In 2018, Korea amended its product liability law to allow among other things, punitive damages. These changes should be on the radar of every multinational manufacturer and supplier, selling or distributing products in Korea. A short summary of the changes is as follows:
1. Introduction of punitive damages
The current product liability law limits the claim for the damages to actual damages incurred and does not include punitive damages. The new amendment will provide for punitive damages (up to three times the actual damages or treble damages) if (i) the manufacturer knew about the defect of the product and failed to take necessary measures and (ii) the defect resulted in significant harm to a consumer’s life or body. The claimant has the burden of proving the fact that the manufacturer knew about the defect of the product and failed to take necessary measures.
2. Lessening of the claimant’s burden of proof
The amendment provides that if the claimant proves that (i) the claimant incurred damages while the product is used in the ordinary course of use, (ii) the damage was caused by a cause which is under de facto control of the manufacturer, and (iii) the damage does not customarily occur without the relevant defect of the product, it shall be presumed that the product was defective (existence of defect) and the damages are caused by the defect in the product (the causality between the defect and damages).
3. Shifting of the claimant’s burden of proof in case where the manufacturer is unknown
Under the current product liability law, in order for a claimant to seek compensation from the distributor in case where the manufacturer is unknown, the claimant had to prove that the distributor knew or could have known the manufacturer. Under the amended law, , if the manufacturer is unknown to the claimant, the claimant may seek compensation from the distributor regardless of whether the distributor knew or could have known the manufacturer.
Conclusion
With introduction of the punitive damages, manufacturers doing business in Korea should review their internal procedures regarding the handling of product defects. Distributors also should review processes on handling information on the manufacturers and distributors who supply the products. Companies are also advised to establish internal procedures for taking appropriate measures in case of consumer complaints in order to minimize product liability risks such as (i) immediate suspension of sales or recalls, or (ii) adding additional or appropriate warnings in the label for the product.
Law firms and other service oriented organizations are just beginning to realize that risk management concepts apply to them as well as manufacturing based organizations. Lately, consultants are advising law firms to implement project control methods, look at legal processes from a six sigma point of view and even apply the basics of marketing 101 or sales 101 to increase business from potential clients. As the legal industry continues to shift from the old “charge per hour” model, law firms are beginning to realize that not only do marketing concepts apply to the “business and management of law” but risk management concepts apply as well including loss control.
Risk management should be viewed as an essential part of everyday management, including legal management. Managing a company’s risks is not only important but vital. Until recently, lawyers have been trained to think reactively- i.e. to react to a threat or perceived legal risks. But given the recent changes in the global business environment, as well as changes in how law firms manage themselves, attorneys and support staff must now learn to proactively manage risks. Such proactive management encompasses a large area of not only pure legal risks but also business risks that could lead to legal threats and issues. In essence, lawyers must now learn to proactively manage risks by minimizing risk, mitigating risks, transferring risks and eliminating risks. All are in a sense a proactive response to a risk rather than a purely reactive response. This of course includes minimizing costs and using processes or tools to minimize costs and risk.
Loss control is a tool that a law firm or other service related organization can utilize or should use to minimize or reduce risk. If properly used, loss control can reduce losses and decrease exposure associated with such losses. Loss control can of course be simply defined as “efforts that reduce expected losses”. But of course it is more than that as it encompasses management of efforts that reduce expected losses – or in other words processes that can prevent, reduce, or mitigate losses. Loss control processes, in other words, if properly used, can mitigate and reduce risk. Normally, loss control processes can be very effective in reducing costs and expenses faced by any organization, especially a manufacturing company that manufactures products. But it can also be applied to service organizations such as law firms or accounting firms.
The traditional definition or concept of loss control relates to loss prevention or loss reduction that is associated with products or monies related or associated with products. Loss control processes are normally divided into two main categories—loss prevention and loss reduction and are defined as follows:
Loss prevention: activities that reduce expected losses of inventory or monies associated with inventory by proactively reducing the frequency of losses
Loss reduction: activities that reduce expected losses of inventory or monies associated with inventory by decreasing the size of the loss, which is a reactive and not a proactive process
Applying these concepts to a law firm or service related organization we can see how six sigma and other concepts such as project management can be utilized as a loss control process. After all the main goal of six sigma as well as and project management would be to improve efficiencies and minimize waste or the costs associated with waste. Law firms tend to over analyze and over process matters. How much cost can be saved if documents are no longer over processed or over analyzed? How much time can be saved for more productive matters? From a loss control standpoint, what processes can a law firm or law department implement that reduces cost and monies associated with cost? What efficiencies will be gained once project management processes are implemented?
