Overview

Court system

Outline the organisation of your court system as it relates to collective or representative actions (class actions). In which courts may class actions be brought?

Korea’s court system is based on a three-tier judicial system composed of district courts, High Courts and the Supreme Court. The 18 district courts have original jurisdiction over most civil and criminal cases, with some exceptions, and the six High Courts have appellate jurisdiction over cases decided by a trial panel of three judges in a district court. Ultimately, the Supreme Court functions as the highest court for most legal issues, including class action cases.

While there are other special courts, such as a patent court and a family court, there is no specific court exercising jurisdiction over collective or class actions. Class actions are, therefore, brought in the district courts. There is a unique characteristic in terms of jurisdiction, however, for securities-related class actions where an ‘opt-out’ system is applied: district courts having jurisdiction over defendants have an exclusive jurisdiction. Thus, when there are several defendants and the courts having jurisdiction over such defendants are different, several lawsuits should be filed against such different defendants, and the High Court, having common jurisdiction over the district courts where such lawsuits are brought, should appoint one district court as the court exercising jurisdiction over such consolidated cases.

Frequency of class actions

How common are class actions in your jurisdiction? What has been the recent attitude of lawmakers and the judiciary to class actions?

Korea has a securities-related class action law, the Securities-Related Class Action Act, allowing US-styled class action for certain types of securities-related cases. For other cases such as consumer, antitrust or environment, where there are unspecified numerous victims, general civil procedures should be applied. Because a class action system has not yet been adopted for such fields, those victims should bring actions individually or jointly.

However, with the election of President Moon Jae-In in 2017, the authorities are trying to expand the areas in which class actions can be filed (eg, securities, antitrust and consumer protection). Some lawmakers have gone even further and submitted a bill expanding the areas not just to antitrust and consumer protection but also to the environment and personal information leakage. It is generally agreed that the expansion of class actions is a trend that cannot be avoided with the growth of collective disputes, even with vigorous opposition from the business community. The expansion of class actions is expected to replicate the existing securities-related class action law as well as expand the types of claims currently available under the law.

Since 1 January 2005, the effective date of the Securities-Related Class Action Act, only 10 class actions had been filed up to 1 September 2019, with five cases finalised and five cases still pending in court. Among those five finalised cases, one was adjudicated, another one was dismissed at the certification stage and the other three were settled immediately before adjudication by the court. Other cases, such as consumer, antitrust or environment cases, or even securities cases, which are not eligible as class actions where general civil procedures are applied, have relatively low settlement rates. This is because the expectations of both parties regarding victory and defeat in an action are significantly different owing to the lack of a discovery system.

Legal basis

What is the legal basis for class actions? Is it derived from statute or case law?

In Korea, a civil law country, the Civil Procedure Act is the primary source of law for litigation. However, a special law has been adopted to govern the procedural aspect of class actions - the Securities-Related Class Action Act. The Act was proclaimed on 20 April 2004 and became effective on 1 January 2005.

Types of claims

What types of claims may be filed as class actions?

Only predetermined types of securities claims can be filed as class actions. Article 3 of the Securities-Related Class Action Act specifically provides the causes of actions on which the claims can be based as following:

  • false representation (or omission) of any material fact in a registration statement or a prospectus;
  • false representation (or omission) of any material fact in annual, biannual or quarterly report;
  • unfair securities practices including insider trading or market manipulation; and
  • false representation in an audit report, all of which are causes of actions provided by the Financial Investment Services and Capital Market Act.

There is no court ruling that further limits the types of claims that may be litigated by class actions.

Relief

What relief may be sought in class proceedings?

Only money damages can be sought in class proceedings under the Securities-Related Class Action Act. Consumer protection law has a system that allows consumer groups to move for injunction against companies, but it is not widely used.

Initiating a class action and timing

How is a class action initiated? What is the limitation period for bringing a class action? Can the time limit for bringing a class action be paused? How long do class actions typically take from filing to a final decision?

Unlike general actions, where only a complaint is necessary to be filed as a class action, the plaintiff should prepare two sets of documents - complaint and application for certification. The application for certification, as the name of the document represents, is for certification as a class action. With the filing of the two documents, the case begins as a class action. If the proceedings are successful in getting certification as a class action, the case then goes on to the merits stage. There is no advance notice requirement.

