Locked between crotchety superpowers, and with an unstable neighbour to the north, South Korea must balance diplomacy with development, and its legal sector is no different, writes John Church
While media news reports are hopeful, a string of analysts are quick to warn against any change bar an opportunity for Kim to elevate his self-importance, bargaining as he is with an operational nuclear arsenal he claims is capable of reaching the US.
Pusan National University political science professor Robert Kelly and others have described the summit as an unnecessary risk that would “probably be a bust”.
“The ideological and strategic divisions between the two sides are so wide that it’s almost impossible to bridge them [before the meeting],” said Kelly. “It’s just not doable.”
Lee Wan-keun, president of the Korea Inhouse Counsel Association (KICA), says outsiders looking in must understand that the environment surrounding the Korean peninsula has been dynamic and volatile for decades. “The scope of uncertainty is not specific to certain areas, rather it is universal,” he says. “So, in-house counsel in South Korea are very familiar with coping with political and economic uncertainties. If you see the very recent rapid political changes in this region, it is no exaggeration that in-house counsel in [South] Korea should always be prepared for any drastic change coming into their own industry.”
Accordingly, and in line with continuing uncertainty (regardless of apparent moves towards peace on the peninsular), all business conducted in South Korea has a political postscript. Developments in commercial law must consider the bigger picture. International and domestic contracts are signed and sealed with the firm knowledge that there are two or three large elephants in the room scrutinizing the pen strokes.
First and foremost is North Korea, nuclear-capable, in recent weeks passive, but always unpredictable. It is matched by a US led by a man many associate with brashness and egotism, not unlike the North Korean leader. And with China lies an ally to Pyongyang with an uncertain amount of influence and its own aggressive regional agenda.
Political instability, even due to positive events or influences, is instability nonetheless, and has repercussions, not the least being for the South Korean legal sector. And of course, recent moves give many reason to be optimistic. “Although I have talked about staying calm during the most tense periods, we are currently seeing renewed interest in the analysis of the local and global economic impacts of the North Korea situation and future opportunities for investment under a new era of peace and economic stability in the region,” says John Kim, a partner at Lee & Ko.
But on the other hand, he reasons, “the political uncertainties and proposed tariffs have created opportunities for lawyers specializing in international trade and WTO counselling. While all the interested parties on the ground are closely watching the KORUS FTA [United States-Korea Free Trade Agreement] renegotiations, the current priorities have centred around managing local legal risk on behalf of critical local industries such s steel, automotive, shipbuilding, consumer electronics, and the agricultural sector.”
Steven Li, foreign counsel with Orne Haneul Attorneys at Law, believes that politics and economy are inseparable from each other, and economic foundation is indispensable to the prosperity of legal business. “So long as it is politically uncertain among countries, economic activities, including investment and trade, will not be as active as usual, which will eventually cause the legal business, especially the cross-border part, to shrink,” he says.
“It seems that the trade war between [China and the US] has started, subject to further negotiation. The US and China together account for almost 40% of the GWP [gross world product], thus the trade war between them should not be simply regarded as a regional economic conflict between two countries. It is actually a global issue that affects almost all the countries taking part in the process of globalization, and will destroy sound economic relationships among countries, which in turn will also eventually bring about damage to the legal business.”
But as South Korea’s relatively young democracy develops, there are other challenges closer to home. “[South] Korean society normally has two extreme ends at the same time,” says Lee Wan-keun. “For example, while there is a very radical legislation toward transparency and compliance, there are still people who insist on conventional practice. Addressing these two extremes may be one of the toughest challenges that in-house counsel face.
“In the past, MNCs generally respected the importance of compliance more than local companies, but the difference is getting smaller and smaller. Strategic communication and alignment with various stakeholders may be a solution to overcome these challenges.”
Hwang Ju-myung, chairman of HMP Law, observes: “The main challenge is that that the legal profession is becoming weaker, while the governmental power of the prosecution and judiciary is getting stronger.”
Hwang’s words have particular clout given that he was, as far as he is aware, South Korea’s first in-house counsel, having worked in the position for Gulf Oil for a year in 1977 before moving to Daewoo in 1978. He was also formerly a judge and at 78 has a reputation of not being one to mince words on legal issues.
