesting from Russian markets. Among the first were energy giant BP, which abandoned its stake in Rosneft, the Russian oil company, as well as automakers Renault, Volvo, and General Motors. On March 1 Visa and Mastercard blocked Russian banks from their network, and by March 6, major tech companies, including Apple, Netflix, Microsoft, and Airbnb, all limited their sales, operations, and manufacturing within the country. In May McDonald’s announced that it would sell all of its Russian locations to a local licensor. Even major professional services firms PwC, EY, Deloitte, and KPMG announced they would go beyond mere compliance with international guidance, no longer taking Russian clients as well as severing ties with their branches in Belarus and Russia.

Law firms are unique organizations with distinctive decision-making practices, and their responses to the invasion were different from typical corporate responses.

But what about major international law firms? On the surface, they too joined the exodus—releasing statements, complying with sanctions, and closing offices. Looking into it further, however, tells a more complicated story, particularly around the representation of Russian clients. In this article, we look at what law firms actually said and did after the Russian invasion of Ukraine—a process that was largely unprecedented in the legal profession. We do so based on a major research project led by John Coates, the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School; Ian Ayres, deputy dean and Oscar M. Ruebhausen Professor of Law at Yale Law School; and Robert M. Daines, associate dean and the Pritzker Professor of Law and Business at Stanford Law School. As Coates explains to The Practice, law firms are unique organizations with distinctive decision-making practices, and their responses were different from typical corporate responses. Law firms have deeply rooted professional obligations around confidentiality, not to mention the potential legal requirements of representation. And, of course, law firms are generally partnerships composed of many people with diverse perspectives. In other words, it was not easy.

Tracking international law firms in Russia

Soon after Russia invaded Ukraine, Ayres, Daines, and Coates began gathering information related to law firm operations in Russia, launching the Law Firms and Russian Profits project, hosted on Stanford Law School’s website. Describing the project and why they were compelled to build the database, they write:

We want to understand how law firms are responding to this seismic rupture in the international order and professional norms about client representation. Lawyers have a special obligation to support the rule of law and democratic freedoms. They also help grease the wheels of commerce. Lawyers are the “transaction cost engineers” that structure deals, help companies raise capital by issuing stocks and bonds, and comply with regulations. They can work to strengthen or undermine economic sanctions.

To start, the project tracked law firm public responses to the invasion, attempting to move beyond the simple metric of office closures (more on this below, but suffice to say most firms with offices in Russia closed them). Rather, the project team looked specifically at client work and representation as a prevailing indicator, therein dividing it into two segments—(1) firms that announced they would decline any new work from Russian clients; and (2) those that withdrew from current engagements with Russian clients, unless prohibited by legal ethics or court. In doing so, the team provided a taxonomy to the various legal responses. It should be noted that the database tracks public commitments, not whether such actions were actually taken.

According to their data (collected on a rolling real-time basis in spring 2022), fewer than 10 firms announced they would not do any work with Russia, indicating that they would both decline any new work for clients based in Russia and withdraw from any current such engagements (again, consistent with professional norms and court obligations).

More than 10 firms made more limited commitments, announcing they would “decline new work for (1) the Russian government, (2) state-owned or state-controlled firms, and (3) sanctioned entities and individuals” and “withdraw from any current such engagements unless [they were] prohibited by legal ethics or courts (other than work defending against Russian prosecution or civil suits).” Beyond these criteria, however, firms may still be open to taking Russian clients.

The researchers also documented statements from more than 20 firms that were not officially exiting Russia and/or were vague about their exact exit from the Russian market overall. For instance, Linklaters indicated it would shutter its offices in Moscow and “wind down operations,” figuring out how to transition its Russian workforce. But the firm was “unclear whether [they] will accept any new Russian clients,” the researchers say on their site.

The point is not where service professionals work, but whether they’re helping to strengthen the Russian economy.

Ian Ayres, Robert Daines, and John Coates

And many other major international law firms have been silent altogether.

