On September 28, 2020, the Ministry of Justice announced new bills ① proposing the enactment of the Class Action Act that will expand the availability of South Korea’s existing class action suits to all industries concerning any area of law, and ② the amendment of the Commercial Code (“Amendment to the Commercial Code”), which will allow for awards of punitive damages for intentional or grossly negligent conduct in all commercial causes of action, regardless of industry. For companies in the business-to-consumer sector, thorough preparation will be necessary to adequately respond to the implications of the proposed changes.
Below is a summary of the key implications of the proposed Class Action Act, and the Amendment to the Commercial Code.
1. Expansion of class actions to all areas of law
Class action suits are brought on behalf of a group of individuals or business entities who have suffered common losses as a result of the defendants' conduct, with at least one individual or entity acting as a representative of the group.
The key implications of the proposed Class Action Act are as follows.
a) Expansion of scope of class action suits
Class action suits are currently only available for claimants filing suits to recover damages related to securities transactions under the Securities-Related Class Action Act, however, the Class Action Act will make class actions available to plaintiffs in any industry concerning any area of law. Under the new Class Action Act, the requirement that there be at least 50 class members to file a class action remains; however, the former requirement that to file a class action the “total number of securities held by the class members must be at least 1/10,000 of the total number of securities of the defendant company” has been struck.
b) Easing of requirements for class representatives
For class representatives, the “person with the greatest economic interest in the outcome” requirement has been pared down to a “person who can fairly and adequately represent the interests of all members.”
c) Requirement to appoint a legal representative
Currently, each of the plaintiff and the defendant must appoint a legal representative in securities-related class action suits, however, the proposed Class Action Act only requires the plaintiff to appoint a legal representative.
d) Expansion of jurisdiction
Under the current legislation, securities-related class action suits are exclusively heard by at a district court with jurisdiction over one of the defendants. However, under the new Class Action Act, in light of the purpose of class actions, which is to seek relief for large numbers of victims and a potential trial by jury, a class action suit can also be heard at a district court under a high court with jurisdiction over one of the defendants, and it is also possible for the case to be transferred at the request of the parties.
e) Restrictions on appealing the court’s approval of the class action
The Securities-Related Class Action Act allows immediate appeals against the court’s approval of a class action, and therefore, class action suits are generally carried out over the course of six trials. However, in order to expedite class action suits, the new Class Action Act removes the right to immediately appeal the court’s approval of a class action, and requires any objections to be contended at trial on the merits of the case.
f) Introduction of pre-litigation discovery
The Class Action Act proposes to introduce a pre-litigation discovery system to facilitate more efficient dispute resolution. To that end, the Class Action Act introduces an obligation to preserve and produce evidence if an applicant requests pre-litigation discovery, or alternatively, by court order.
g) Introduction of jury trials
The proposed Class Action Act will allow the class representative to request a trial by jury at the court of first instance, unless the court decides to exclude jury trials.
h) Retroactive effect
The proposed Class Action Act will apply retroactively, which means that claimants will be able to bring a class action suit against defendants for causes of action that occurred prior to the effective date of the new legislation, to the extent that the statute of limitations has not expired.
In addition, the Securities-Related Class Action Act will be repealed upon the enactment of the Class Action Act, however, the Securities-Related Class Action Act will continue to apply to securities-related class action cases that are then-pending in court.
Securities-related Class Action Act
Proposed new Class Action Act
Claims for damages arising from securities-related transactions
All claims for damages
Requirements for class action
1) 50 or more class members
2) Class members must collectively own at least 1/10000 of the defendant company’s total number of shares
50 or more class members
Those who can represent the interests of all class members fairly and appropriately such as the person with the greatest economic interest in the outcome
Those who can represent the interests of all members fairly and adequately
Exclusive jurisdiction of the district court with jurisdiction over one of the defendants
① Appropriate district court with jurisdiction over one of the defendants
② District court under a high court with jurisdiction over one of the defendants
Availability of immediate appeal against court’s approval of class action
Immediate appeal available
No immediate appeal
① Introduction of pre-litigation discovery
② Introduction of jury trials
2. General Introduction of Punitive Damages: Amendment to the Commercial Code
Punitive damages deter parties from repeatedly engaging in illegal activities by imposing liability for damages in excess of the amount of damages actually incurred by plaintiffs, provided that the defendant’s actions are intentional or grossly negligent. The current system for punitive damages is found scattered in various individual statutes such as the Product Liability Act and the Patent Act, and the punitive damage awards are generally limited to three times the damages sustained.
The proposed Amendment to the Commercial Code removes this distinction between individual statutes, and introduces a common punitive damages scheme over all commercial causes of action applicable to companies and business owners.
The Amendment to the Commercial Code will allow claimants to be awarded punitive damages of up to five times the damages sustained from the company’s or business owner’s intentional or grossly negligent conduct. The courts will consider the following six factors in determining the punitive damages to be awarded:
1. The degree of intentional or grossly negligent conduct;
2. The extent of damages incurred by the plaintiff(s);
3. The economic benefits obtained by the defendant;
4. The defendant’s assets;
5. Whether the defendant is subject to criminal or administrative punishment; and
6. The degree to which the defendant has made efforts to provide relief.
Punitive damages will not be awarded if the defendant proves that the damages incurred by the plaintiff(s) were not caused by the defendant’s commercial activity.
The Amendment to the Commercial Code stipulates that any prior agreements to exclude or limit punitive damage liability are null and void, however, will not apply retroactively to causes of action that occurred prior to the effective date of the Amendment to the Commercial Code.
3. Future prospects
The Ministry of Justice is within its 40 day public comment period as of September 28, 2020, and is gathering input from stakeholders and related organizations regarding the proposed bills. While there have been comments that the Class Action Act and the Amendment to the Commercial Code will promote corporate social responsibility and strengthen consumer rights protections, there are also growing concerns that such legislative changes will result in companies bearing an unnecessary increase in legal costs due to malintenioned consumers abusing these new legislations. There are also concerns that these legislative changes will harm business activity as it will be difficult to predict the amount of potential damages if companies are held accountable for punitive damages.
Yoon & Yang’s Corporate Litigation Group and Corporate Transactions Group offers a depth of experience with respect to class action suits and claims for punitive damages, and recently formed a task force team, which is focused on conducting in-depth research and developing solutions for corporate clients in response to these new bills. Our task force will continue to closely monitor the progress of these bills through the legislative process, and if the proposed bills are enacted, we will provide a deeper analysis of the key implications of such legislative changes.
If you have any questions or would like further clarification regarding any aspect of this article, please do not hesitate to contact us.