“In [South] Korea there are no longer instances of abuse by government officials, as happened in the past,” he says. “Civil rights are guaranteed. But the public prosecutor is strong enough to influence the business sector, so many businesspeople are afraid of government power. That will change somewhat, but the current administration is pushing everything [back towards] the old style by using news media and social networks to drive the government’s agenda.”
Hwang says another challenge, related to the first, is challenging government suppression through excessive regulation not warranted under the law. “Koreans have an unfortunate tendency to want to destroy anybody who has wealth, and regulations are part of that effort,” he says. “They also negatively affect foreign investment into Korea.
“Furthermore, the number of lawyers has increased exponentially, so the status of lawyers has fallen and weakened. Lawyers now have less power and earn less money than when there were fewer of them. Some young lawyers do not abide by the law, and they handle cases that they should not take on, just to make money.
“An in-house counsel is supposed to give legal advice based on law, but the wishes of the boss pushes an in-house counsel to try to get around the law. In-house counsel look to their bosses more than to the law. This can lead to firms getting into legal trouble. Compliance with the law will not be honoured.”
John Kim, from Lee & Ko, says the biggest challenge facing the Korean legal market is the sheer breadth and scope of accelerating risk management for local business operating on a global scale. “We work with in-house teams who are attempting to counsel their clients over the General Data Protection Regulation issues in Europe on Monday, and then attempting to manage bet-the-company litigation and licensing issues on Tuesday, followed by critical M&A counselling to grow the business on Wednesday, with compliance training and risk management responsibilities on Thursday, and internal corporate governance issues on Friday,” he says.
“While the largest Korean conglomerates can address these needs with experienced in-house and external legal teams, most Korean business entities must rely on a handful of trusted counsellors to address these dynamic and multi-disciplinary legal needs.”
Park Sung-won, a partner at Choi & Kim, sees compliance as an issue for law firms and in-house counsel. “We have seen a rising number of compliance-related issues and work because, since 2016, the government has tightened the regulations on bribery and accounting transparency,” says Park. “Many Korean companies reacted by implementing compliance strategies and establishing compliance divisions separate from their legal departments. “Along the same line, law firms have increased their coverage of compliance-related issues to provide advice on a broad spectrum of issues such as internal control, financial management systems, and codes of conduct.”
Lee Sung-bum, a partner at Yoon & Yang, says the rise in the number of in-house counsel, and their increasing importance within the legal market, are challenging factors for Korean law firms. “Yoon & Yang is trying to navigate these new challenges by focusing on the needs of its clients,” says Lee. “As a part of such efforts, we will continue to invest in niche practice areas such as international trade, Fintech, healthcare, TMT and energy.”
Lee Wan-keun says legal reforms on labour issues and government agencies’ more robust law enforcement since the beginning of President Moon Jae-in’s administration has added a lot of burden to almost every in-house counsel’s work. “Stricter requirements on transparency and anti-corruption also affected in-house counsels’ daily work greatly,” he says. “We expect that these trends will never be overturned.
In response, he says the KICA is allocating more resources to sub-committee activities and regional meetings, giving more tangible and concrete assistance to its members. “KICA plans to expand collaboration with various stakeholders such as legal societies, government agencies, law firms and academia to elevate its own capacity,” he says. “By doing this, KICA strives to contribute not only to the interest of its members, but also to the balanced development of the corporate environment in Korea.”
Crazy creep of cryptos
Without doubt a hot legal topic in South Korea is cryptocurrencies. “South Korea was and is one the hottest markets for cryptocurrencies, making it the third by transaction volume in the world,” says Steven Li. “It is not exaggerated at all to call the 2017 cryptocurrency market in South Korea ‘crazy’.
“Nowadays, cryptocurrency is concerned with millions of people in South Korea, and the group of these people is big enough to be regarded as ‘the public’. In my view, as far as something is related to the interests of the public, the government has the obligation to regulate it as soon as possible. Considering all the circumstances in South Korea, I expect relevant laws to be enacted in the third quarter of this year at the latest.”
