On December 1, 2022, the Ministry of Justice of Korea (the “MOJ”) announced a proposed amendment to the Civil Act to introduce the Digital Content Contract Act, which will regulate transactions involving digital content and related services.  The proposed amendment is prepared with reference to the “EU Directive 2019/770 on certain aspects concerning contracts for the supply of digital content and digital services,” which was introduced by the European Union in May 2019.  The proposed amendment aims to enhance user protection by regulating contracts for digital content and related services, with features distinguished from general purchase contracts. 

The provisions in the proposed amendment are of discretionary nature.  Accordingly, when passed, the proposed amendment would not immediately apply to the service providers that have already entered into contracts (e.g., terms and conditions, or terms of use) with users.  Nevertheless, the provisions in the proposed amendment may still be considered in the regulatory authorities’ review of standardized contracts or enforcement of laws and regulations and serve as the guiding principle/standard by the court or competent authorities when resolving disputes between service providers and users.  In its press release on the proposed amendment dated December 1, 2022, the MOJ also explained that the proposed amendment is intended to address the concerns that “the terms of use of service providers are too broad in scope or vary widely from one to another” and that “the terms and conditions primarily reflect the service providers’ position, and therefore insufficient to protect users.”

The MOJ will reportedly finalize the proposed amendment based on the public comments collected during the public comment period and submit it to the National Assembly in early 2023.  The public comment period for the proposed amendment ends on January 10, 2023.  We will need to continue monitoring the relevant developments. 

Key details of the proposed amendment are as follows.

1.   Establishing the Concept of “Contract for Provision of Digital Products” (newly inserted as Article 733-2)
 

In adding “digital product supply contract” as one of the contracts regulated under the Civil Act, the proposed amendment defines the term as “an agreement under which one party provides the other party with content (digital content) produced and supplied in digital form or services related to the production, processing, storage, distribution of, and access to, such content (digital services) (collectively, “digital products”), and the other party provides consideration in return for the use thereof.”

Although the scope of products and services subject to the proposed amendment is unclear, based on the above definition, it would be reasonable to interpret that the proposed amendment applies not only to the typical content such as video products, webtoons, e-books, games, music sources, and services related thereto, but also to app markets, cloud services, social media services, etc.  In addition, it could be viewed that because the proposed amendment uses the concept of “consideration” rather than “fee,” it may apply also to cases where personal information, rather than payment of money such as subscription fees, is provided in return for the use of digital products.  Moreover, as the proposed amendment does not limit users of digital products to individuals, it would also be prudent for B2B service providers to review the proposed amendment.
 

2.   Imposing Obligation to Provide Quality Digital Products and Maintain Quality (newly inserted as Article 733-3)
 

Providers of digital products (“providers”) are obligated to provide quality digital products and maintain the quality as follows.

Because the scope of “functions and quality that are reasonably expected” of digital products is open to different interpretations, the resulting ambiguity and uncertainty may cause difficulties in the provision of services in practice in line with the amendment.  The MOJ also expressed its position that “the level of functions and quality that are reasonably expected will be more clearly specified going forward based on court precedents, trade practices, etc.”  For reference, “gacha games, which provide false probability information and manipulate probability” are presented as an example of content with quality that falls short of such expectation in the MOJ’s information material dated December 16, 2022.

Furthermore, “substantial period” and “reasonable supplementary measures” in item (ii) above are also not clearly defined and thus open to different interpretations, which may increase the burden on the providers with respect to user complaints, disputes, investigations by the regulatory authorities, etc.  The same goes with the defect warranty liability provisions discussed in section three below.
 

3.   Establishing Separate Defect Warranty Liability Provisions for Digital Products (newly inserted as Article 733-4)
 

The proposed amendment recognizes users’ claims against providers regarding a defect in digital products.  In addition, the proposed amendment extends the defect warranty liability period, which is currently up to one year under the Civil Act, to two years.

Under the current law, providers are obligated to grant users the right to cancel their purchase under the Act on the Consumer Protection in Electronic Commerce and are recommended to take necessary measures in response to user complaints under the Consumer Dispute Resolution Guidelines of the Korea Fair Trade Commission.  We understand the proposed amendment as an attempt to prescribe providers’ legal liability that may be claimed based on digital products’ “function” and “quality,” which are rather abstract concepts.

Considering that the scope of the obligation to provide quality digital products and maintain the quality may be broadly interpreted and applied as explained in section two above, there is an increased likelihood of providers being held liable for defect warranty for failure to perform such obligation.  More importantly, as a defect warranty liability claim does not require the user to prove the provider’s willfulness or negligence, providers may have a greater difficulty in responding to disputes with users.

Many service providers already have provisions on liability exemption in their terms and conditions, but given the potential increased liability for defects, they may consider updating their terms and conditions to expand the scope of such exemption.  However, depending on the scope and degree of the exemption, such liability exemption provision may be judged to be invalid or subject to correction under the Standardized Contract Regulation Act (the “SCRA”).  Therefore, the existing liability exemption provisions, or any revisions thereof, may not be sufficient in terms of effectively mitigating the potential risks associated with liability for defects under the proposed amendment. 
 

4.   Regulating Legal Relation between Parties after Termination of Contract (newly inserted as Article 733-5)
 

The proposed amendment imposes the following restrictions on both users and providers after the termination of the contract.

We view that item (i) above would be particularly applicable for contracts for provision of video products, music sources, software services, etc. that are “non-exclusive, easily reproduced and used after the fact” as mentioned in the “Statement of Reason for Amendment by Each Provision,” rather than for services that restrict access upon cancellation of membership.  Meanwhile, item (ii) is expected to have more direct impact on services where User-Generated Content (“UGC”) is created rather than one-way digital content and services.
 

5.   Regulating Provider’s Right to Change Digital Product under Ongoing Provision Contract (newly inserted as Article 733-6)
 

Under the proposed amendment, a provider offering services based on an ongoing provision contract may exercise its right to change the digital product only if all of the following requirements are met.  However, even if all of the following requirements are met, a user can terminate the contract within a substantial period if his/her interest in using the digital product is infringed due to the change of the product.

The SCRA invalidates a “provision that grants a service provider the right to unilaterally determine or change the details of benefits without any substantial reason.”  Meanwhile, the proposed amendment sets itself apart from the SCRA in that it regulates the change of products itself and requires that there be reasonable grounds for such change, e.g., it becomes difficult to achieve the purpose or the interest of either party is unfairly infringed.

While there are various elements that constitute digital products (e.g., image quality, revenue structure, ancillary functions, scope of content sharing, and content library), the scope of “change of digital products” subject to the proposed amendment is unclear at this stage.  It also remains ambiguous what cases could constitute “infringement upon interest in using the digital product,” which is the condition for users to exercise their right to terminate the contract.  We view that such ambiguity may lead to increased termination claims by users and related disputes over whether the provider has duly changed its digital product.

[Korean Version]