Six Sigma and Loss Control
Six Sigma has been championed by companies such as GE, Motorola, Samsung, IBM and others. Originally promoted as a process to improve profitability it is really about reducing expenses, waste, and loss as well as adding value and efficiency. Consider using six sigma when reviewing processes that involve:
(i) Client expenses
(ii) Office expenses such as mail
(iii) Review of documents
(iv) Use of software
Project Management
Project management has become another Legal Risk Management tool or process that has become more popular amongst law firms lately. Firms are realizing that once they get away with the old “charge per hour” paradigm and start focusing on alternative fee arrangements there is really a need to manage the matter on a project by project basis to contain and reduce costs.
Parts of a Project Management Process
(i) Initiation of the matter- this includes the scope of the matter, the desires of the client and the goals of the client and law firm.
(ii) Planning of the project- just like an architect plans the design and building of a house or a building, the planning portion of legal project management covers the key decisions in achieving the desired outcome.
(iii) Implementation- this is when the firm of the staff conducts the work to implement the plan.
(iv) Monitoring of the project- is the budget being followed? Are the expenditures reasonable for the work being performed?
The concepts of loss control (and really risk management) can be applied to the legal industry as well as other service industries. Just because the original concepts were applied to the manufacturing industry doesn’t mean these concepts can’t be applied to service related organizations as well. Remember, for law firms it’s all about effectively and efficiently representing clients in a manner that not only achieves the goals and objectives of the client but does so at minimal cost and expenses. The more efficient a law firm becomes at handling matters at minimal cost, the more value the firm adds to the client’s business. The will usually equate to a higher client retention rate.
On November 19, 2019, the Korea Fair Trade Commission (the “KFTC”) announced it was creating a task force that would investigate unfair trade practices in the information, communication and technology industry- ie ICT Industry. . Although the KFTC had established a task force team for the ICT industry in 2016, the team had been inactive since the decision against Qualcomm. The establishment of the new team is believed to reflect the determination of the KFTC’s new head- Chairwoman Joh. Since her appointment in September of 2019, Joh has continuously expressed interest in creating a fair trade environment in ICT areas.
Led by the Secretary-General of the KFTC, Mr. Chae Kyu-ha, the 15-member task force will take charge of investigations involving unfair trade practices and abuse of dominance in the ICT areas. The Economic Analysis Division and the International Cooperation Division will also closely cooperate with the new task force to react to the rapidly changing competition environment of the ICT industry.
The KFTC is expected to continue its push against unfair trade practices and abuse of dominance in the ICT areas. The task force's investigations may lead to changes in the KFTC’s enforcement guidelines.
For more information, please contact Lee & Ko's Antitrust Practice Group.
The other day I had lunch with a friend who was lamenting the fact his company’s sales team continued to ink deals without any regard for risk. When he asked them why they continued to do so, the reply was “that’s the way we have always done things.” Unfortunately, many companies continue to plod along doing business without regards to risk. In fact, many companies fail to look at operational risk which can lead to disaster down the road. In order for a company to succeed it not only has to a sustainable business model but it has to constantly review its risk processes. After all, what happens when the current business model does not work anymore? What happens when the risks outweigh the benefits of continued standard corporate operations? Maybe it’s time to re-examine your risk management processes. Do they really work?
When talking to your staff or to other departments, how often have you heard the phrase “That the way we have always done things.” Just because corporate processes have been done one way doesn’t mean that the best way or even in todays’ fast changing world- the right way. Even after 2008 many companies continued to use the failed metrics that got them into trouble in the first place. Even the credit markets haven’t changed as much as you would think after 2008. Why?
I truly believe that once processes are created in a corporate or bureaucratic environment, it is as if the processes have been set in stone. They are very hard to change. Even if the world around the company has changed. It is human nature to accept what has been done in the past. Few people want to “rock the boat” even if the proverbial boat is actually sinking. Companies get into real trouble because of this. What happens if the company’s business model actually is out of date or its business plan is no longer viable? Just because it worked in the past doesn’t mean it will work in the future.
I therefore caution everyone not to blindly accept the current risk management processes in place. Risk managers as well as in house counsel and other managers should be challenging risk management metrics on a regular basis. Counsel should be auditing departments on a regular basis. Does that compliance program really work? Maybe it did 5 years ago. But what about today?
