The Ramifications Of Korea's New Distributor Law

December 16, 2016

Flag_of_South_Korea_(cropped)On December 23, 2016, the Fair Distributorship Transactions Act will take effect. The Fair Distributorship Transactions Act ( “FDTA”  or “Act”) is Korea’s new law governing unfair trade practices in distributorship transactions.The distributors  can be  retail outletsthat sell directly to the end consumers or the distributors  or middlemen that sell to retail outlets or stores.  The FDTA, upon review can be seen as very onerous law, especially when it is applied to suppliers.

Among the obligations of a supplier under the FDTA is that the supplier must prepare and retain written agreements which must include certain terms.  The terms include provisions covering the transaction type, products, delivery method, place and time of delivery, method of payment, and conditions for return of product as well as  causes for termination.   Failure to comply with the obligations can result in an administrative fine levied by the KFTC.  In the case of a failure to draft the agreement with the prescribed terms, the supplier many be fined  up to KRW 50 Million Won.

The FDTA contains  a number of  unfair trade practices types that suppliers must be aware of. and guard against.  Though some of the unfair trade practices set forth in the FDTA may be seen as overlapping with the types of abuses under the Monopoly Regulation and Fair Trade Act (“MRFTA”), the FDTA will pre-empt the MRFTA for any unfair trade practices arising from the supplier-distributorship transactions as of December 23, 2016.  The main unfair trade practices are as follows:

  1. Forced purchase- a practice whereby the distributor is forced to purchase a product against its will;
  2. Forced economic disadvantage- a practice whereby a distributor is forced against its will to pay the costs of promotional sales activities or cover the wages or other expenses for personnel employed and managed by the supplier;
  3. Forces sales targets- a practice whereby the supplier proposes sales targets for the distributor and decides, intends or does suspend or terminates the agreement  or suspends the supply of products if the distributor fails to meet the targets;
  4. Unreasonable terms- this is a catch all provision which prohibits the practice of imposing unreasonable contract terms and imposing unreasonable sanctions by the supplier in performance of contract or the imposition by the supplier of disadvantageous contract terms ;
  5. Interference with management activity- a practice of giving instructions to the distributor regarding the hiring, firing and work place or employment terms of the distributor’s employees;
  6. Specification of Order- refusal of supplier to provide specifics of the distributors’ order upon request of the distributor;
  7. Retaliation- retaliation of the supplier against the distributor for the distributor’s disclosure to the KFTC of supplier’s prohibited conduct under the Act.

Besides covering a broad number of unfair trade practices which can subject a supplier to fines and penalties, the Act  also subjects violators to damages, large administrative penalties and criminal sanctions.    The potential exposure to large fines and penalties are as follows:

  1. Damages- the FDTA provides that any person incurring loss or damage due to forced purchases or economic disadvantage may recover treble damages.  The damage exposure therefore is up to 3 times the amount of actual damages.
  2. Surcharge or Administrative Penalty- the FDTA provides that depending on the specific violation, administrative penalties up to the amount of 80 % of the transaction amount in question may be levied.  This is a very large amount, as even in the case of cartels under the MRFTA, the surcharge is up to 10% of the volume of commerce.
  3. Criminal sanctions- though the suppliers conduct may be ambiguous; the KFTC may still refer the matter to the prosecutors’ office.  Under the Act, individuals may receive criminal sanctions of up to 2 yrs. imprisonment and a fine of 150 million KRW. Companies are also subject to criminal penalties.

Considering the current environment surrounding the promulgation of the FDTA, it is expected the Act will be found constitutional if challenged at the Korean Constitutional Court. This added to the potentially large fines and criminal penalties as well as expected aggressive enforcement by the KFTC, necessitates suppliers  to fully comply with the Act and to seek legal counsel prior to entering into agreements with distributors.  For those companies wishing to set up distributors in Korea or those companies who already have distributors in Korea, I recommend a thorough analysis of the proposed distributorship agreement as well as the current distributor set up. It is not uncommon for a disgruntled distributor to look at all legal options when considering a claim against the supplier.

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