The Fairness in Dealership Transactions Act (the "Dealership Act"), which was enacted to improve the unfair trade practices in dealership transactions in the aftermath of the scandal regarding coercion to purchase products by Namyang Dairy Products Co., Ltd., and the Enforcement Decree thereof are scheduled for implementation on December 23, 2016. The key regulations to be implemented are as follows:
1. Application of Dealership Act (Articles 2 and 3)
The term "dealership transactions" governed by the Dealership Act refers to transactions between a supplier with a superior trading position (i.e., large corporation) and a dealership (i.e., small or medium-sized company) which are performed for the resale or consignment sale of goods or services, and are repeatedly performed under a contract that continues for certain period (Articles 2 and 3 of the Dealership Act). In contrast to the Fair Transactions in Franchise Business Act, the use of "business marks" is not one of the requirements. While the term "resale" entails no special interpretative issue as a simple purchase and sale, there is a dispute over the definition of the term "consignment sales," in particular, whether the definition is limited only to "consignment purchase and sale" or whether it encompasses the commercial agent under the Commercial Code of Korea.
2. Obligation to Prepare, Provide and Safe Keep Dealership Transaction Agreement
A supplier has to prepare, provide and safe keep a written contract that contains the following items (Article 5(1) and 5(3) of the Dealership Act): 1) Form, item and period of transaction; 2) Means, location and date of delivery; 3) Means and timing of payment of price of goods; 4) Conditions for product returns; 5) Matters related to business transfer; 6) Grounds and procedures for termination of contract;
1) Form, item and period of transaction;
2) Means, location and date of delivery;
3) Means and timing of payment of price of goods;
4) Condition for product returns;
5) Matters related to business transfer;
6) Grounds and procedures for termination of contract;
7) Matters related to payment of sales incentives;
8) Matters related to scope of consignment service and means of performance thereof (applicable only for consignment sales); and
9) Matters related to compensation for consignment sales (applicable only for consignment sales).
3. Unfair Trade Practices Prohibited under the Dealership Act (Articles 6 through 12) – Takes precedence over the Monopoly Regulation and Fair Trade Act (“MRFTA”)
1) Coerced Purchase: Act of coercing a dealership to purchase goods (including goods with imminent expiration dates), samples, fixture or promotional items against such dealership’s will
2) Coerced Provision of Economic Benefits: Act of coercing the dealership to bear (i) the costs of sales promotion events for the supplier’s needs, (ii) the expenses for personnel employed and managed by the supplier, or (iii) the expenses related to the donations that are irrelevant to the dealership transactions.
3) Coerced Sales Target: Act of presenting a sales target to a dealership and coercing such dealership to meet the sales target by imposing sanctions, such as terminating the contract or discontinuing the supply of goods, etc., or expressing the intent to impose such sanctions if the sales target are not met
4) Provision of Disadvantages: Unreasonably establishing/changing transaction terms or unreasonably disadvantaging the dealership in the performance of the transaction
5) Interference with Management Activities: Instructing the dealership to appoint/remove an employee or officer, demanding trade secrets of the dealership without reasonable grounds and unilaterally limiting the dealership’s transacting counterparty.
6) Refusing or Evading Order Confirmation Requests
7) Retaliatory Measures
4. Dispute Resolution Process (Articles 13 through 22)
The Dealership Dispute Mediation Council will be established at the Korea Fair Trade Mediation Agency (Article 13). Once dispute mediation is applied, the statute of limitations will be tolled (Article 19(4)) and the mediation protocol prepared after successful mediation will have the same effect as a court settlement (Article 21 of the Dealership Act). The Dealership Act was the first statute to impute a settlement-like effect to a mediation protocol (currently, the same provision exists in the MRFTA and the Fair Transactions in Franchise Business Act).
5. Damages Liability (Article 34)
In the event of injuries to a dealership due to a supplier’s violation of the Dealership Act, the relevant supplier is liable for damages to the dealership. In particular, if a supplier injured a dealership by engaging in (i) a coerced purchase or (ii) coerced provision of economic benefits, such supplier may be liable for treble damages (Article 34 of the Dealership Act).
Based on our experience of successfully handling litigations and advisory services related to dealership transactions from the previous enforcement of the MRFTA and the Notification on Dealerships, Yoon & Yang LLC possesses the capability to assist clients in responding to the relevant risks in a timely and efficient manner in regard to the implementation of the Dealership Act.