What Can You Do When a Client Uses Your Technology Without Permission? South Korea’s Win-Win Cooperation Act [Series 2]
Table of Contents
- 1. How Does South Korea’s Win-Win Cooperation Act Regulate Technology Data Misappropriation?
- 2. Why Does Technology Misappropriation Carry Quintuple Damages Under South Korean Law?
- 3. How Is the Amount of Damages Calculated?
- 4. What If the Principal Enterprise Simply Denies Using the Technology?
- 5. How Should a Subcontractor Secure Evidence in a Technology Dispute?
- 6. FAQ
A South Korean mid-sized manufacturer had spent three years jointly developing and supplying proprietary component technology to a large conglomerate affiliate. Then the subcontractor discovered that the client had begun producing an identical component through a competing manufacturer. A non-disclosure agreement had been signed when the technical drawings were handed over — but the principal enterprise insisted the design was entirely its own independent work. Could South Korea’s Win-Win Cooperation Act provide a remedy?
When the Evidence Is Locked Inside the Other Party’s Building
* The scenario above is hypothetical and presented for illustrative purposes only.
In cases like this, the central difficulty is not establishing that a violation occurred — it is proving it. The non-disclosure agreement is in place. The list of technical documents provided to the principal enterprise is documented. But whether the principal enterprise actually used those documents, or developed the competing design independently, is information that sits entirely within the principal enterprise’s own records: its R&D logs, engineering revision histories, and internal design files. South Korea’s Win-Win Cooperation Act directly addresses this structural asymmetry. It places an affirmative obligation on the principal enterprise to explain its own conduct — and if it cannot, the law allows the court to accept the subcontractor’s account as true.
1. How Does South Korea’s Win-Win Cooperation Act Regulate Technology Data Misappropriation?
Article 25(2) of the Win-Win Cooperation Act establishes a prohibition on technology data misappropriation that operates separately from the supply price provisions of Article 25(1). Understanding the structure of this provision is the starting point for any claim.
The Two Prohibited Forms of Misappropriation Under Article 25(2)
Article 25(2) provides: “A principal enterprise shall not engage in any of the following acts of misappropriation with respect to technology data obtained from a subcontractor — limited to technology data managed as confidential — in an unjustifiable manner.”
Source: Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises, Article 25(2)
| Subparagraph | Prohibited Conduct |
|---|---|
| Article 25(2)(i) | Using the technology data for the benefit of the principal enterprise itself or a third party |
| Article 25(2)(ii) | Providing the technology data to a third party |
Source: Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises, Article 25(2)(i) and (ii)
The Meaning of “Technology Data Managed as Confidential”
Article 25(2) does not protect all technology data that a principal enterprise obtains from a subcontractor — only data that is managed as confidential at the time of transfer. This concept is likely to be assessed in a manner analogous to the “confidentiality management” requirement under the Act on the Prevention of Unfair Competition and Protection of Trade Secrets. In practice, subcontractors strengthen their position by marking technical documents as confidential, restricting access to identified personnel, and executing non-disclosure agreements before transferring any proprietary data.
The Scope of “Technology Data”
Article 2(ix) of the Win-Win Cooperation Act defines technology data as methods of manufacturing or producing goods, and other data that is useful for business activities and has independent economic value, as further specified by Presidential Decree. Manufacturing drawings, process design documents, raw material composition ratios, quality control standards, and mold design data are among the categories that may qualify. Whether any specific material constitutes “technology data managed as confidential” is frequently the central contested issue in misappropriation disputes.
The Non-Disclosure Agreement Requirement and Document Retention
Article 21-2(1) of the Win-Win Cooperation Act requires a principal enterprise to execute a non-disclosure agreement when requesting technology data from a subcontractor. Under Article 11(1)(ii) of the Enforcement Rules, this agreement must be retained for seven years from the end of the transaction — more than twice the three-year retention period applicable to supply price documents. The extended retention period reflects the long time horizons over which technology disputes can arise. For subcontractors, the non-disclosure agreement is the single most important document in establishing that the transferred data was managed as confidential.
Source: Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises, Article 21-2(1); Enforcement Rules, Article 11(1)(ii) and (2)
2. Why Does Technology Misappropriation Carry Quintuple Damages Under South Korean Law?
Under the Win-Win Cooperation Act, the standard ceiling for punitive damages is three times the actual loss. Technology data misappropriation under Article 25(2) is one of two categories that attract a higher multiplier of five times the actual loss. This difference reflects a deliberate legislative judgment about the severity of this particular form of harm.
