[Summary] SM v. Korean Fair Trade Commission
SM v. Korean Fair Trade Commission (Dossier 2002누13613), Seoul High Court Judgment issued 2004.4.1: Summary
In 2002, SM Entertainment— the Petitioner—was given orders by the Korea Fair Trade Commission—the Defendant—to modify the content of its exclusive contracts with its contracted entertainers, which the Commission deemed violated relevant national fair trade law with regards to unequal bargaining power as well as posed a threat to civil and social security as defined by Article 103 and 104 of the Korean Civil Code. SM Entertainment not only refused to comply with the Commission’s orders but filed suit against the Commission to have its orders overturned.
SM Entertainment argued: 1) Its business model relies on investing in untested young singers, and since such investment carries high investment risk of incurring loss, contractually burdening singers with extremely high penalties for breach of contract is justified in order to gain back the its investment costs and cover for failed investment losses; 2) The Commission has no jurisdiction in relation to private exclusive contracts negotiated between singers and their entertainment management companies; and 3) the exclusive contracts SM Entertainment uses do not violate laws on exclusive regulation or Fair Trade Law Article 23, Section 1, Sub-section 4 on unfair bargaining and unequal negotiations.
The Court rejected all of the above positions and ordered SM Entertainment to pay all attorneys fees, finding that: 1) Even accepting that investment in training and educating carries high investment risk, high-risk enterprises presume equally high returns upon success, and so it is only reasonable and principled that in such investment scenarios the investor to assumes responsibility. It is thus unjust to impose on successful star singers the burden of repaying the investment costs for other failed singers, or, for that reason, to constrain the successful singer contractually with an excessively high penalty for breach of contract. To do so is an abuse of the superior bargaining position of the Petitioner and exploitation of the powerlessness of its artists. Excessive damages also cannot be justified on claims that risk of a singer breaching the contract and leaving the management company becomes higher with success and stardom;
2) When a party utilises his superior bargaining position to extort unfair gains from the other party such as through excessive damages provisions, violates civil law—Civil Code Article 103, Article 104 and Article 398 Section 2—and, on this basis the contract may be declared null and void;
3) The domestic music market has a severe imbalance of power between the entertainment companies and its artist, with the entertainment companies having unquestionable dominance over the artist and thus controlling all aspect of the contract and business matters and as such being enabled to engage in practices such as standardizing an excessively high damages provision. As such, these contracts between the entertainment companies and the artists also infringe upon national laws on antitrust regulation and Fair Trade Law Article 23 Section 1 Sub-section 4;
4) It is the mandate of the Korea Fair Trade Commission to examine instances and reports of unfair conduct or conduct damaging to the functioning of fair and free market competition occurring in domestic markets and to issue recommendations, decisions or orders to the infringing parties to rectify their conduct in line with national laws on fair trade. Therefore the Commission did not step outside its jurisdiction in issuing an order to SM Entertainment to correct the content of its exclusive contracts.
Translation credit: leperenands
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