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Amendment to the Fair Transactions in Subcontracting Act

2024.04.01

A proposed amendment to the Fair Transactions in Subcontracting Act was passed by Korea’s National Assembly on February 1, 2024 (the “Amendment”).  The Amendment (i) strengthens the maximum liability for damages in case of misappropriation by a prime contractor of the technical information of a subcontractor, increasing it from three times the actual damages to five times, and (ii) introduces specific criteria for calculating damages caused by the misappropriation of technical information, which will likely alleviate the burden of proof on the subcontractor regarding the amount of damages. 
 
 
1. Increase of Limit on Punitive Damages 
 
Under the current Fair Transactions in Subcontracting Act, the maximum limit on punitive damages in case of misappropriation by a prime contractor of the technical information of a subcontractor is three times the actual damages.  While the statutory maximum limit is three times the actual damages, in practice, the courts tend to limit the damages to twice the actual damages.1  In response, the Amendment increases the maximum limit on such punitive damages up to five times the actual damages incurred by a subcontractor.  Meanwhile, the maximum punitive damages under the current Fair Transactions in Subcontracting Act for other actions by a prime contractor, such as unfair subcontracting payment determination, unfair cancellation of outsourcing, unfair returns, violation of prohibition on reduction, retaliatory actions, etc., remain unchanged at three times the actual damages. 
 
 
2. Introduction of Specific Criteria on Calculating Subcontractor’s Damages 
 
Criticism has been raised that the difficulty subcontractors face in proving their damages incurred from prime contractors’ misappropriation of technical information prevents them from pursuing adequate remedies against such misappropriation.  In response, the Amendment draws guidance from Article 128 of the Patent Act and introduces specific criteria for calculating damages incurred by a subcontractor in case of a prime contractor’s misappropriation of technical information: 
 
<table class="MsoTableGrid" style="border-collapse:collapse; border:solid #bbbbbb 1.0pt">
	<tbody>
		<tr>
			<td bgcolor="#f1f1f1" style="border-width: 2pt 1pt 1pt; border-style: solid; border-color: rgb(204, 0, 0) rgb(187, 187, 187) rgb(187, 187, 187); border-image: initial; text-align: center;" width="20%">Basic Calculation Criteria</td>
			<td style="border-width: 2pt 1pt 1pt; border-style: solid; border-color: rgb(204, 0, 0) rgb(187, 187, 187) rgb(187, 187, 187); border-image: initial; text-align: left;padding: 10px 30px 10px 30px;" width="70%">A reasonable amount of compensation for the use of technical information exceeding the subcontractor’s production capacity is allowed, enabling a broader range of remedies.</td>
		</tr>
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			<td bgcolor="#f1f1f1" style="border-right: 1pt solid rgb(187, 187, 187); border-bottom: 1pt solid rgb(187, 187, 187); border-left: 1pt solid rgb(187, 187, 187); border-image: initial; border-top: none; text-align: center;">Compensation 
			Level</td>
			<td style="border-bottom:solid #bbbbbb 1.0pt; border-top:none; border-left:none; border-right:solid #bbbbbb 1.0pt; padding: 10px 40px 10px 30px;" valign="top">The compensation level required for the use of technical information is prescribed as “reasonable compensation”, which is generally higher level than “ordinary compensation”*.</td>
		</tr>
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			<td bgcolor="#f1f1f1" style="border-right: 1pt solid rgb(187, 187, 187); border-bottom: 1pt solid rgb(187, 187, 187); border-left: 1pt solid rgb(187, 187, 187); border-image: initial; border-top: none; text-align: center;">Scope of Goods</td>
			<td style="border-bottom:solid #bbbbbb 1.0pt; border-top:none; border-left:none; border-right:solid #bbbbbb 1.0pt; padding: 10px 40px 10px 30px;" valign="top">Considering that subcontracting in the Fair Transactions in Subcontracting Act includes both goods and services, the scope of the subject matter includes not only goods but also services.</td>
		</tr>
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			<td bgcolor="#f1f1f1" style="border-right: 1pt solid rgb(187, 187, 187); border-bottom: 1pt solid rgb(187, 187, 187); border-left: 1pt solid rgb(187, 187, 187); border-image: initial; border-top: none; text-align: center;">Presumption 
			Criteria</td>
			<td style="border-bottom:solid #bbbbbb 1.0pt; border-top:none; border-left:none; border-right:solid #bbbbbb 1.0pt; padding: 10px 40px 10px 30px;" valign="top">It may be presumed that the amount of profit** gained by the prime contractor or a third party through the misappropriation of technical information constitutes damages to the subcontractor.</td>
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<div style="line-height: 10px; text-align: justify;"> 
* Article 128(3) of the Patent Act provides that a patent holder may receive from an infringer a license fee equal to the “ordinary amount they would typically receive.”2 
** The Supreme Court has calculated the amount of profit gained by an infringer through patent infringement under the Patent Act by either multiplying the net profit margin by the total sales revenue of the product or multiplying the net profit per unit of the product by its production and sales quantity.3</div>
 
 
3. Need to Reassess the Process for Handling Technical Information 
 
The Amendment aligns with the national pursuit of technology protection for small and medium-sized enterprises and subcontractors.  The Korea Fair Trade Commission distributed ‘The Guideline for Drafting Technical Information Requests and Non-Disclosure Agreements’ on April 13, 2023, in its efforts to strongly regulate the prime contractors’ demand for and misappropriation of technical information under the Fair Transactions in Subcontracting Act. 
 
In line with the strengthened regulations, it will be necessary to thoroughly reassess the processes for handling technical information in transactions with subcontractors. 
 
<a href="https://www.jipyong.com/kr/board/news_view.php?seq=12726&page=1&value=&type=&nownum=0" target="_blank">[Link to Korean Newsletter]</a> 
 
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<div style="line-height: 110%;">1 Seoul High Court Decision 2020Na 2032402 (December 23, 2021 ) 
2 Same provision now deleted with the amendment to the Patent Act effective as of March 11, 2020. 
3 Supreme Court Decision 96Da 43119 (September 12, 1997  ) 
 
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