Dongho Lee, managing partner, Korea, and foreign legal consultant for Herbert Smith Freehills in Seoul, says clients looking at cryptocurrency investment should be concerned with anti-money laundering regulations, know your customer requirements and cybersecurity issues, in addition to securities regulations and financial services regulatory regimes. “In addition to such regulatory issues, there are practical issues such as opening an operational bank account, i.e. a new cryptocurrency exchange will find it difficult to open a bank account in numerous jurisdictions even without specific laws with such effect,” he says.
Steven Li says that although some regulatory announcements have been made regarding cryptocurrencies, there are still many uncertainties. “From my point of view, investors need to be concerned with the following: (1) the protection of their lawful investments; (2) taxation regarding the profit out of investing in cryptocurrencies; and (3) certain rules or procedures for investment in the crypto market, just like investment in the stock market.”
Steve Ahn, a senior foreign attorney at SEUM Law, expects that during 2018 the country’s national assembly will pass a bill requiring cryptocurrency exchanges to comply with requirements similar to those imposed on financial institutions, such as a minimum capital requirements and a clean track record. “It is likely that the exchanges will have to register with the financial regulators, effectively implementing a licence-like scheme,” he says.
“We have seen a number of news articles referring to a government ban on the use of ‘anonymous bank accounts’ for cryptocurrency trading. The government did take some action with respect to bank accounts, but it was not a ban. At the time, the cryptocurrency exchanges were holding their users’ funds in bank accounts the exchanges opened under the name of the applicable exchange. The exchange then managed customers’ funds in what are called ‘virtual accounts’ by designating a virtual account to each customer (or user).
“Consequently, the banks did not know the users’ identities, since the exchanges managed funds in bank accounts opened in the name of the exchange. The regulators ordered the banks to cease permitting the exchanges to manage users’ funds in virtual accounts and required banks to verify the applicable user identity for each bank account. Many media reports were misleading in that they gave the impression that the banks and exchanges were allowing users to trade anonymously, which was not the case.”
Ahn says that under current tax laws, individuals are not subject to tax for gains received through the trading of cryptocurrencies. “However, the government’s latest announced position on this point expressed that it intends to amend the tax law to require individuals to pay capital gains tax on profits from crypto trading, and would not subject cryptocurrency transactions to a value-added tax,” he says.
“A number of headlines have reported that the Korean national tax service will impose heavy taxes on the cryptocurrency exchanges. This is not inaccurate in the sense that taxes will be levied, but it is misleading. The media reported that the cryptocurrency exchanges would be subject to corporate income tax.
“Since the exchanges are operated by corporate entities, they are subject to corporate income tax like all other corporate entities and businesses. This is not particularly newsworthy. It would, for example, be newsworthy to report if the cryptocurrency exchanges were exempt from corporate income tax. The headlines of these articles likely mislead the public into thinking that exchanges were not paying any tax, which was never the case.”
Although much of the recent attention on the ground in Seoul has focused on the renegotiation of the KORUS FTA, South Korea currently has 15 trade deals with 54 countries and regions, including the US, the EU and China, notes John Kim. “Most recently, despite the rising tide of protectionism leading to a growing Korean focus on the importance of India, Australia, and Vietnam in the Asian region, South Korea signed bilateral agreements with five Central American nations – Costa Rica, El Salvador, Honduras, Nicaragua and Panama.”
Lee Sung-bum says the main issue regarding international trade for South Koreans is the relationship between the US and China. “Unless a serious contingency such as war occurs in the future, the relationship with North Korea will not affect the trade relationships of South Korea substantially, because we hardly trade with North Korea,” he says. “Additionally, the North Korea risk has existed for a long time and thus has been internalized to a certain degree. Therefore, any risk is unlikely to have a significant short-term impact on South Korea’s international trade.”
On the other hand, he says the trade relationship between the US and China can have a serious impact on South Korea. “The US suspects that Chinese steel producers circumvent the US trade barrier by exporting to the US via South Korea,” he says. “The South Korean government has vehemently denied this allegation, but the US government … maintains suspicion against South Korea.
