The Korea Fair Trade Commission (“KFTC”) announced its plans to amend the Enforcement Decree of the Fair Transactions in Subcontracting Act (the “Subcontracting Act”), and from July 26 to August 27, 2018, sought public comments.  

The proposed amendment will allow the KFTC to request a limitation on the eligibility of a company to participate in public bidding, even if the company was charged only once for unfair determination or decrease in subcontracting fees, or for divulging or misusing subcontractor’s technology.

Key Provisions of the Proposed Amendment & Considerations:

1. Penalty points system strengthened to allow for request to limit public-bidding eligibility

Currently, under the Subcontracting Act, the KFTC must request the relevant agencies to restrict a corporation with more than five penalty points from participating in public bidding or to take other appropriate measures.  

The proposed amendment raises the penalty points imposed on unfair determination/decrease of subcontracting fees and divulgence/misuse of subcontractor technology from 3.0 to 5.1, and thus introduces a “one-strike-out” system, requiring the KFTC to submit a request for limiting eligibility for public bidding for corporations with only one charge.

Moreover, the proposed amendment increases the penalty points for fines assessed due to retaliation from 2.5 to 2.6, and thus introduces a “two-strike-out” system, requiring the KFTC to submit a request for limiting public-bidding eligibility for corporations with two fines within three years.  Special attention is necessary as a “one-strike-out” system is already in place for a retaliation charge, requiring the KFTC to submit a request for limiting public-bidding eligibility for corporations with one charge for retaliation.

2. New penalty standards for obstruction of written investigation

Under the amended Subcontracting Act promulgated in April 2018, preventing a submission of materials or requesting a false submission of materials in relation to a written investigation constitutes a violation of the Subcontracting Act.  

Accordingly, the proposed amendment to the enforcement decree introduces a new penalty standard for obstruction of written investigation, whereby the penalty increases, based on the number of penalties imposed during the preceding three years.  The maximum penalty is KRW 50 million for corporations and KRW 5 million for individuals.

• Corporations: (First violation) KRW 10 million, (second violation) KRW 25 million, (three or more violations) KRW 50 million
• Individuals: (First violation) KRW 1 million, (second violation) KRW 2.5 million, (three or more violations) KRW 5 million

3. Retention period for technology data extended

The amended Subcontracting Act promulgated in April extended the investigation period from three years after the transaction to seven years after the transaction for divulgence or misuse of technology data.  

Accordingly, the proposed amendment to the enforcement decree increases the retention period for technology data from three years to seven years, if a company requests technology data from its subcontractor.  

Thus, companies are advised to take special care in retaining documents in subcontractor transactions.

4. New items to include when requesting technology data

The proposed amendment requires the contractor, when requesting technology data from a subcontractor, to include period of use, date of return or disposal, and method of return or disposal in writing.  

Thus, the companies are advised to review the written items in their technology data requests.

5. Eligibility for exemption from the obligation to guarantee payment of construction subcontractor fees reduced

The proposed amendment deletes the provision exempting a company, which received an excellent credit rating from a credit rating company, from the obligation to guarantee payment of construction subcontractor fees.  

Construction companies are advised to pay special attention, since the exemption only applies to companies whose cost of the construction project does not exceed KRW 10 million, or when the subcontractor fee is paid directly or through an electronic system.

6. The ceiling for base penalty increased

The proposed amendment increases the base penalty from KRW 500 million to KRW 1 billion for divulgence and misuse of technology data, retaliation, non-issuance of subcontract in writing, and in other instances where the violation amount is difficult to define.

Overall Significance / Impact:

The proposed amendment contains major provisions for government subcontractor transactions and prescribes heavy sanctions for violations.  Thus, companies engaging in government subcontractor transactions are advised to carefully review the applicable provisions.

Particularly for technology theft, stricter enforcement action is expected given the government-wide measures, and in practice the KFTC has increased the frequency of inspections.  As such, companies are advised to perform internal checks for risks of violation with the new provisions in mind.