It should be stressed that this list has nuance. First, methodologically, the researchers note that the “coding is based on press reports, press releases and emails sent to us at the address below (unless we are asked not to release the contents),” and they have not yet assessed whether words and policies are matching actions. This perhaps helps explain some of the substantive idiosyncrasies. For instance, while Covington did not make statements about dropping clients or withdrawing from Russian business, they are representing Ukraine at the International Court of Justice against Russia. Similarly, other firms may not have offered insight into their business practices around Russian clients or profits but did indicate that they would be setting up Ukraine relief funds, like Paul Weiss, or offering pro bono services for Ukrainian immigration, like Kingsley Napley.

While the project recognizes the evolving situation, as the team notes, “clarity is important.” They continue:

Some firms have made clear statements about current clients or matters but not made clear commitments about future clients or matters. … We encourage firms to reach out to the email listed below if they believe they have made clear commitments of the kind described above.” The research project does not currently try to hold legal leaders’ accountable for their statements; it will be another project entirely to grasp the complexity of how exactly the firms are leaving Russian business, if at all.

The nuances of firm responses

What should one make of all of this, and how should one assess the actions taken?

First, focusing on client work and representation—not just office closures—is key given the global nature of legal services. Indeed, all the law firms with offices on location ultimately closed physically in some form, Akin Gump being the last after 24 years of being in the country. Moreover, some firms, like Baker McKenzie and Dentons, announced that their Russian offices would form independent practices. As the site notes, “Firms have finally closed their Russian offices, but this is a modest and possibly misleading first step. When McDonald’s shuts its doors in Moscow, it does not mail burgers from London. By contrast, law firms can and do serve Russian interests from afar; if nothing else, COVID has taught us the possibilities of remote work. The point is not where service professionals work, but whether they’re helping to strengthen the Russian economy.” From this context, clients and representation is the key metric of assessment.

Second, Coates stresses that the ways companies and law firms are structured are quite different, which may explain some of the differences, particularly why, as they note, law firms have been slower to respond. “A business like McDonald’s can make this decision much more easily than a law firm. McDonald’s might think it has a relationship with its customers but not in the way law firms do; people walk in and out every day to get food, and brand loyalty is different from having someone on retainer,” he says. “Law firms typically have multiyear relationships built on confidential information—this means you’ve got more nuance to what kind of decision you’re making when you terminate that relationship, and you have to carefully consider how you’re going to do it,” he says.

Tracking business

A similar effort to Coates and his collaborators is underway at Yale for the business world. Jeffrey A. Sonnenfeld, senior associate dean for leadership studies and the Lester Crown Professor in the Practice of Management, has documented more than 1,000 companies that have adjusted their practices in response to the conflict. In a recent working paper, he and his collaborators note that “equity markets are actually rewarding companies for leaving Russia while punishing those that remain behind, with divergent stock performance generally corresponding with the degree of Russian exit.” Business has, of course, done this before. In the last few years, the corporate landscape has become more vocal about social issues, driven by employees, consumers, a globalized economy, and a 24-hour news cycle where silence itself is a moral statement.

Moreover, law firms operate differently from companies, where hierarchy might be clearer. “Law firms are professional partnerships, and the governance of those organizations has to be more collaborative and therefore a little bit more time-consuming,” Coates says. “You have to reach consensus, and then you have to have that consensus reflected in words. And then those words have to be thought about, and lawyers are lawyers, so they’ll spend some time thinking about those things.” As we return to in the conclusion, law firm structure and processes may be a key point to consider given the increasing importance of public statements.

Third, practically speaking, dropping clients is a complicated process governed by ABA Model Rules of Professional Conduct. As reported by Reuters, in one instance, Freshfields Bruckhaus Deringer asked the court “to pause a case over the return of Jewish texts from Russia while its client VEB, [a] sanctioned Russian bank, finds new counsel.” For the plaintiff, a Jewish organization demanding the return of confiscated sacred books, delaying the trial felt like delaying justice.

As Daines explains in an Stanford Law School interview, “No one should expect lawyers to immediately stop representing all Russian clients. For example, defending Russians against the Russian government would be laudable, and rules of professional conduct limit when a lawyer can withdraw.” He continues: “But if the law firm is really only working for the client because of ethical rules, the firm can simply promise to donate their fees to Ukrainian relief efforts, as Norton Rose has done. That way it’s clear that ethical obligations—and not greed—are driving the decision.”