“South Korea recently had fruitful talks with the US Trade Representative on this issue, and successfully escaped from the 25% additional duty to be imposed on foreign steel imported into the US. Thus, Trump’s proposed tariffs will not negatively affect [South] Korea, but are expected to bring the opposite result by reducing the competition for Korean steel producers in the US, since Chinese imports will significantly decrease.”
However, the US has linked this exemption from additional duties to the ongoing free trade agreement (FTA) negotiations between South Korea and the US. “The Korean press have reported on concerns about the [South] Korean government accepting US demands to open up the doors of the [South] Korean automobile market wider for car manufacturers in the US,” says Lee Sung-bum. “Therefore, we will have to wait and see the directions of the FTA negotiations … to fully analyze the impact of developments regarding US duties on South Korean products.”
He says that a development in the past 12 months that has most affected the nation’s trade and investment prospects is “definitely the relationship with the US”.
“Korean hot-rolled and cold-rolled steel has been subjected to a high countervailing duty, and Korean corrosion-resistant steel was subject to a high anti-dumping duty,” he says. “These have definitely had a substantial effect on the Korean steel industry. Furthermore, Hyundai Motors and Kia Motors’ factories in the US have been having difficulties with issues in importing the raw material into the US, especially corrosion-resistant steel plates that are used in manufacturing automobiles. Thus, the high rate of duty on steel products affects not only the Korean steel industry, but also the Korean auto industry.”
A talking point in Seoul’s legal community, particularly with foreign lawyers and firms, is the Ministry of Justice’s (MoJ) failure to give foreign firms unfettered access to the domestic market as they were led to believe would happen under the Foreign Legal Consultant Act.
However when the MoJ implemented phase 3 of its liberalization process, under amendments to the act it stipulated that the long awaited joint venture arrangements would give foreign firms no more than 49% ownership. Further, the headquarters of the foreign JV partner would bear sole responsibility for the JV. And there must be more senior Korean lawyers than senior foreign legal consultants.
Daniel Lee says the Korean legal market was first opened on 1 July 2011 for EU law firms under the Korea-EU free trade agreement, and on 15 March 2012 for US law firms under the Korea-US FTA, respectively. According to these FTAs, he says, “no later than five years after the date of this agreement entering into force, [South] Korea shall allow US [or EU] law firms to establish, subject to certain requirements consistent with this agreement, joint venture firms with [South] Korean law firms”.
“It was generally understood that the market was supposed to open ‘fully’ in three phases over the period of five years,” he says. “However, in April of 2015, MoJ issued a press release saying that ‘the legal market opening defined by the FTA is the third phase opening, not the complete opening’. As this was contrary to what the foreign firms understood when they first opened their offices in Seoul, this created a lot of confusion.”
Daniel Lee says that, regarding the joint venture law firm (JVLF) with a local firm, so far no foreign firm has attempted to set one up because the restrictions are too onerous and commercially difficult to achieve.
“I am the founder of the Foreign Law Firm Association (FLA) in [South] Korea,” he says. I established the FLA in June, 2014, and at that time, I met with 17 managing partners of foreign law firms in Seoul individually, and explained the need to have ‘one voice’ and they all agreed with me and joined the FLA without any hesitation. I served as the president until December 2016 and am now an adviser.
“It is said that the MoJ wants to delay the full market opening as much as possible to protect the domestic legal market. If it is true, it is quite unfortunate that the MoJ does not see the bright side of full legal market opening. Foreign firms can offer many jobs to young Korean attorneys who are in need of more job opportunities in Korea. Also, it will enable Korean attorneys to seek a professional career path at international law firms in and out of Korea.
“Under the current law, the JVLF is possible only with a partner Korean firm that has been in operation for more than three years, with more than five lawyers who each have more than five years of experience. Also, three of them should be partners. As there are only handful of law firms in Korea which meet this criteria, in reality, this works as a barrier to set up a JVLF.
“In essence, this is geared to effectively prevent foreign law firms from setting up a JVLF with a qualified group of seasoned Korean lawyers who are currently working at Korean firms.”
