2002 Judgment: Korean Fair Trade Commission versus SM Entertainment

Background Info: Back in 2002, the Korea Fair Trade Commission called out SM Entertainment for the content of its exclusive contracts–notably, the Commission had issues with the excessive penalty for breach of contract and damage compensation in SM’s contracts–and ordered the management company to amend its contract to comply with national fair trade law and civil law relevant to contracts. (At this time, SM’s contracts weren’t 10-13 years long as they had become by the time TVXQ debuted, but in every other way it resembled JYJ’s contract.) SM not only refused to listen to the Fair Trade Commission’s orders, it brought the Fair Trade Commission to court in a lawsuit, claiming that its contracts, including the clauses on damage compensation to the company in cases where the company deems that the artist has breached the contract, were perfectly fair and reasonable. At the stage of the Seoul High Court, the Court ruled in favor of the Fair Trade Commission and admonished SM. This is the text of the judgment that was issued. Readers are to keep in mind that this is almost 10 years old, but the issues of the contract in contention are eerily similar to the current JYJ v. SM case, which begs the question, how does a company like SM get away with disobeying the law for almost 10 years without any consequences? Who and in which high places are shielding this company from the rule of law and the consequences of its disobedience?

[Seoul High Court, 2004.4.1, 2002누13613]

【Points under consideration】

[1] Whether or not the high risk and investment costs involved in nurturing and training news singers justifies music productions companies imposing on the singer the responsibility of repaying the investment costs once s/he achieves success or imposing a heavy penalty for breach of contract on the grounds that there is an increased risk of the singer neglecting his/her responsibilities under the contract and seek to abandon the business partnership once s/he attains success (minor point)

[2] Whether the Korea Fair Trade Commission overstepped its jurisdiction in invoking cartel regulations and fair trade laws [in issuing orders to SM] when this situation could have been resolved through cooperative dialogue (minor point)

[3] Whether the the penalty for breach of contract that music disk production companies regularly include in their singers’ contracts violates cartel regulations and fair trade law Article 23 Section 1 Sub-section4

【Summary/Main points of judgment】

[1] Even upon accepting that the nurturing and training of untested singers carry considerable investment risk, in general high-risk enterprises translate into high returns if successful, and thus it is by principle that any and all investment risk/responsibility be assumed by the investor so that it is not acceptable for a singer that has achieved fame and success to be obligated to make up for the losses of investing in a failed singer or for the record company to force [the successful singer] to do this by imposing on him an impossible fine that goes against all notion of equal bargaining in good faith or for the record company to justify this practice by claiming that the risk of flight from contract obligations by the successful singer increases with the success.

[2] A party in business who “deals with another party by using his position in the deal unjustly” is restricted by laws on antitrust and fair trade. This restriction is of different purpose and requirement than the articles and rules of civil law that regulates the dealings between civil persons. Therefore, even if a provision that provides for excessive damages may become invalidated or have its amount become reduced through Civil Code Article 103, Article 104, Article 398 Section 2 that regulates the content of the contract, to apply law on antitrust and fair trade in order to maintain societal order in dealings is not an improper application of law.

[3] However, when one considers the circumstances of the domestic music market which allow for record producing companies to impose such penalties on singers, the disparity in business know-how between the cited management company and the aspiring singer, the particularaties of an investment contract, the means/objectives/effect/influence of a clause on penalty for breach of contract, the the cited management company’s position and influence in the music records market relative to that of the aspiriting singer, which is such that the former can constrain the latter to conditions against his interests through the imposition of a penalty, it can be clearly established that the bargaining relationship between the two are neither fair nor equal, and, as constituting acts that cause consternation, it violates cartel and fair trade law Article 23 Section 1 sub-section 4.