The Financial Investment Services and Capital Market Act provides the statutes of limitations for the claims that may be filed as class actions as follows:

  • false representation (or omission) of any material fact in a registration statement or a prospectus: within one year from the date on which he or she becomes aware of the relevant facts, or within the three-year period beginning on the date a registration statement related to the relevant securities takes effect;
  • false representation (or omission) of any material fact in annual, bi-annual or quarterly report: within one year from the date on which he or she becomes aware of the fact, or within three years from the date of submission;
  • unfair securities practices, including insider trading or market manipulation: within two years from the date on which he or she becomes aware of the fact, or within five years from the date of submission; and
  • false representation in an audit report, all of which are causes of actions provided by the Financial Investment Services and Capital Market Act: within one year from the date the claimant becomes aware of the relevant fact or within eight years from the date the audit report was submitted.

While it is difficult to conclude general trends as to how long a class action lawsuit would take, it normally lasts for more than five years after filing the complaint.

Class formation

Standing

What are the standing requirements for a class action?

Class actions are only available for damages arising out of certain securities-related transactions, and the Securities-Related Class Action Act specifies those certain securities-related transactions and the eligible plaintiffs.

For claims based on false representation in a registration statement or a prospectus, the plaintiffs should be purchasers of the securities and must have suffered damage by such false representation. For claims based on false representation in annual, biannual or quarterly reports, the plaintiffs should be purchasers or sellers of the securities issued by the defendant corporation whose annual, biannual or quarterly reports were falsely represented. For claims based on unfair securities practices, including insider trading or market manipulation, the plaintiffs should be the persons who trades, or makes any other transaction of, the relevant specific securities and must have suffered damage. For claims based on false representation in an audit report, the plaintiffs should be the persons who sustained damage by relying on the falsely represented audit report.

One or more victims who meet the standing requirement above can file a class action. The person who filed the action can be the lead plaintiff; however, the court may appoint another victim as the lead plaintiff. In principle, a lead plaintiff or plaintiff attorney cannot serve as lead plaintiff or lead counsel if they had previously been lead plaintiff or lead counsel in three or more class actions within the last three years.

On the other hand, injunction actions provided under the consumer protection law can be filed only by certain qualified consumer organisations.

Participation

Do members of a class have to opt in or opt out of the action? Are class members notified that an action has been commenced on their behalf and, if so, how?

The class action system in Korea employs an opt-out model. This means that all potential claimants who fall within the definition of a class become members of the class on the filing of the complaint, whether they are aware of it or not. They will all be bound by the final judgment of the court or any approved settlement unless they opt out of the proceedings individually.

If the certification of a class action becomes final and conclusive, the court is supposed to notify the relevant class of such fact, and the notice should be made both through regular mail and newspaper. A class member may give a written opt-out notice to a court within a certain period of time. Class members who have not opted out shall be bound by the final judgment or any approved settlement.

Certification requirements

What are the requirements for a case to be filed as a class action?

To be certified as a class action:

  • there should be a minimum of 50 victims whose aggregate interest in the securities concerned is 0.01 per cent or more;
  • relevant legal or factual issues must be ‘common’ to all members of the class;
  • the class action must be an ‘adequate and efficient’ means of fulfilling the rights of, and protecting the interests of, the class members; and
  • the matters stated in the application for certification and its accompanying documents should be free of defects.

The matters that should be stated in the application for certification are as follows:

  • the person or persons who files the class action and his or her legal representative;
  • the attorney for the plaintiff;
  • the defendant;
  • the scope of the class;
  • the careers of the person or persons who files the class action and plaintiff’s attorneys;
  • relief requested and the cause of action; and
  • agreement of attorneys’ fees.

The person or persons who files the class action should submit a document detailing the following:

  • the fact that the person has not acquired securities with respect to the class action to file the class action, or in accordance with the instructions given by the attorney; and
  • details of the securities-related class actions that the person has been involved in as a lead plaintiff during the preceding three years.