Despite foreign lobbying, no regulatory changes are imminent. “Unfortunately, there seems to be no interest at all. Back in 2015, Amcham, the American Bar Association, the Law Society of England and Wales, and the Law Council of Australia all submitted respective comments on the revised Foreign Legal Consultant Act in writing to the MoJ, but the MoJ did not accommodate them. The US Embassy and other embassies in Seoul also have been continuously working on this issue, but no visible progress has been achieved.”
Meanwhile, the international law firms that have already entered the South Korean legal markets have more recently been trying to ramp up revenues generated in the market by hiring more foreign legal consultants (FLCs), says Park Sung-won. “To some, this move is seen as a natural response for those players who have been present in the Korean market for four to five years already, to growing client needs for outbound deals.
“To others, however, such move is seen as the groundwork for these global law firms to establish joint ventures with the local firms. The recent news regarding re-opening of the KORUS FTA talks is worth following in this regard.”
John Kim says that, with almost 30 new international law offices in Seoul, phase three was meant to foster relationships in the Korean legal market to allow joint ventures and the full practice of local law. “Although the process of a fully open legal market may be taking longer than originally anticipated, several of the new offices in Seoul have built meaningful relationships with Korean clients in a range of practice areas, including corporate and disputes work,” he says.
Steven Li says that with the liberalization of the legal market, competition with foreign firms is inevitable. “One of the major problems is that while several foreign firms have already successfully penetrated into the legal market in South Korea, none of the domestic firms are equipped for the competition against foreign firms in foreign countries,” he says. “Therefore, it is time for domestic firms, as well as in-house counsel, to enhance their competitiveness at an international level if they want to survive in this era of globalization.”
SMAA and arbitration
In the arbitration sector, Park Sung-won points to the establishment of the Seoul Maritime Arbitrators Association (SMAA) on 28 February 2018 as a recent positive for the country’s massive shipping industry. “Even though South Korea’s economy relies heavily on shipping, shipbuilding and trade sectors, disputes arising out of these sectors have been resolved mostly in foreign proceedings,” he says.
There have been efforts to establish local infrastructure so that local firms and companies would be able to domestically handle maritime claims and disputes, and the establishment of the SMAA could be regarded as a fruition of past efforts.
Says Park: “Compared to the Korean Commercial Arbitration Board (KCAB), which is an alternative arbitration institution, the SMAA, as a voluntary arbitration forum, is: (1) more cost-effective (i.e. the parties pay fees directly to the arbitrators, which saves them the administrative fees by bypassing the association); (2) more firsthand (the parties can directly appoint the arbitrators without any intervention from the association); and (3) more efficient (the parties and the arbitrators have more autonomy with respect to the proceedings).”
Park says the Korean Shipping Association plans to specify SMAA arbitration as the obligatory dispute resolution method in its insurance agreement, and other local players are expected to follow suit in this regard. “Ultimately, the SMAA arbitration is expected to boost the competitiveness of the Korean maritime industry overall,” he says.
“It is worth noting the rising number of international arbitration cases and intellectual property disputes during the past year. As Korean shipbuilding and shipping companies have struggled, we have seen more and more contract disputes involving Korean parties and foreign parties and, accordingly, a rising number of international arbitrations.
“In addition, the development of high-tech industry has led to more cross-border disputes related to intellectual property. In this regard, as the investor-state dispute settlement (ISDS) clause is one of the subject matters for the renegotiation of the KORUS FTA, we need to monitor how much impact that will have on the rising trend of international arbitration.”
The IP market
Kim Sung-wook, the senior patent attorney at Nam and Nam World Patent & Law Firm, says one of the main challenges in the IP sector in South Korea is ensuring the quality of patents so that they can be useful weapons, both in attack and in defence, for potential lawsuits with competitors.
“In the famous case of Samsung v Apple, 12 registered patents (from both sides) were used to prove the other party’s infringement of patent right, but eight of them were determined as invalid for lack of an inventive step, or even for any addition of new matter during prosecution,” he says. “Almost 70% of the registered rights [of the parties], for which they had invested significant resources to have the patents registered and to keep them registered for years, turned out to be void.