【Legal references】

[1] Law on Cartel Regulation and Fair Trade Article 23 Section 1 Sub-section 4, Section 2; Law on Cartel Regulation and Fair Trade Article 36 Section 1
[Exhibit/Special mention 1] Sub-section 6 (라)목

[2] Civil Code Article 103, Article 104, Article 398 Section 2, Law on Cartel Regulation and Fair Trade Article 23 Section1 Sub-section 4

[3] Law on Cartel Regulation and Fair Trade Article 23 Section 1 Sub-section 4, Section 2; Law on Cartel Regulation and Fair Trade Article 36 Section 1
[Exhibit/Special mention 1] Section 5 (라)목


【Plaintiff】SM Entertainment Corp. (official legal representative for suit Attorney Hwang, Changseok and 2 others)

【Defendant】Korea Fair Trade Commission (official legal representative Attorney Jang, Kyeongchan)

1. Rejection of Plaintiff’s claims 2. Plaintiff shall bear the costs of the lawsuit.

1. If there is no contestation between the parties over the foundational facts and details in the handling of affairs, or the drafter of the contracts is willing to modify subclauses 1,2 of clause 1 as well as subclause 1 subsubclause 4 of clause 1 to be compatible with the original purpose of such contracts as stated by the defense, this can be accepted.

A. The Plaintiff, as an entity directly involved in the production of media products and music production and distribution, is an entrepreneur/business party as defined by Law on Cartel Regulation and Fair Trade (hereafter ‘Fair Trade Law’) Article 2 Section 1.

B. The Plaintiff was founded 1995.2.14 and in 2000.12.31 was registered on the Korean Stock Exchange (KOSDAQ); as of 2001.12.31 the Plaintiff currently has 72 staff employees, its current business management situation for the period 1999 to 2001 is as shown in <Table 1> [T/N: This version of the judgment has removed all graphs and tables in order to give priority to the text], and its stated mission as an enterprise is to discover promising rookies and train them into singers and manage them

ㆍAs a producer and marketer, it currently has, as of 2002. 5., under exclusive contract groups S.E.S, Shinhwa, solo singer BoA and some 20 other singers.

<Table 1> Plaintiff’s current business operation (unit: 1,000,000 Won)

C. Between 1996.3 to 1998. 11. 3 the Plaintiff signed former group H.O.T members Ahn Seungho [T/N: aka Tony An], Moon Heejun, group Blackbeat member Jang Jinyoung on to exclusive contracts with a clause ‘should the singer breach this contract s/he is obligated to pay a penalty for suffered damages, taking full responsibility for any damages that result from any conduct of the singer which interrupts scheduled entertainment activities; the singer is also obligated to pay the penalty for breach of contract if, as a result of the singer’s conduct, the Plaintiff judges that it would be difficult to continue scheduled entertainment activities and thus cancels activities (even if the penalty is payed the contract is not cancelled). Should the singer desire cancellation of the contract, s/he must pay the penalty even if there were prior negotiations with the Plaintiff.’ In this manner, this penalty for damages and breach of contract, which is laid out in <Table 2>, was incorporated into the body of the contract (Clause 1 subclause 1 subsubclause 4 of Article 9). <Table 2> on the amount of penalty included in the exclusive contract for breach of contract and damages (in ’98 currency value, unit: 100 million Won) demonstrates precisely that for which the Defendant confronted the Plaintiff—through the penalty for damages and breach of contract, the Plaintiff was abusing its superior bargaining position vis-à-vis that of the singer and in a way that made it difficult for either the singer or the singer’s parents to satisfy that clause as the amount can only be qualified as excessive, even if this amount had been decided on in a fair and equal way between two similar parties it would have been considered excessive, and that  as such the Defendant judged this act by the Plaintiff infringed upon Fair Trade Law Article 23 Section 1 Subsection 4, Subsection 2 and could only be defined as an anti-competition act based on Fair Trade Regulations Article 36 Section 1 [Exhibit 1] Section 6 (라)목 —and on 2002.7.31 imposed a mandatory decision on the Plaintiff (no. 2002-160), the content of which is more or less identical to that of this present judgment (hereafter the mandatory decision [of the Korea FTC] shall be referred to as ‘disposal of this case’)

