The Customs and Medical Device groups of Kim & Chang represented a medical device importer (“Company A”) in a criminal case where customs authorities and the prosecutors accused Company A, its representative director and an officer of inflating the price of the imported goods in order to help an overseas supplier, Company A and its distributors gain economic benefits by preventing a reduction in insurance reimbursements (Supreme Court Decision 2022Do16592, June 15, 2023).

Under Article 270-2 of the Customs Act, the crime of price manipulation is an act of manipulating the price of goods in filing a declaration for the purpose of unfairly obtaining economic benefits.

Since 2019, the customs authorities have conducted planned audits and investigations on a number of medical device importers, including Company A, on charges of intentionally setting and maintaining high import prices for the purpose of receiving higher insurance reimbursements or maintaining the higher insurance reimbursements already received. While the Prosecutors’ Office (the “PO”) has cleared suspicion for many importers, the PO indicted Company A, its then-representative director and an officer (the “Defendants”).

Throughout the trial, the PO argued that the Defendants intentionally manipulated the import price by taking advantage of the special circumstances where the tariff rate of 0% was often applied to Company A and thus there was no customs duty even if the import price of medical devices increased, while the increased price would directly lead to increased insurance reimbursements and subsequently higher revenue.
  
We researched and analyzed in great depth (i) Korea’s medical device insurance system, (ii) the national tax and customs system in relation to medical devices, (iii) the unique practice of determining import price by medical device companies, and (iv) how Company A determined the import price and what was changed. Based on the detailed analysis, we rebutted the PO’s position, arguing that there was neither price manipulation nor any intent to unfairly obtain economic benefits.

The key details of the trial are as follows:
 

• In the first trial at the Seongnam Branch of the Suwon District Court, the PO submitted a considerable amount of evidence, totaling six volumes and 105 incidents, and provided a number of briefs alleging that the price manipulation was intentional, including records requested from the Health Insurance Review & Assessment Service (the “HIRA”). We defended through a number of briefs and witness examinations arguing that (i) the import price was not manipulated, but rather it was the actual import price determined through mutual agreement between the overseas supplier and Company A, (ii) Company A’s import declaration price was reasonably and lawfully determined in light of the Korean insurance system, the comparable company’s import price and the customs regulations on the same or similar goods, and (iii) the Defendants had no intention of unfairly gaining economic profits. However, the trial court ruled against the Defendants and sentenced each Defendant to a fine on February 16, 2021.

• At the appeal, we argued that the elements of a price manipulation crime were not all present and even examined a Defendant, the officer of Company A. While maintaining the basic position presented at the lower court, we presented a number of briefs and the Defendant’s testimony to effectively convey to the appellate court the complicated and unique workings of the medical device insurance system and the national tax and customs system, as well as how reasonable and justifiable Company A’s pricing decision was. The appellate court reversed the lower court’s decision and found all Defendants not guilty based on the ground that (i) there is no evidence showing that the import price agreed upon by Company A and the overseas supplier was different from the import price declared by Company A, (ii) it appears that Company A paid the price of the goods to the overseas supplier in the same amount as the declared import price, and (iii) the Defendants did not have the purpose of unfairly obtaining economic gains.

• The PO appealed the appellate court’s decision. However, on June 15, 2023, the Supreme Court dismissed the appeal in its entirety, and thus the appellate court’s decision became final and conclusive.
   

The key issue in this case was whether declaring as an import price a price mutually agreed with an overseas supplier should be deemed as a crime of price manipulation under the Customs Act. It was found that the terms and conditions of the agreement executed as a result of a normal negotiation between the transaction parties should be respected, and that a crime of price manipulation cannot be recognized under the Customs Act unless the PO proves beyond a reasonable doubt that the importer declared the price at a price agreed upon with the overseas supplier and that there was a separate and different agreement between the transaction parties.

The customs authorities have been increasingly alleging that imported goods were declared at an inflated price. The above decision can serve as an important precedent in cases related to price manipulation under the Customs Act.