The plaintiff’s attorney should submit a document with the following:

  • details of the securities-related class actions in which the person has been involved as an attorney during the preceding three years; and
  • the fact that the person has no conflict of interest with the class in such a manner as to be deemed inappropriate to serve as a legal representative in the action for owning, or having any direct monetary interest in, the securities at issue.

How does a court determine whether the case qualifies for a class action?

Based on the requirements set forth in question 9, the court determines by issuing a written opinion whether the action qualifies as a class action. Because this decision is appealable, the certification stage alone can take three to five years to be finally and conclusively certified by the Supreme Court. Similar to the merits stage, the certification stage also has trials and hearings. The plaintiffs bear the burden of proof that the case is qualified as a class action.

Consolidation

Is there a process for consolidating multiple class action filings?

Where multiple class actions are filed over the same cause of action with the same court, the court is required by law to consolidate them. Similarly, in cases where such multiple class actions are filed with the different district courts, the higher court having common jurisdiction over the district courts determines which court should preside over the case, and the designated court must consolidate the case. When class actions are filed, information about such filing is posted on the website of the Supreme Court, and thus anyone is able to find out which class actions have been filed.

Procedure

Discovery

How does discovery work in class actions?

The discovery that provides the parties with the extensive and effective right of access to the evidence held by the other parties is not available in Korea; it is no different from the class action procedure. However, a party could seek document disclosure by requesting the court for a document submission order by identifying requested documents with a relatively high degree of specificity. A party can also request the court to order the other party to disclose evidence by showing that there is risk that this evidence would not be available at a later time. The sanctions for not following court orders to produce the documents, however, are very weak. Recently there have been many claims that it is necessary to introduce discovery, especially in collective dispute cases, and thus the submitted bills for expansion of class actions contain systems similar to discovery.

Privilege and confidentiality

What rules and standards govern non-disclosure of documents on the grounds of professional privilege, litigation privilege or other confidentiality considerations?

The Attorney-At-Law Act regulates attorneys’ duty to maintain confidentiality. Moreover, according to the Civil Procedure Act, attorney-at-law and other professionals liable for keeping secrets under statutes may refuse to give testimony on matters falling under the secrets of their official functions. Any person who holds documents containing such matters and whose obligation to keep secrets has not been exempted may decline to provide such documents as evidence to the court. However, there is no legal concept of general attorney-client privilege in Korea, and thus it is difficult to comprehensively refuse disclosure of documents for the reason that those documents contain communications between an attorney and a client.

Testimony

What rules apply to submission of factual and expert witness testimony? In what circumstances will the court order witness-examination?

The procedures for investigating evidence in class actions are the same as in general civil lawsuits. With regard to factual witness testimony, one party may motion to examine a witness, and if the court deems it necessary witness examination will be carried out. Deposition, a pre-examination as means of discovery, cannot be utilised.

The Korean judiciary adopts an independent expert system, having an expert with specialist knowledge and experience to supplement information for the judge by reporting his or her opinion to the judge based on his or her expertise. Unlike the expert witness system in the common law regime, in which a party selects their own expert as a witness, the Korean courts choose the independent expert after hearing the opinions of both parties.

Defence

Defence strategy

What mechanisms and strategies are available to class-action defendants?

At the certification stage, class action defendants contest the requirements for certification, such as numerosity, commonality, adequacy and efficiency. At the merit stage, defendants argue the lack of illegality, causation and damages. But defendants often argue, even at the certification stage, the merits of the suit (such as loss or statute of limitation) to increase the burden of the court and induce rejection of certification of the class. Due to the lack of discovery procedure after certification and the weak penalties for non-compliance with a submission order for evidential documents, defendants tend to hide or deny submission of critical evidence that would support allegations in the complaint.

Joint defence agreements

What rules and standards govern joint defence agreements? Are they discoverable? What are the advantages and disadvantages of these agreements?

There are no explicit regulations regarding joint defence agreements or attorney-client privilege. Therefore, it is difficult to find cases where these agreements are utilised. Discovery in the common law system is not adopted in Korea.

Settlement

Approval of settlements

Describe the process and requirements for approval of a class-action settlement.