2. While the Korea Fair Trade Commission asserts that its disposal of this case on the grounds elaborated above was done according to relevant law and is thus legitimate and fair, the Plaintiff contests that for the following reasons the disposal of this case was not legitimate:

A. On the accusation that the Plaintiff abused its bargaining position, (1) the Plaintiff operates by selecting from among a pool of aspiring singers those with bright prospects and admitting them under a provisional contract into a special training regimen operated by the Plaintiff, which is free of charge to the trainees, and selecting once again from this pool those exhibiting star qualities to place under exclusive contracts such as the one in contention here; the business model on which the 20-some management companies like the Plaintiff runs allows the aspiriting singer to relocate to another agency between the expiry of the provisional trainee contract and the activation of the exclusive contract, and thus the exclusive contract is justified in light of the Plaintiff’s particular business model and the investment spent on singers as well as the fact that these contracts are freely entered into and so cannot be said to infringe on the principle of fair bargaining.

(2) Not only is there considerable risk involved for music record production companies due to the unpredictable and shifting nature of popular consumer demand in this industry, which ultimately determines the success or failure of the training investment, but also because even the star singer can’t predict when or how quickly his fame will disappear, so that the investment made on the singer is even more at risk. Also, under this system, the discovery and nurture of a star-quality singer is fully attributable to the management company, and even if one can say that the talent and popularity of a singer is all his doing, on the other hand the capital and invesment undertaken by the management is not negligible, and so in order to respect the distribution of responsibility in the partnership and investment it is only fair that the successful singer help recover the costs invested in an unsuccessful singer in order to preserve the company both parties have a stake in. For these reasons, since it is imperative to keep the singer from abandoning the partnership before the stabilization of the company, the contracts include the obligation to pay a penalty in damages for breach of contract.

(3) In the case of the Plaintiff, the Plaintiff spends much more on average than other similar management companies in the training of its singers, which has resulted in its current dominant market position and the value of its reputation, the amount the singer receives as income under the exclusive contract is proportional to the investment that went into his training, excluding the training period the time under exclusive contract is on average 2-3 years, the clause on penalty for damages or breach of contract in the contract under contention in this case is not completely inflexible and can be adjusted depending on the terms in the rest of the contract or other factors and circumstances, and successful singers have their popularity managed for 5 years under exclusive contract and once the contract expires they are free to change to another management company as they wish, without having to pay the Plaintiff a transferal fee, where they can negotiate the terms of their next contract, including the clause on obligations and actions regarding breach of contract, as they see fit. For these reasons, it cannot be said that the penalty for damages and breach of contract included in the exclusive contract is excessive.

(4) It cannot be said, as the Defendant claims, that the 7 other management companies similar [to the Plaintiff] have reasonable or standard bargaining arrangements (damages amounting to no more than double the deposit) with their artists or extrapolate from the content of these 7 companies’ contracts that the 500 other national management companies have the same contractual arrangements, since the 7 companies cited above does not follow the business model of the Plaintiff whereby nameless singers are discovered and trained for several years but rather they seek out already famous singers to get a commission from their album sales as any simple music records producer, a fact which their contracts reflect, and do not provide for bearing invesment costs in training.

B. On the question of the Fair Trade Commission’s unlawful hindrance (1) the penalty for damages is set up in order for the Plaintiff to guarantee inasmuch as possible that the training and investment made in the nurturing of a star quality singer will bring some returns, but it also has the effect of constraining the singer without any provisions in his [the singer’s] favor should the training expenses already be paid and makes it impossible for him to move to another agency, which [the Plaintiff] will obviously say is to prevent free-riding, and so the hindrance on the part of the Defendant in order to prevent possible abuse is warranted.

