Worlds apart

Nearly without exception, top-tier UK firms have been struggling to gain anything but a toehold in the US market.

Despite their apparent brilliance in building global infrastructure outside the US, they have stubbornly refused to take anything but a cursory look at the business models of the top-tier US firms with which they would like to compete, much less try to model themselves accordingly.

With a firm amount of ignorance and a good dose of arrogance, they have stumbled badly in their efforts to achieve even the barest of critical mass in the US. The question is: what are they missing?

It doesn't take a rocket scientist to figure out where the gaping hole is in the strategy of the major Continental firms that have tried to lay down a US footprint. It is litigation that is missing.

The top-tier UK firms seem to be operating under the mistaken impression that their US forays should be aimed at duplicating the success formulas of the Wall Street firms which, they believe, means a single-minded focus on capital markets work. Either they are very bullheaded in refusing to acknowledge the error of their ways, or they are seriously misinformed about what makes the firms they aspire to compete with thrive.

A brief glance at the 10 most profitable US firms – nine of which are among the 10 most profitable firms in the world – reveals two compelling mistakes that the Europeans have made. First, they have failed to see that six of them are bi-coastal. Second, and more importantly, they have failed to grasp that at least a third of each of the top-10's revenues are derived from their litigation practices – an area that is scoffed at by the Europeans, but which drives huge revenues and even bigger profit margins for US firms.

A look at the US market would indicate that litigation alone is a $50bn-$60bn (£31.94bn-£38.32bn) market that, in all likelihood, dwarfs the entire market for legal services on the Continent. Not to mention that it is a practice that continues to enjoy robust growth at a rate far outstripping the rest of the legal market and the economy itself.

UK firms seem to have recognised that they cannot compete for the global brass ring in legal services without having strong US practices, but they have simply missed the boat in understanding that there is nary a single top US firm that does not derive much of its success from litigation.

This point is not lost on the best US corporate partners, who want to be on a platform that includes a substantial litigation practice because of the stabilising effect it has on revenue and net income per equity partner during a downturn, not to mention the added access it gives them to the boardroom.

Simply put, it is impossible for UK lawyers to compete in the US without building US-style litigation practices and, if they cannot compete in the US, they will be virtually precluded from the small circle of firms that are emerging as dominant global players.

So, how do so many smart lawyers overlook the obvious? In all likelihood it is because litigation practices on the Continent are hobbled by four critical flaws. First, they commonly invoke 'loser pays' rules that are rarely applicable in US-style litigation. Second, they do not have a thriving contingent fee and class-action bar of the sort that breeds gunslingers and go-for-broke trial gamblers in the US plaintiffs' bar. Third, unlike in the US, there are no runaway juries on the Continent, because there are no juries to speak of. And, finally, there are no wild punitive damages awards, again because there are no punitive damages.

The magic environment of contingency fees, punitive damages, jury trials and no 'loser pays' – which has produced class action supremos such as Milberg Weiss Bershad Hynes & Lerach – has made profligate defence work the keel of nearly every successful top-tier US law firm, save a few that manage to go both ways. Without it, their profits per partner would suffer dramatically and they would teeter near collapse during weak economic times.

US firms, likewise, need to look hard at market drivers on the Continent. Home-style litigation is not one of them for the very reasons that top European firms have anaemic litigation practices that can only be described as 90-pound weaklings in comparison to the top US trial firms. Compared to the US, there is virtually no trial or big-case litigation practice on the Continent. With nearly 100 US firms now trying to push their way into London, they are going to have to try a different formula than that which worked in the US if they are going to do anything but continue to suck wind. This will undoubtedly involve a much stronger mix of arbitration and mediation in their dispute resolution practices than works in the US.

Some may argue that US-style litigation will come to Europe. Others may argue that the US will, with tort reform, more closely resemble the Continent. But I would argue that neither is likely.

The plaintiffs' bar has too much at stake to allow tort reform to take hold in the US. Despite the Bush administration's and Congress's proclivity for tort reform, the Democrats will not let it happen – they get too much money from the plaintiffs' bar. Even if it gets through Congress and is signed by the President, it will not make it past the US Supreme Court, which for the past three decades has been hell-bent on a 30-year states' rights drive, dousing federal legislation in areas traditionally reserved to the states. Tort reform fits too neatly in the box of states' rights to survive a constitutional challenge should the Feds ever enact it.

Likewise, the US defence bar, on behalf of large corporations, has too much at stake to allow US-style litigation to gain a toehold in Europe. More frequently, multinationals want their disputes resolved in non-US forums that are instead governed by Continental-style common law, or are subject to the rules of international arbitration or rules of their own making – no juries, no punitives and loser pays. This approach is too over-the-top sensible for any reasonable company to forego.

The American Tort Reform Association recently published a white paper on 'hell-hole' jurisdictions – the US plaintiffs' bar's favorite local venues because of the runaway verdicts they consistently produce. The paper is well written, but the strategy for addressing the issue is virtually non-existent. These venues are not going to go away and compared with the Continent, the entire US is a 'hell-hole' jurisdiction for litigation.

In the end, if the top-tier firms on the Continent want to compete for global dominance with their US counterparts, they will have to have a lot more than a toehold in US litigation – they need to get in at least hip deep. And to compete on the Continent, US firms are going to have to keep their clients' disputes in European venues whenever possible, or at least become more expert in escaping US-style litigation by deploying much larger arbitration and mediation practices than they have to date.

Peter Zeughauser is managing partner of law firm consultancy Zeughauser Group