Remember, if local or national laws have changed maybe the current processes are out of date. If the products that your company manufactures or the services it provides have changed maybe the internal processes surrounding the review of those products and services are out of date. What about the current social environment? When reviewing your current product liability review processes have you factored in the new risks created by the Internet of all Things? These risks are real. Are you ready for them? Does your current business model still work or is it outdated? What about data privacy laws?
It is a fundamental truth that all things change. Of course, some things change faster than others. Regardless, don’t rely on your old or standard risk management processes to continue to provide the same level of comfort they did in the past. Continue to review and to modify them if necessary. And don’t think that just because “that's the way things are done” your company should continue to operate as usual.
Leniency programs have been used quite successfully around the world to battle cartels. The same holds true in Korea. Since its introduction in 1997, Korea’s leniency program has become the most important and effective means of cartel discovery. Korea’s leniency program was updated in 2005 which improved predictability and reliability.
From 2005 to 2018, Korea’s antitrust regulator – the KFTC- applied fines in 557 cartel cases. Among those cases, 335 cartels were discovered using its Leniency Program. Or in other words, over 60 % of the cartel cases from 2005-20018 that resulted in fines were discovered because of the leniency guidelines.
What is leniency? Basically, it’s a system of partial or total exoneration from penalties that would otherwise be applicable to a cartel member which reports its cartel membership to a competition or antitrust enforcement regulator. It has been used quite effectively in the US, EU and other jurisdictions. Some jurisdictions, such as the EU uses the leniency program to offer a reduction in fines up to 100%.
Korea’s leniency program, is similar to the US and EU. Of course unlike the EU, which only levies administrative fines in the case of a cartel, the KFTC may refer a cartel case to the Prosecutor’s Office for criminal prosecution, which makes a leniency deal to avoid prosecution quite tempting for many cartel members.
For more information on the Leniency Regime in Korea, please contact me or the antitrust practice group of Lee & Ko.
Today, many in house lawyers and managers still think of risk management as the department that manages insurance policies. Some may in fact think that risk management also encompasses handling bad publicity or maybe even covers a disaster recovery plan. Many in house lawyers, as well as some corporate managers don’t believe risk management is part of their job description. However, given the globalization of business, the increased volatility of today’s business climate and the changes in social media that has increased communication tenfold, risk management is now part of every manager’s job description, including the in house lawyer.
The main role of in-house counsel in corporations or legal entities is now, of course, to mitigate legal risk in connection with the sale of products or services provided by the company. In essence how the company protects its success will be based in part on its ability to manage, control, and minimize legal risk, especially in a litigious society such as the US marketplace. Legal counsel must take an active effort in developing strategies, systems, and processes that will minimize the legal risks faced by the company on a daily basis. The area of risk management for in house counsel has become so large it can now be labeled “Legal Risk Management” or LRM.
What is LRM? Legal risk is the probable occurrence of a future event or non-event that will have a negative impact on the company that could result in law suits, fines, investigations, crisis, reputational harm, financial harm and of course the destruction of the company’s brand or even the company. Legal risks and business risks intertwine to such an extent that business risk have legal impact. Therefore, in house counsel must become involved in the day to day management of business risk itself and think in terms of risk analysis. The lawyer must use tools to not only identify risk but provide a qualitative analysis a risk’s probability and its impact on the company’s objectives and bottom line. Various tools include risk map, use of processes such as interviews of key personnel, procedures involving review of industry guidelines, internal procedures, risk diagrams, etc. What risk analysis has been developed to gauge the safety controls in the manufacturing division’s product design protocols? How does the R&D division handle the potential risk of defective parts and materials?
It is time that in house counsel realize they are in fact legal risk managers. The law department of a corporation can serve it well by playing a substantial role in the corporate wide management of risk by proactively managing potential risk instead of just reacting to it. By working with cross corporate teams to manage risks through corporate governance, compliance, loss control, review of HR processes or product safety concerns besides just purely legal issues, a corporation’s law department increases its value to the company.
By controlling and managing legal risk, an organization is able to control its future. Without adequate LRM processes, a company is exposed to claims, lawsuits, fines, and investigations. Not a day goes by where some governmental investigation or lawsuit is not reported in the local newspaper. These days it is a common occurrence. Therefore, it is imperative that an organization and its in house legal team understand that by managing legal risk it can control its’ future. Therefore, it is imperative that an organization understands the role that LRM plays in an organization.