(2) Should the content of the contract between the Plaintiff and its signed singers, in its division of right and duties, amount to a violation of social mores and civil security as defined by civil law, it can be rendered null and void on the basis of Civil Code Article 103 or Article 104, in the case of an exorbitant penalty for damages on the basis of Article 398 Section, and therefore in these instances it is not necessary to invoke the Fair Trade Law, interpret the Fair Trade Law to cover these instances or modify the application of that Law to fit better with the present set of circumstances.

3. While Article 23 of the Cartel Regulation and Fair Trade Law (interdiction of conduct detrimental to fair and free competition) to this case in the sense that the business party has committed and is committing acts defined under subsubclause 1 that give ground to concern that conduct detrimental to fair competition (hereafter “unfair conduct”), it cannot be made to apply to subsidiary companies or other business parties.

4. The standard and criteria of what constitutes abuse of one’s superior bargaining position is determined by Presidential decree. In the case of a violation of Article 24 (prompt corrective action) or Article 23 (interdiction of unfair conduct) Section 1, suspension of unfair acts against the suffering business party, annulment of contract terms, coercive legal measures for the correction of the circumstances can be ordered. Parties that fall under Article 67 (punishment) subsection 1 can be sentenced to 2 years in prison and up to 150,000,000 won in fines.  

5. The criteria for violations that fall under Article 5 (prompt corrective measures), Article 16 (prompt corrective measures) Section 1, Article 17 Section 2 (particularities attached to prompt corrective measures) subsection 1, Article 21 (prompt corrective measures), Article 24 (prompt corrective measures), Article 27 (prompt corrective measures) (prompt corrective measures), Article 30 (modification arrangements pertaining to prices of re-sold items), Article 31 (prompt corrective measures), Article 34 (prompt corrective measures) or any other rules under Cartel Regulation and Fair Trade Law that address prompt corrective measures or desist orders as defined under Article 31 (consequences for unfair conduct) and Article 23 (ban on unfair conduct) are as shown in [Exhibit 1].

[Exhibit 1] Standard and category of sentencing of unfair conduct (related to Article 36 Section 1)

 6. When it comes to the law related to use of negotiating powers, Article 23 (ban on unfair conduct) Section 1 subsection 4 classifies “abuse of one’s superior negotiating powers/position another party” as at least one of the following:

A. Use of undue aggression or force in order to get someone to purchase a good or service in which s/he shows no interest in purchasing,

B. Use of coercion or force against someone for profit; coercing someone to sell for the benefit of the coercer any goods, services, item, etc.,

C. Undue aggression or use of force in order to meet sales goals; when someone exerts undue aggression or force on another party in order to meet sales goals for his product or service.

D. Any act that seeks to create a situation of unfair exchange or damage for the other party through any combination of A through C or any act that in the process of creating such circumstances leads to unfair bargaining balances or disadvantage for the other party.


A. If among the following facts, there is no conflict between the parties or on the matter of contract clauses 1 and 2, 10 subclause 2, clause 1 subclause 1 subsubclause 4, 2 subclause 1 subsubclause 9, 3 and all its subclauses they are able to harmonise their positions with that of witness Park, Jaehoon, we will accept this.

(1) Within the country there are about 500 entertainment management companies, of which 260 belong to the Korean Entertainment Producers Association (hereafter “KEPA”), and at the moment the Plaintiff is not a member and, as can be seen from <graph 3> has the third largest market share at 6.36%.

<graph 3> displays the current situation in terms of market share of the music recordings market: compiled by YBM Seoul Research Institute of Korean Music Recordings from national sales rates.

(2) Management companies that oversee the process of discovering, training and producing the music of aspiring new singers for the purpose of launching them on the market take on no more than 10 [trainees] on a long-term basis (the Korean Enteratinment Association’s Department Committee on Singers has some 4000 registered singers), and the total cost of producing the first album in terms of producing costs, recording costs and promotional marketing costs amounts to 700,000,000 won [TN: approx. $700,000], the expected sales of the album is on average 100,000 units from which profits must be distributed, and the probability of a debuted singer succeeding on the market is barely 5%, and so those who utilise the services of management companies to reveal and distribute their individual music recordings receive a commission of 5% for the roughly 700 works released if they exceed 100,000 units in sales.

