New regulations protecting small and medium enterprises (“SMEs”) from improper influence exerted by large companies will come into effect in the near future in Korea. These new regulations will strongly regulate the transfer of technical materials and ideas from SMEs to larger companies. Unfortunately, large foreign companies with Korean subsidiaries (irrespective of the size of the Korean subsidiary) can still be potential defendants, while being precluded as potential plaintiffs due to the definition for SME’s under the Framework Act on Small and Medium Enterprises. As a result, large corporations, including large foreign corporations with Korean subsidiaries of any size, must put in place precautionary measures to minimize risks when requesting information and ideas from SMEs.
1. Statutory Amendments and the Government’s New Policies
On March 30, 2018, the National Assembly approved amendments to the Unfair Competition Prevention and Trade Secret Protection Act (the “Unfair Competition Act”) and the Fair Transactions in Subcontracting Act (the “Subcontracting Act”), which are expected to come into effect within the first half of 2018.
The amendments to the Unfair Competition Act (i) adds a new form of unfair competitive act of taking ideas during business negotiations or in the course of business transactions and (ii) authorizes the chairman of the Korea Intellectual Property Office (“KIPO”) to investigate the taking of ideas and to order remedial recommendations against such taking.
The amendments to the Subcontract Act (i) identify as a legal violation the transmission by a principal of technical materials acquired from a subcontractor to a third party, and (ii) extend the statute of limitations for investigating the taking of technology from three (3) years to seven (7) years.
In addition, the National Assembly is currently deliberating on the following additional amendments, although they have not yet been passed into law: (i) eliminating the requirement that the information be ”kept secret” for the information to be considered a trade secret (ii) permitting punitive damages of up to ten (10) times in litigations regarding infringement of trade secrets or technical materials, and (iii) shifting the burden of proof to the alleged infringer for trade secret infringement cases.
Government agencies have reacted to these laws by creating new divisions to investigate and enforce them. For example, the Daejeon Prosecutor’s Office newly launched a Patent Crimes Division in order to investigate the crime of infringing trade secrets or technology. KIPO is also expected to launch a Technology Misappropriation Investigation Division in the first half of this year to investigate the taking of ideas and order remedial recommendations or refer such taking for criminal prosecution, on a discretionary basis. Likewise, the Korea Fair Trade Commission announced that it will investigate, on a discretionary basis, technology misappropriation cases in (i) the machinery and automotive industries by 2018, (ii) the electric, engineering, and chemistry industries by 2019, and (iii) the software industry by 2020.
The related government agencies have also been hiring forensic experts en masse, as well as nominating expert commissioners, who will be empowered to make determinations on infringement of various technologies. Further, KIPO and the Korea Intellectual Property Protection Association have jointly launched a new Unfair Competition Conduct Reporting Center to encourage reporting by SMEs.
2. Why Corporations Need to Respond Proactively
These changes to Korea’s laws and regulations significantly increase the risk that an SME will assert violation of the Unfair Competition Act and/or the Fair Subcontracting Act against a large business counterparty, asserting unfair taking of technical ideas and information of the company, as well as trade secret infringement. Additionally, unfair competitive acts will likely be added as a new cause of action in pending litigations involving technology.
Therefore, large corporations will need to take prophylactic measures to minimize these risks, including (i) establishing a system for verifying, and maintaining records of, the purpose of receiving any information, such as ideas, the identity of the developing party, and drafting consents for disclosure and use, and (ii) revising or newly drafting related agreements, request for bids, confirmations, and other documents. In particular, large companies are recommended to set up a system for managing electronically stored information, such as emails.
3. Yulchon’s Expertise
Yulchon’s IP Practice Group, along with attorneys from the Antitrust Practice Group and the Litigation Practice Group, newly launched a Technology Misappropriation Team to help clients efficiently manage risks related to technology related information.
The Technology Misappropriation Team has extensive experience in establishing risk-minimizing systems (compliance and corporate governance systems) for potential allegations of technology misappropriations and trade secret infringement. In particular, Yulchon’s Technology Misappropriation Team has access to various forensics tools, such as NUIX and X-ways, and its attorneys and patent attorneys are experienced in using these systems. These resources lend to a different level of legal advice in developing strategies for, and responding to, investigations relating to alleged technology and/or idea misappropriation from SME’s.