In the case of securities-related class actions under the Act, the withdrawal or settlement of a lawsuit is invalid without leave of a court. Before granting approval of the withdrawal or settlement of a lawsuit that binds the entire class, the court must notify the class members in advance and provide an opportunity for them to present opinions. Thus, to be settled, the attorneys for each party agree on the general terms and conditions first and then apply for settlement to the court. In turn, the court determines whether to approve or deny the settlement after notifying and hearing from class members.

Objections to settlement

May class members object to a settlement? How?

Class members who are not satisfied with a settlement proposal may make a statement of objection, but once approved by court, they cannot object to the settlement and are bound by it.

Separate settlements

How are separate class action settlements handled?

When multiple securities-related class actions are filed over the same issues at a court, the court is required by law to consolidate them. Therefore, it is unlikely to have multiple class action settlements on a single conflict issue, and there has been no such case in Korea.

Judgment and appeal

Preclusive effect

What is the preclusive effect of a final judgment in a class action?

The final and conclusive judgment of a securities-related class action affects the entire class, and thus any class member who did not opt out is bound by the judgment, even if he or she is not satisfied with the judgment.

Appeals

What type of appellate review is available with respect to class-action decisions?

Appeals to the certification decision (whether certified or not certified) are permitted by either party, first to the appellate level, and then to the Supreme Court. Similarly, in the merits stage, either party may appeal first to the High Court for the district court’s decision, and then to the Supreme Court for the High Court’s decision.

Regulatory action

Regulators

What role do regulators play in connection with class actions?

The financial authorities related to securities-related class actions are the Financial Supervisory Commission and the Financial Supervisory Service. The enforcement actions by these authorities could be important clues in filing securities-related class actions; however, it is hard to say that the authorities encourage class actions. They are passive in sharing their investigation materials. Further, because the enforcement actions by these authorities are generally taken before a class action is filed and the settlement of a class action is made at the end of the litigation, if ever made, the settlement has no significant effect on such enforcement actions.

Private enforcement

Describe any incentives the civil or criminal systems provide to facilitate follow-on actions.

Generally, an ordinary civil action takes a shorter time compared to a class action. Therefore, the securities-related class action may proceed more expeditiously after a related individual or joint action is concluded.

When criminally indicted at the criminal court, the defendants may wish to end the case more promptly by agreeing to a settlement. Thus, it is quite common that the victims of securities frauds file criminal complaints at the prosecutor’s office.

Alternative dispute resolution

Arbitration and ADR

What role do arbitration and other forms of alternative dispute resolution play in class actions? Can arbitration clauses lawfully contain class-action waivers?

In the case of Korea’s securities disputes, alternative dispute resolution is very rare, and thus there is no effect of arbitration on securities-related class actions. Even though there is an arbitration clause that applies to some of the class members, there is likely to be no impact on the class action procedure, because the members are not parties to the class action.

Court-ordered mediation

Do courts order pretrial mediation in class actions? Does the appointment of a mediator make it more likely that the court will approve a settlement?

There have been no cases where the court has ordered a securities class action to a pretrial mediation or where the court has appointed a mediator. However, the parties may settle during trial with the approval of the court. Securities-related class actions regarding Hanwha Smart ELS No. 10, Jinsung TEC and GeneMatrix Inc. were all ended with settlements that were approved by the court.

Fees, costs and funding

Contingency fees

What are the rules regarding contingency fee agreements for plaintiffs’ lawyers in a class action?

A contingency fee agreement where the fee is calculated by reference to a percentage of the amount awarded either by a judgment or settlement is available in Korea. The Act requires stipulating an agreement on the attorney’s fee when applying for certification, and the court has the authority to reduce the attorney’s fee taking into account various factors, such as the fee agreement, the period and difficulty of the suit, awarded and distributed amounts to the class members, the time spent on the preparation for briefs and the quality of the briefs.

Cost burden

What are the rules regarding a losing party’s obligation to pay the prevailing party’s attorneys’ fees and litigation costs in a class action?

In the Korean legal system, plaintiffs are required to pay in advance the filing fee calculated by reference to damages, and losers bear the legal fee including the attorney’s fee incurred by the other party after the action is completed. Similarly in a securities-related class action, the plaintiff should pay the legal fee of the other party if the case is lost, regardless of whether the case is meritorious or frivolous. For example, if a case is dismissed just because the plaintiff failed to establish loss causation while having succeeded in proving the defendant’s torts, the plaintiff should still bear the burden of the legal fee.