(3) In cases where the management company is a member of KEPA, it uses the standard contract prepared by KEPA as the model for its long-term exclusive contracts with its singers, but in the case of non-members like the Plaintiff, who is not a registered member, the entertainment company generally takes the basic structure of KEPA’s standard contract and adjusts it in other areas and circumstances; in general the content of these contracts consistes of an exlusive duration of 3-5 years, an album output requirement of 3-5 albums, an expected profit distribution under the terms of the exclusive contract ranging from some 100,000,000 won [TN: $100,000] (new singers) to some 1,000,000,000 won [TN: $1,000,000] (established star singers), a penalty for breach of contract or damages under terms summarized in <graph 4>, which shows that the standard for penalty and damages owed to the company is usually equal to 1-2 times the contracted profits for the artist, not exceeding twice the amount of the artists’ profits through various creative mechanisms, and the companies that appear under <graph 4> include DSP Entertainment (hereafter ‘DSP’) and Doremi Media (hereafter, ‘Doremi’), both of which operate by discovering, training, producing music recordings and managing the human resources of nameless aspiring singers, while companies Daeyoung A&B and Shinnara Music are music recordings management companies, but all use KEPA’s standard contract for drafting their exclusive contracts with established star singers.

(4) The Plaintiff justifies itself by saying that it was the first in the nation to depend entirely on building enterprises from the complete obscurity of its singers via large-scale upfront investment as its business model and after 2001 it was discovering 50-70 rookies and placing them under provisional training contracts, absorbing all the costs involved for 1-2 years, and promoting the candidates with star quality in 1-2 teams (from 2 to 10 members) before signing them on to exclusive contracts without deposits that includes provisions on the payment of penalties for breach of contract or any damages to the company for any damages incurred to the company in the following manner:

(A) During the 5 years of the exclusive contract duration, the Plaintiff agrees to spare no effort in the management of the conracted singer’s entertainment activities, public appearances, casting, any issues related to the law or anything requiring legal representation, as well as in managing the fame and image of the singer, and in return the singer agrees to not question the decisions and judgments of the Plaintiff but fulfill all obligations and decisions with due diligence.

(B) In the time while the contract is active, the intellectual property rights to all songs produced in albums belongs to the Plaintiff, and by merely signing the exclusive contract the singer gives up all claims to self-composed, produced or written songs as well as the copy, distribution, broadcast, publicizing or 2nd-hand utilization of said songs all to the Plaintiff.

(C) In the case where a given album sells over 100,000 units, the group is given 50,000,000 won [TN: approx. $50,000], when sales reach 1,000,000 units the group is given 100,000,000 won [TN: approx. $100,000], and in relation to all broadcast productions whether on public or cable stations, the Plaintiff takes all proceeds if they were produced by the Plaintiff and distributes 50% of the earnings to the artist in cases where they are not.

(5) Among the rookie singers that the Plaintiff has debuted after the training regimen are groups H.O.T., S.E.S, Shinhwa, Fly to the Sky, MILK, Blackbeat, Shinbi, IsakNJiyeon and solo artists BoA, Dana, adding up to 10 groups/artists (H.O.T, S.E.S, Shinhwa, Fly to the Sky, BoA have sold at least 100,000 albums).


(1) Regarding the claim of abuse of bargaining position

(A) The act of ‘using one’s superior bargaining position in a coercive or inappropriate way to gain an upper hand over another party’ is considered an unfair and anti-competitive act, and fair trade law forbids that in present businesss relations where the economic power balance between the parties is clearly uneven, but before reaching the conclusion that there was such an abuse of bargaining power as alleged, it is necessary first to determine if the abuse was deliberate or if the mere size and influence of the party at fault led to circumstances (connected to market share, the party’s overall business capacities, the particular qualities of the good or service in question, and the objective, effect, or influence behind the suffered unfair acts) that gave rise to the abuses banned under fair trade legislation and led to unlawful disadvantages that would be judged abnormal in order to make an appopriate judgment. (Refer to final ruling of the High Court issued 2002.9.27, dossier no. 20003801).

