Kim & Chang represented the appellant in a successful administrative action before the Seoul High Court seeking the annulment of a decision and all related sanctions imposed by the Korea Fair Trade Commission (the “KFTC”), including a corrective order, a notification order and an administrative fine, for allegedly unfairly restricting a licensee’s right to use a standard essential patent (“SEP”) owned by the appellant in connection with license audits.

The appellant in this case was Dolby Laboratories, Inc. (including affiliated companies), which owns and licenses the rights to a SEP relating to digital audio codecs. For over two-years, the KFTC investigated allegations that the appellant had (i) unilaterally conducted license audits and thereby imposed undue royalties on the licensee, a Korea-based set-top box manufacturer, and (ii) unfairly restricted the licensee’s right to use the SEP in connection with such license audits. In August 2021, the KFTC closed its investigation on the first allegation without bringing any charges, concluding that it was impossible to verify, but found that the second allegation was acknowledged and imposed the sanctions against the appellant, which subsequently filed an administrative action to appeal the KFTC’s decision.

Representing the appellant throughout the KFTC’s investigation and the subsequent litigation process, our firm proactively argued with evidence clearly demonstrating that (a) the license agreement between the two sides was executed based on an honor system (i.e., whereby the licensee makes voluntary reports to the licensor, which in turn conducts third party expert compliance audits in order to verify the licensee’s compliance with the terms of agreement) under which the licensee, who has relevant documents and records, bears the burden of proof regarding compliance, (b) the dispute between the two sides was fundamentally caused by the licensee’s failure to carry out its duty to preserve related documents and records and to cooperate with the audits, and the licensee also clearly committed a serious violation of its duties under the license agreement, and (c) for disadvantages in the form of monetary damages, Supreme Court precedents mandate that confirmation of existence of damages and the damage amount is necessary, but in this case, such existence of damages and the damage amount were never proven. Ultimately, our firm was able to persuade the Court to accept all of Dolby’s arguments and issue a decision revoking the KFTC’s decision and imposed sanctions entirely.

The Seoul High Court’s ruling could be interpreted as confirmation that a FRAND declaration (i.e., to offer a license on fair, reasonable, and non-discriminatory terms) does not require the licensor to guarantee the use of a license to licensees that commit a serious violation of the terms of agreement, and thus, restricting the use of a FRAND license by said licensee cannot be deemed as a violation of the Monopoly Regulation and Fair Trade Law. In light of the above, this ruling could set a meaningful precedent on the practice of license audits under an honor system and on the exercise and limitations of SEP rights.