“So, the trend is to have strong, more robust patents, even if it means reducing the total number of patent filings. However, ‘quantity has a quality all its own’ is true for patents. So the challenge is how can we, with a limited budget for patents, produce strong patents while maintaining the number of patents being produced. We think that streamlining the prosecution process and saving costs during and after registration with long-term accumulated knowhow of local practice and utilization of cutting edge tools (both technological and legal) will be the solution for this challenge.”
Kim Sung-wook says South Korean courts have adopted compensatory damages as a legal principle to calculate damages, which has been often criticized for damages that are determined too small for right holders, as with the Samsung v Apple case. “In this regard, discussion on the introduction of punitive damages has been progressing steadily,” he notes.
“When punitive damages for infringement of patent and trade secrets, and technology extortion are successfully introduced in the Korean legal system, the rights of IP owners who obtained patents and trade secrets will be more strongly protected.”
Lee Eui-hoon, a partner and patent attorney at C&S Patent and Law Office, believes the IP market is changing and will continue to change in South Korea. “The large Korean companies reduce the number of patent applications each year, so the market is changing from patent prosecution to patent utilization, such as licensing and commercializing patents,” he says.
“In-house counsel and law firm attorneys should recognize this change and adjust themselves to the new environment. For example, they should pay attention to the value of patent applications when they prosecute patent applications. In other words, the patent applications should be prosecuted in terms of the licensing or commercialization value when the applications are issued to patents.”
Lee Eui-hoon says the Korea Intellectual Property Office (KIPO) has introduced new processes for filing patent applications. For example, foreign applicants can file the applications in a foreign language, such as English. Although the foreign applicants have to submit a Korean translation within a certain period of time, it is convenient for foreign applicants who first filed patent applications in foreign countries to file Korean patent applications claiming priority to the foreign applications.
He says South Korea is currently following closely a case in the US Supreme Court involving intellectual property rights (IPR) proceedings around the invalidity of patents with the US Patent and Trademark Office. South Korea has the Intellectual Property Trial and Appeal Board (IPTAB) in the KIPO, and one of the procedures before IPTAB is a procedure for invalidating IPR.
“It is similar to the IPR proceedings in the US except for some procedural differences,” he says. “The issue in the US Supreme Court is whether the administrative branch can deprive people of their property rights. If it is decided unconstitutional that a property right is invalidated by IPR, our concern is whether the same reasoning can apply to the Korean invalidation system.
“However, there are differences between the US constitution and the Korean constitution, and between the US and Korean legal systems. Therefore, although the IPR is decided unconstitutional in the US, it may be possible that the reasoning may not apply to the Korean invalidation system.”
C&S has a consultancy called CSIP to help foreign clients with Korean patents and vice-versa. “The primary practice area at C&S is filing and prosecuting patent applications,” he says. “C&S has established CSIP to try to expand the practice area to patent licensing and consultation. Therefore, C&S and CSIP can work together to help foreign clients procure and license/enforce their Korean patents. It is also beneficial to our domestic clients who manage a large patent portfolio by monetizing their patents or other IPR.”
The year ahead
Despite all the uncertainty, John Kim says: “While I have an obvious bias toward technology law, I believe that Korean legal practitioners in our IP, antitrust, tax, compliance, and investigations practice groups will remain particularly busy over the next year.”
Park Sung-won says an area that has been gaining attention lately in the legal industry is advising on startups. “As you know, startups are exposed to various legal risks from the early incubation stage, but many of them do not get to enjoy the benefit of receiving legal advice due to cost reasons,” he says. “Many law firms have responded by charging less to startups in exchange for acquiring stakes in the promising startups. From a long-term perspective, law firms are attracted to the area also because they can explore ways to streamline efficiency by joining forces with startups in this regard.”
Daniel Lee says a big challenge facing the legal community is how to accommodate 1,500 new lawyers each year. “Job opportunities for new Korean lawyers is a big issue,” he says. “Although it will not be a complete solution, foreign law firms, if allowed to hire Korean lawyers, may be able to contribute to a certain extent to ease the situation.
“As the domestic market is saturated, all chaebol groups are focusing on overseas markets. This inevitably entangles them with arbitration and litigation in foreign jurisdictions. International arbitration is definitely a go-forward legal practice area. Also, we will see more class action litigations in the US and Canada.”