(B) According to the facts accepted thus far, aspiring singers enhance their skills to the maximum extent via a specialized training regimen, and they dream to launch albums from this groundwork and advance into the category of established star singer; Although [the Plaintiff] claims that the costs of managing, producing, paying for the songs and the recording, and for the promotional marketing comes to a total of approximately 700,000,000 won [TN: $700,000] and that the success rate of singers who release their first album is barely 5%, the Plaintiff commands 6.36% of the music recordings market and since 1999 has managed to amass a fortune of 12,500,000,000 won [TN: $12,500,000] just from sales and as a manager the Plaintiff boasts a 30% success rate for the singers that it manages under it specialized training system, thus making it difficult to justify, even given supposedly unfavourable circumstances faced by the Plaintiff, the inclusion of contractual conditions that clearly put the aspiring singer at a disadvantage in the context of negotiations between the Plaintiff and the aspiring singer, conditions that either make it difficult for the singer to freely enter into contract or change to another management company, and in the current business relationship the Plaintiff clearly has the upper hand in ‘negotiating power’, to the extent that it can determine completely the terms which aspiring singers will have no choice but to accept otherwise face annulment of any possibility of having the trainee contract evolve into something more desirable, and this would be true regardless of the aspiring singer’s awareness of the Plaintiff’s business model or investment system.

(C) Even if we concede that nurturing rookie singers incurs an extremely high investment risk, normally an enterprise with high risk will bring high returns if it is successful and so by principle it is only acceptable that the investor assumes all the investment risk himself (in the present case, the accepted facts have shown that in truth through investments in rookie singers the Plaintiff has seen a return of 3,000,000,000 won [TN: approx. $3,000,000] in 1999, a return of 1,200,000,000 won [TN: $1,200,000] in 2000, and a return of 2,100,000,000 won [TN: approx. $2,100,000] in 2001). We are therefore going to declare that to force successful singers absorb the investment costs and losses of failed singers by imposing on the successful singers a penalty for breach or termination of contract as well as additional charges for any and all damages toward the company in and of itself is an abuse of the Plaintiff’s unequal and superior position, and we declare to be without merit the argument of the Plaintiff that allowing the successful singer to touch the financial returns of his success will increase the danger of him terminating the exclusive contract with the Plaintiff before the full costs of investment in his training has been regained and thus the necessity of the excessive penalty for damages.

(D) According to the accepted facts, the Plaintiff has laid the terms of the exclusive contract so that in the case of a violation of contract or even in cases when the violation happens without incurring any real damage on the Plaintiff, the singer is required to pay in penalties the total cost of investment (contract deposit amount, album production costs, miscellaneous costs and fees) multiplied 3-5 times, projected earnings for the remainder of the duration of the contract multiplied by 3, and an additional amount of 50,000,000 won [TN: approx. $50,000] to 100,000,000 won [TN: approx. $100,000]; in addition, this above amount in penalties is activated not only if the singer moves to another management company but for whatever other reason through which the contract is jedged to have been violated, even in cases where after the release of the debut album the singer has not been able to secure the desired fame and in dissatisfaction with the level and quality of the Plaintiff’s management wishes to either quit being a singer or move to another management company the singer is still obligated to pay the standard music recording costs of 700,000,000 won [TN: approx. $700,000] multiplied by 3-5 times (roughly 2,100,000,000-3,500,000,000 won [TN: approx. $2,100,000-3,500,000]) in addition to another 50,000,000-100,000,000 won [TN: approx. $50,000-100,000] as damages (since the Plaintiff claims that there are undisclosed yearly costs in the training amounting to around 12,000,000 won [TN: $12,000], the additional costs calculated into the penalty for damages can amount to as high as 360,000,000 won [TN: $360,000]), and in the case of star-level singers the above calculation of the penalty for damages in fact makes it impossible for them to change management companies during the duration of their exclusive contracts due to the excessive total of the projected earnings for the remainder of the contract that is multiplied by 3, and so we find to be without merit the argument that all these disadvantageous calculations are offset by the fact that the Plaintiff does not demand a transfer fee from the star singer should he wish to change agencies.

