Korean Companies Expanding Abroad Face Soaring Legal Service Deficit [Invest&Law]

Deficit Surpassed $1.5 Billion Last Year
This Year’s Deficit Exceeds Usual Annual Levels in Just Five Months
U.S. Patent Trolls and Skyrocketing Legal Fees Weigh Heavily
Domestic Law Firm Revenues Remain Stagnant

The demand for legal advisory services for overseas corporate establishment, M&A due diligence, and license acquisition by Korean companies is skyrocketing, leading to a sharp increase in the 'legal services trade balance deficit.' The legal services balance refers to the difference between income from and expenditure on legal services, such as litigation and legal consultations, exchanged with foreign entities. It is calculated by subtracting the legal advisory fees that domestic companies pay to foreign law firms from the foreign currency earned by domestic law firms providing legal consultations to foreign companies or individuals.

For example, when Naver entered the North American market by acquiring the U.S. company Poshmark, it spent a astronomical amount on legal fees by hiring Kirkland & Ellis, a major U.S. law firm. This outlay is included in legal services expenditures. While the amount Korean companies spend on foreign law firms breaks new records every year, the earnings of domestic law firms from foreign companies have stagnated. As a result, the legal services balance deficit has been widening every year.

According to the legal sector on July 15, last year’s legal services deficit surpassed USD 1.5 billion. This year, in just five months, the annual deficit has already exceeded the previous year's levels. The deficit in the legal services trade balance almost tripled from USD 537.6 million in 2022 to USD 1.5403 billion last year. After hovering between USD 500 million and USD 600 million from 2020 to 2022, the deficit increased to USD 873.5 million in 2023 and USD 1.1406 billion in 2024, marking an upward trend. The trend this year is also concerning. From January to May alone, the cumulative deficit reached USD 584.3 million, surpassing the annual deficit for 2021 and 2022 in just five months.

U.S. 'Patent Troll' Onslaught and Astronomical Fees

The legal community cites increasing intellectual property (IP) litigation within the U.S. and the astronomical billing rates of major law firms in advanced countries as key drivers of the surge in expenditures. Doil Son, Managing Partner at Yulchon (Judicial Research and Training Institute Class 25), explained, "As Korean companies actively expand internationally, IP litigation from U.S. non-practicing entities (NPEs) has surged. Partner billing rates at top-tier U.S. law firms are high, resulting in consulting and litigation costs ranging from millions to tens of millions of dollars per case, which is the largest cause of our legal services deficit."

The enormous fee gap with law firms in advanced countries is another main factor expanding the deficit. The head of the international group at another major law firm said, "Although domestic law firms are working to boost global capabilities by hiring experts from mature legal markets, companies still tend to prefer hiring foreign law firms directly due to concerns over double spending and trust."

Strict Regulations in the U.S. and Europe: 'Local Law' Barriers

The nature of legal work also inevitably increases the deficit, as it is grounded in local law. Corporate establishment, M&A due diligence, and license acquisition are subject strictly to local laws and requirements of local licensing agencies. Moreover, as U.S.-China tensions, American export controls, and subsidy issues related to taxation have emerged, a higher level of local network and expertise is required than in the past. For example, in the case of expansion into Southeast Asia, domestic law firms can handle matters internally, utilizing their overseas branch networks without leaking information externally. However, in the U.S. and Europe, the local regulations are so dense and stringent that working with local law firms is indispensable.

While overseas expenditures are rising exponentially, legal service income has been stagnant at around USD 900 million for years, further widening the deficit. Unlike the past, there has been a clear stagnation in inbound transactions (i.e., foreign investment in Korea) and fund investments, meaning that new capital flowing into the domestic legal market is unable to keep up with the massive outbound spending.

Domestic Law Firms Try to Plug Cost Leaks

Domestic law firms are striving for change by strengthening their overseas advisory capabilities and making additional investments. In practice, leading law firms such as Kim & Chang, Bae, Kim & Lee, Shin & Kim, Lee & Ko, Yulchon, HwaWoo, and Jipyong are leveraging their established networks and experience with local institutions and regulatory environments. Even when partnering with foreign law firms, they focus on taking a leading role in drafting documents and negotiations. In large-scale joint venture establishment work, Korean law firms now handle overall communications, seeking advice from U.S. firms only when necessary to block high billing costs at the source.

Cheol Jeong, Head of the International Group at Jipyong (Judicial Research and Training Institute Class 31), said, "The more Korean law firms control local law firms and lead deal and contract negotiations, the more leverage shifts in favor of Korean law firms. The trend now is for us to handle the core functions and only rely on local expertise in areas where we still have gaps."

This content was produced with the assistance of AI translation services.