Finally, these ethical commitments and requirements of confidentiality may help explain differing responses. As Coates says: “The variation between firms comes down to, what’s the precise ethical stance you want to take and how does that actually play out? If you’re in the middle of litigation, you can’t just walk out of the court.” He also notes: “One of the reasons that staying silent is a credible choice for law firms is that we generally don’t know whom they’re working for, except for publicly recorded court appearances. A lot of the kinds of work that lawyers do is not publicly known. They obviously have professional obligations to keep confidential information confidential.”

There’s no question that law firms, like all businesses engaging in the labor market, are increasingly cognizant of the variety of stakeholders impacting their bottom line.

As a prime example of the complexities at play, in their April 5, 2022, statement, Sullivan & Cromwell co-chairs Robert J. Giuffra Jr. and Scott D. Miller note both the importance of client confidentiality while at the same time the unique nature of the Russian invasion. They wrote, “As reports of the ‎Russian Government’s atrocities in Ukraine continue to mount, we are compelled to make an exception to our long-standing policy of not publicly disclosing client representations, and state that, beyond never having an office in Russia, we have no clients that are on any Russia sanctions list, or that are in, part of or associated with the Russia Government; nor after due inquiry are we aware of any clients that are associates of any of those entities or persons.”

As Giuffra and Miller note, this statement was exceptional. “I think Sullivan & Cromwell has never in its entire history put out a statement about whom they’re working for. And so that already tells you something,” says Coates. Further, the firm chairs noted, they would not be taking new clients from Russia. For Sullivan & Cromwell and other firms like it, Coates believes their “principal motive” to make commitments to disentangle themselves from Russian profits arose from a moral basis.

Student boycotts

In the late 1980s, hundreds of corporations pulled business from South Africa in moral outrage over apartheid. Amid the global response, law students at Harvard, Yale, and dozens of other law schools protested several law firms by announcing they would refuse employment at those representing the South African government. One firm, Covington & Burling, dropped the state-owned South Africa Airlines, though they stated that, after over a decade of handling the airline’s legal affairs, the “timing was coincidental.” In the past few years, law students have frequently brought their voices and labor to such issues, refusing to work at firms that contribute to climate change or helping end the use of forced arbitration agreements.

There’s no question that law firms, like all businesses engaging in the labor market, are increasingly cognizant of the variety of stakeholders impacting their bottom line. Banks, law firms, and other large corporations are appointing individuals to spearhead ESG (environmental, social justice, and governance) practices, recognizing that employees, clients, and consumers want to see transparency around corporate profits and investments.

For more on the multistakeholder market and ESG, watch “Reimagining the Role of Business in the Public Square: Multistakeholder Engagement on ESG Commitments, Metrics, and Accountability,” a conference hosted by CLP on September 15, 2022.

For Daines, Ayres, and Coates, putting together this research project certainly derives from a desire to see law firms recognize the ethical implications of the work they do. While legal practitioners need not reveal whom they represent—and in some cases are barred from doing so—they may find themselves asked to by relevant constituencies. Firms that mandate silence beyond the typical ABA rules, like Norton Rose initially did when it barred its lawyers from commenting on Russian sanctions, find themselves at the center of an unwelcome controversy. It’s a difficult line to walk.

I think law firms are going to have to think strategically about some of their choices in a horizon where there is more geopolitical risk.

John Coates

While Coates understands why a law firm’s responses are complicated, he also believes they have to get better. “We’re going to be going through a significant amount of deglobalization over the next few years; trading relationships and sanctions and wars are all a more active part of the globalized economy than they have been in the past 30 years,” Coates says. He continues:

And I think law firms are going to have to think strategically about some of their choices in a horizon where there is more geopolitical risk. They will have to think tactically about being ready to at least talk about divestiture quickly. They have to work on their internal and external communications planning. They need to have a routine set up for how to be able to talk publicly about what they’re doing. I don’t think law firms are used to doing that—yet. They are going to need to get used to doing that, given the world that we’re entering into.


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