(E) According to the accepted facts above, it is the star singer who is at the greatest disadvantage vis-à-vis his management company and the management company does indeed hold an unfair position in relation to the entry into the exclusive contract and to the penalty for breach of contract or damages compensation, which for the star singer is 1-2 times higher for the compensation of damages and 2 times the contract value, especially when considering that even other management companies comparable to the Plaintiff in business model or strategy (DSP Entertainment, Doremi Media, KEPA with their standard contract) do not resort to such measures and only burden their singers with reasonable payment not exceeding the actual damage; in fact, we are not able to find another management company that burdens their singers to the extent of the Plaintiff and thus rule that the Plaintiff’s contractual arrangements regarding penalties for breach of contract or damage to the company are abnormal and represent unfair business relations.

(2) Regarding the Fair Trade Commission’s unlawful hindrance

(A) On the question of whether the Fair Trade Commission overstepped its mandate and authority by ordering the Plaintiff to desist in its practices, whether the Fair Trade Commission, in attempting to stop what it perceived to be unfair business practices detrimental to free and fair market competition, did not in fact itself contribute to the distorsion of the market by excessively pressuring and obstructing the Plaintiff, we are going to say that it is the job of the Fair Trade Commission to monitor the balance of power in the free market and intervene where it judges there has been an abuse of power in business relationships that threaten to distort the market, and given the contract terms and exorbitant penalties for damages involved in this case, which truly do represent an unfair use of superior bargaining power, we declare that the Fair Trade Commission’s actions do not represent unfair pressure or a breach of its authority, even if the clauses in the Plaintiff’s exclusive contract with its rookie singers regarding penalty for damages or breach of contract were inserted to prevent free-riding and loss of training investments.

(B) While the Unfair Business Conduct Act of fair trade law forbids a business party from “abusing his bargaining power or position in order to coerce a favourable deal from another party” and utilizes different standards and requirements from those of civil law, this does not automatically exclude the jurisdiction of civil law, in particular those that address the misuse of damages compensation clauses in contracts—Civil Code Article 103, Article 104, Article 398 Section 2—which would render the contract null and void, and so there is no need or intention in this case to bend the rules of fair trade law as the Plaintiff claims, and so this argument is also clearly without merit.

(3) Therefore, in light of all the above facts and circumstances that speak to the Plaintiff’s requirements for damage compensation, the situation of the music recordings market, the asymmetric business knowledge and know-how that exists between the Plaintiff and the aspiring singer, the particularities of the investment arrangements, and the objective, effect and influence of the clauses on damage compensation, the Plaintiff is clearly in a superior position in the music recordings market that allows it to impose disadvantageous conditions on aspiring singers and, as such, has abnormal business relations to the extent that it endangers fair market trade and endangers Fair Trade Act Article 23 Section 1 Subsection 4, under which such behaviour would be defined as unfair business conduct. In this, we find in favor of the Defendant.

5. In final, we rule that there is no reason to find in favor of the Plaintiff by lifting the charges brought against it and that the Plaintiff shall bear the financial burden of lawsuit costs of this proceeding.