In terms of the attorney’s fee, however, the defeated party bears the amount calculated based on a certain standard set by law, not the actual cost, corresponding to 0.5-1 per cent of the requested damages for each instance, if such requested damages are large enough. In smaller claims the percentage is higher.

Calculation

How are costs calculated? What costs are typically recovered? Does cost calculation differ in the litigation and settlement contexts?

Plaintiffs must pay stamp fees calculated proportionately to the amount claimed, which is normally 0.4 per cent. However, there are special rules in securities-related class actions limiting the stamp fees to half of the amount and fixing the maximum fee to 50 million won. When appealing to the High Court the stamp fees increase by 50 per cent above that of the first trial and when appealing to the Supreme Court the fees increase by 100 per cent above that of the first trial. The winning party may recover stamp fees, delivery fees, public notice fees and appraisal fees from the losing party. However, personally employed experts by the parties may not be covered by the losing party. In the case of class action, the recovered amount should be distributed by a court-appointed distributor. The distribution costs, comprising compensation for the distributor, postal expenses and other costs for communication with the class members and the fees for a mandatory public accountant, may be covered by settlement or judgment amounts. Cost calculations are generally similar in both settlements and judgments.

Third-party funding

Is third-party funding of class actions permitted?

Third-party litigation funding is not available in Korea. A third-party litigation fund is a commercial organisation that enters into an agreement, primarily with the representative party, to pay the legal costs of the representative party and to accept liability to pay the defendant’s costs if the action is unsuccessful. In return, if the claim is successful, the fund receives its money back together with a share of the amount awarded.

Third-party litigation funding has been criticised as allowing someone with no direct interest in the actual dispute to conduct and control the litigation, while it has the merit of allowing plaintiffs to file a suit without the burden of considerable legal costs.

In foreign countries, third-party litigation funds are active, and in fact they are necessary because of the enormous legal costs of class actions. However, because the Attorney-At-Law Act of Korea provides that fees and other profits earned through services that may be provided only by attorneys should not be shared with a non-attorney and the court does not acknowledge agreements in violation of the Act, such funds are not allowed in Korea.

Public funding

Is legal aid or other public funding available for class actions?

Currently there is no legal aid policy for securities-related class action lawsuits in Korea. Public funding for class actions is not available.

Insurance

Are adverse costs, adverse litigation judgment or after-the-event insurance available?

In principle, the losing party should bear the litigation costs according to the Civil Procedure Act. Upon the parties’ request, the court decides the amount of the litigation costs. The cost may be covered by legal expenses insurance, but there are hardly any cases in securities-related class actions where such insurance is used.

Transfer of claims

Can plaintiffs sell their claim to another party?

Transfers of claims to a third party are prohibited under the Attorney-At-Law Act. A person who files a securities-related class action or the lead plaintiff is punished if the person receives, requests or promises money or other economic benefits in return for an unreasonable favour with respect to his or her work.

Distributing compensation

If distribution of compensation to class members is problematic, what happens to the award?

Once the amount of damages is determined by the court and the damages are paid by the defendant, the amount is distributed to the class members, after deducting litigation costs. After the distribution, the balance is returned to the defendant. Although it has not yet been tested whether the distribution plan can include contributions to a charity or consumer group, unless the judgment or settlement agreement itself contains such a contribution clause it is unlikely that a distribution manager can include such matters in the distribution plan because the distribution should be accomplished based on the judgment or settlement agreement.

Update and trends

Legal and regulatory developments

What legislative, regulatory or judicial developments related to class actions are on the horizon?

Legal and regulatory developments34 What legislative, regulatory or judicial developments related to class actions are on the horizon?

The Ministry of Justice proposed a law on 21 September 2018 broadening the scope of class action to suits related to:

  • product liability;
  • antitrust violations, such as cartels and unfair resale price maintenance;
  • false and misleading advertisements;
  • certain violations of the Privacy Act;
  • food safety law infringements; and
  • financial consumer protection act infringements.

However, the proposal is still pending in the legislature.