FTSA Amendment Strengthening Punitive Damages Liability for Technology Misappropriation to Take Effect on August 28, 2024

An amendment to the Fair Transactions in Subcontracting Act (the “FTSA”), strengthening punitive damages for companies that are guilty of misappropriating subcontractors’ technology, is set to take effect on August 28, 2024.

The punitive damages system for technology misappropriation, first incorporated into the FTSA through an amendment in 2011, was the first punitive damages system to be introduced in Korea. However, under the existing FTSA, punitive damages are capped at three times the amount of actual damages, meaning that the value of actual compensation awarded for technology misappropriation in practice typically amounts to no more than twice the actual damages.

To address this issue, the Korea Fair Trade Commission (the “KFTC”) proposed an amendment to the FTSA in an effort to deter technology misappropriation and increase the compensation for affected subcontractors.

The key details of the amendment are as follows:

Increase Punitive Damages Cap for Technology Misappropriation to Five Times the Actual Value of Damages

Under the amended FTSA, a contractor that misappropriates a subcontractor’s technological data will be required to pay the subcontractor up to five times the amount of actual damages as compensation, which is an increase from the previous punitive damage cap set at three times the actual amount.

Introduce Standards for Calculating Damages Caused by Technology Misappropriation to Ease the Burden of Proof on Subcontractors

Subcontractors, who are typically small or medium-sized enterprises (“SMEs”), often do not get appropriate relief for damages caused by technology misappropriation through dispute mediation or litigation because of difficulties in proving and calculating the value of damages. To ease the burden on subcontractors, the set of standards for damage calculation in the Patent Act has been adapted and introduced to the amended FTSA.

In particular, the amended FTSA specifies that the damages amount includes not only (i) the profit the subcontractor could have earned by manufacturing and selling products using the misappropriated technical data within its own production capacity had the misappropriation not taken place, but also (ii) what the subcontractor could have earned beyond its own production capacity by allowing other companies to use the misappropriated technical data. Further, (iii) in cases where the affected subcontractor seeks punitive damages, the amended FTSA assumes that the subcontractor’s profit encompasses the profit earned by third parties that were provided with the subcontractor’s technical data by the contractor.

The increased punitive damages will apply to the first legal violation for technology misappropriation that occurs after the amendment takes effect and the new standards for calculating the damages amount will apply to the first instance where a subcontractor files a claim for damages incurred by technology misappropriation.

The KFTC has expressed its commitment to combating technology misappropriation in its annual enforcement plans. For example, its 2023 Work Plan identified the elimination of technology misappropriation as a key initiative, and its 2024 Work Plan includes an initiative to introduce a system for providing additional remedies for companies affected by technology misappropriation. In February 2024, the KFTC announced its first case of sanctioning a company for misappropriating a subcontractor’s technical data concerning the production of metal molds, adding that it would maintain surveillance over the industry for possible cases of technology misappropriation to protect the rights and interests of metal mold manufacturing companies.

Based on the KFTC’s recent standpoint, it is expected that once the amended FTSA is implemented, the KFTC will take proactive measures to investigate and regulate technology misappropriation. Accordingly, we advise companies to conduct an internal inspection and assess any risks related to technology misappropriation and take appropriate measures to address those risks, such as updating their work process accordingly.

[Korean Version]

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