FSTA Amendment Increases Punitive Damages Liability for Technology Misappropriation

On February 1, 2024, the National Assembly’s plenary session passed an amendment to the Fair Subcontracting Transactions Act (“FSTA”) that increases the punitive damages liability of companies that misappropriate subcontractors’ technology.

The punitive damages system for technology misappropriation, established as part of an amendment to the FSTA in 2011, was the first punitive damages system to be introduced in Korea. Under the current FSTA, the punitive damages is capped at three times the amount of actual damages, meaning the level of actual compensation awarded for technology misappropriation in practice is around at most twice the actual damages. With this background, the recent amendment to the FSTA was proposed by the Korea Fair Trade Commission (“KFTC”) in an effort to more effectively deter companies from misappropriating subcontractors’ technology and increase the compensation for affected subcontractors. Key details of the recent amendment are as follows:

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

Under the amended FSTA, a contractor that misappropriates a subcontractor’s technology is required to pay the subcontractor up to five times the amount of actual damages as compensation. Previously, the punitive damages cap for technology misappropriation was three times the actual damages amount.

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

The amended FSTA introduces a set of standards for calculating the damages amount incurred by technology misappropriation, whereby the damages amount includes the amount that could have been reasonably earned by allowing other companies to use the misappropriated technical data, without limiting the scope of damages to the subcontractor’s own production capacity (i.e., the profit the subcontractor could have earned by using the misappropriated technical data to sell products made at its own production facilities). Further, in cases where the affected subcontractor files a claim for punitive damages, the amended FSTA allows the presumption of the potential profit earned by a third party that was given the subcontractor’s technical data by the contractor as a result of using such data, to be the subcontractor’s profit.

The amendment will be promulgated upon obtaining necessary approvals, including by the Cabinet, and will take effect six months from the date of promulgation. The new maximum punitive damages amount will apply to the first technology misappropriation case that occurs after the amendment takes effect, while the new standards for calculating the damages amount will apply to the first case where a subcontractor files a claim for damages incurred by technology misappropriation.

The KFTC has repeatedly expressed its determination to regulate technology misappropriation in its annual enforcement plans: elimination of technology misappropriation was listed as a key initiative for 2023, and the KFTC plans to introduce a system for providing additional remedies for companies affected by technology misappropriation in 2024. Accordingly, when the amendment takes effect, the KFTC is expected to take proactive measures to detect and regulate technology misappropriation (e.g., through investigations). Therefore, companies are advised at this time to conduct an internal inspection of their risks regarding technology misappropriation, and take appropriate measures to address those risks (e.g., by updating their work process).

[Korean Version]

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