The Punitive Damages Framework: A Comparative Overview
| Violation | Statutory Basis | Maximum Damages |
|---|---|---|
| Unlawful price reduction, refusal to accept goods, order reduction, retaliation for non-technology complaints | Article 40-2(2)(i) | Up to 3x actual loss |
| Technology data misappropriation; retaliation for reporting technology misappropriation | Article 40-2(2)(ii) | Up to 5x actual loss |
Source: Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises, Article 40-2(2)
The rationale for the higher multiplier is the irreversibility of technology-related harm. A delayed supply payment can be recovered once it is eventually made. But once proprietary technology has been used or disclosed by a principal enterprise, the subcontractor’s core competitive advantage may be permanently compromised. The affected company cannot un-share its technology, cannot recapture the market position it has lost, and may find itself competing in its own market against a product built on its own innovations. The five-times ceiling is the legislature’s response to the structural severity of this harm.
Factors Courts Consider When Setting Punitive Damages
Article 40-2(3) requires courts to weigh the following factors when determining the punitive damages award: the degree of intent or awareness of the risk of harm; the scope of losses suffered by the subcontractor and others; the economic benefit gained by the principal enterprise through the violation; compliance with improvement orders, corrective recommendations, or corrective orders; any criminal sanctions imposed; the duration and frequency of the violation; the principal enterprise’s financial position; and the extent of its efforts to remedy the harm. Systematic or prolonged misappropriation — for example, where a principal enterprise built an entire product line on misappropriated technology — is likely to attract damages toward the upper end of the permitted range.
3. How Is the Amount of Damages Calculated?
Quantifying loss in a technology misappropriation case is structurally more difficult than in a payment dispute. The extent to which the technology was used, for how long, and across what volume of production are facts that reside almost entirely within the principal enterprise’s internal records. Article 40-3 of the Win-Win Cooperation Act addresses this by providing three distinct calculation methodologies.
The Three Calculation Methods Under Article 40-3
| Method | Calculation Basis | Applicable Circumstances |
|---|---|---|
| Article 40-3(1)(i)(a) | Units sold by the principal enterprise using the misappropriated technology × the subcontractor’s per-unit profit margin | Where the principal enterprise manufactured and sold products using the misappropriated technology |
| Article 40-3(1)(i)(b) | Reasonable royalty equivalent for units not covered by method (a) | Applied as a supplement where method (a) does not cover all infringing units |
| Article 40-3(1)(ii) | Reasonable royalty equivalent for use of the technology data | General method for cases not covered by (i) |
| Article 40-3(1)(iii) | Actual profit gained by the principal enterprise through the violation | Where the principal enterprise’s profit from the violation can be clearly established |
Source: Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises, Article 40-3(1)
Court-Determined Damages Where Precise Quantification Is Extremely Difficult
Article 40-3(2) of the Win-Win Cooperation Act provides that where the existence of harm is established but its precise quantification is extremely difficult given the nature of the facts involved, the court may determine a reasonable damages figure based on the overall record, including all evidence submitted and the course of the proceedings. This provision directly acknowledges the structural difficulty of quantifying technology-related losses and gives courts meaningful discretion to ensure that the practical impossibility of precise measurement does not defeat a valid claim.
Source: Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises, Article 40-3(2)
4. What If the Principal Enterprise Simply Denies Using the Technology?
The most common defense in technology misappropriation cases is a claim of independent development: the principal enterprise asserts that it designed or developed the competing product entirely on its own, without reference to the subcontractor’s technology data. South Korea’s Win-Win Cooperation Act establishes a framework that significantly limits the effectiveness of this defense.
The Principal Enterprise’s Obligation to Present Its Own Conduct (Article 40-4)
Article 40-4(1) of the Win-Win Cooperation Act provides that where a principal enterprise disputes a subcontractor’s allegations of technology data misappropriation in litigation, it must affirmatively present the specific content, method, and form of its own conduct, unless there is a substantial reason why it cannot do so.
Source: Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises, Article 40-4(1)
The practical significance of this provision is substantial. Under ordinary civil procedure, the burden of proving every element of a claim rests with the claimant — the subcontractor. Article 40-4 disrupts this allocation specifically in the context of technology misappropriation. A principal enterprise that wishes to deny misappropriation cannot simply assert that denial; it must explain, concretely and specifically, what its own independent development process actually consisted of. A general denial, without substantive detail, does not discharge this obligation.
The Consequence of Failing to Present Conduct: Deemed Admission
Article 40-4(5) of the Win-Win Cooperation Act provides that if a principal enterprise fails without legitimate justification to present the specific content, method, and form of its own conduct, the court may treat the subcontractor’s characterization of the misappropriation — including its specific content, method, and form — as true.
Source: Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises, Article 40-4(5)
This is a powerful mechanism. A principal enterprise that is unable or unwilling to demonstrate the details of its claimed independent development faces the prospect of having the subcontractor’s account accepted as factually established by the court.
The Court’s Document Production Order (Article 40-5)
Article 40-5(1) empowers a court, on application by a party, to order the opposing party to produce documents necessary to prove the existence of a violation or to calculate the amount of loss. In technology misappropriation cases, this may extend to the principal enterprise’s internal R&D records, engineering revision histories, design drawings, and production process documentation.
Critically, Article 40-5(3) provides that where documents are essential to proving the violation or calculating damages, the fact that the documents constitute trade secrets does not, by itself, constitute legitimate grounds for refusing production. In such cases, the court may specify the permitted scope of disclosure and limit the persons entitled to review the documents, balancing confidentiality protection against the need for effective adjudication.
Source: Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises, Articles 40-5(1) and (3)
If a principal enterprise refuses to comply with a production order without legitimate justification, the court may treat the subcontractor’s assertions regarding those documents as true (Article 40-5(4)).
5. How Should a Subcontractor Secure Evidence in a Technology Dispute?
Evidence management in technology misappropriation cases has two distinct phases: proactive measures taken before any dispute arises, and reactive steps taken once misappropriation is suspected. The pre-dispute phase is often more consequential.
Pre-Dispute Measures: Before Technology Data Is Transferred
- Document every item of technology data being provided and obtain a written acknowledgment of receipt from the principal enterprise
- Mark all technical documents clearly as confidential (“CONFIDENTIAL” or equivalent designation in both English and Korean)
- Execute a non-disclosure agreement identifying the specific data being protected, the obligations of the receiving party, and the consequences of breach — and retain this agreement for at least seven years (Enforcement Rules, Article 11(1)(ii))
- Restrict access to transferred technology data to named individuals at the principal enterprise and implement internal procedures governing external use and reproduction
- Document the purpose and scope of each technology transfer in writing, including the specific project or component for which the data is being provided
Post-Discovery Steps: When Misappropriation Is Suspected
- Gather publicly available materials showing that the principal enterprise or a third party is using similar or identical technology: product catalogs, patent applications, exhibition materials, and product photographs
- Preserve any communications in which employees of the principal enterprise reference the subcontractor’s technology data or describe their development process
- Secure the original files of all technology data provided, with creation date metadata intact
- Identify specific elements of the principal enterprise’s or third party’s products that correspond to features of the subcontractor’s proprietary technology data
- Obtain written statements from internal personnel who participated in the development and transfer of the technology
The Technology Data Escrow System
Article 25(1)(xiii) of the Win-Win Cooperation Act prohibits a principal enterprise from disadvantaging a subcontractor because the subcontractor has requested that technology data be held in escrow by a designated third-party custodian. Technology escrow provides an independent record of the content and timing of proprietary data — evidence that can be decisive in a dispute. Where misappropriation is a genuine risk, subcontractors should consider lodging key technical documents with an authorized escrow institution. A principal enterprise cannot lawfully retaliate against a subcontractor for making this request.
Source: Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises, Article 25(1)(xiii)
6. FAQ
Technology data misappropriation disputes in South Korea tend to be more complex and protracted than supply price disputes. The evidentiary framework established by Articles 40-3, 40-4, and 40-5 of the Win-Win Cooperation Act — covering damages calculation, the conduct presentation obligation, and document production orders — gives subcontractors meaningful tools that are not available in ordinary civil litigation. At the same time, the effectiveness of these tools depends heavily on how well the subcontractor has managed its technology data from the outset. The strength of the non-disclosure agreement, the quality of the documentation trail, and the precision with which the transferred data is identified will determine whether these statutory mechanisms can be deployed effectively.
The final installment in this series addresses the obligations and risks on the subcontractor’s side — the prohibited acts that Article 25(4) of the Win-Win Cooperation Act imposes on subcontractors themselves, and the compliance framework that subcontractors should maintain while asserting their own rights against principal enterprises.
* The legal information in this article is provided for general informational purposes only. All statutory references are to the Act on the Promotion of Mutually Beneficial Cooperation between Large Enterprises and Small-Medium Enterprises and its Enforcement Rules as currently in force. Legal outcomes depend on the specific facts of each case, and this article does not constitute legal advice. Parties involved in actual disputes should consult a qualified attorney.
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