Judge Oh, SeBin (Presiding Judge), Judge Kim, SoYoung, Judge Kim, JaeHo

Download the original judgment in Korean HERE

For French translation, please visit HERE (courtesy of translator @JaeLenaa)

Source: Archives of the Seoul High Court
Translation by: leperenands
Shared by: TheJYJFiles

22 thoughts on “2002 Judgment: Korean Fair Trade Commission versus SM Entertainment

  1. ” this is almost 10 years old, but the issues of the contract in contention are eerily similar to the current JYJ v. SM case, which begs the question, how does a company like SM get away with disobeying the law for almost 10 years without any consequences? Who and in which high places are shielding this company from the rule of law and the consequences of its disobedience? ”

    That does seem to be the question, all right–it’s certainly the question I’ve been asking for months. At least part of the answer must be, “Some person or persons VERY high up in the govt./justice bureaucracy of Korea.” But who, exactly? Wouldn’t this have to be considered a scandal of rather MAJOR proportions in SK after SM’s 10 years of flouting the law with impunity?

    We hear regularly on the JYJ3 list of the various scandals that erupt when a pop star is found to be dating, or to have a girlfriend stashed away somewhere. Why isn’t THIS situation considered a “scandal” of such major proportions that everything stops until the facts are revealed and justice is done!? Where are the SK public’s priorities??

    • 1st -Thanks JYJFiles for providing yet ANOTHER profoundly solid legal document on court judgements against SM’s business dealings. The work that goes into doing this must be exhaustive and I THANK everyone involved in this endeavor. ❤

      Then….lilibaiyu – I know right?! It makes every major news source if an idol ‘breaks wind’…but MAJOR court judgements are invisible ~ poof~ There are definitely DIRTY HANDS (cronies?) at work here. It would be nice if the Koreans themselves would smoke these rodents out…but I have to constantly remind myself that this is a very small, intimate country. Those in power seek/threaten to ruin not only a single person’s career, but entire families…and sadly, in such a closed environment that threat can have very real consquences.

      • @sally_b
        “but I have to constantly remind myself that this is a very small, intimate country. Those in power seek/threaten to ruin not only a single person’s career, but entire families…and sadly, in such a closed environment that threat can have very real consquences.”

        Damn, you’re so right. It is DIFFERENT than here, we can never stop reminding ourselves of that, it seems. I confess I have never before been so fascinated, so taken up by such an exotic locale, so different in so many ways from my own homeland. Don’t really know what that’s about but it’s true. Do you like other Korean pop music or just JYJ?

      • In addition, I think the fact the press is not as free as they should be and also (correct me if I am wrong) from what I’ve gathered is that idols aren’t well respected, they’re seen as manufactured goods hence the general public doesn’t care about them to demand a change in the industry to protect the rights of idols.

        I think a major difference is how the rights of individuals is strongly protected by the legislature and judiciary. South Korea and many nations in the world are young nations compared to America and Western Europeans countries which are centuries old. It took America years to get where rights of individuals are strongly protected ( not always), where the press is free etc. So it going to take South Korea and plenty of nations worldwide years to get to a point where citizens know what their right is as protected by the constitution.

        As the world gets more globalised and access to information becomes easier things would change for the better not only in South Korea but many nations that suffer from the problems that’s rampant everywhere.

  2. Another judgment for the SME stans and defenders to ignore.
    Time and time again SME’s mo is further revealed and verified. Same pieces for the same puzzle. They don’t have reasonable arguments to defend those contracts.
    That SME still kept those unfair clauses (specially those penalty clauses) even after this judgement from the Korean High Court, is proof enough they are banking on their artists never to sue them. They’re so sure that their artists are so scare of them that they’ll accept anything and never do anything against the company.

    Thanks jyjfiles for the posts

    • Love your username. How come everyone is more creative than I am? I just use MIA2 because my name is Mia but since one of the admins already has that name I use the number 2 to distinguish myself…*sigh* alas, I will come up with a new name and you guys will love it!!!!

      • @Mia2
        “Love your username. How come everyone is more creative than I am?”

        I’m pretty sure “ILUVJaeJoonG5o0,000,007” is still available…

  3. Anyways…onto the good stuff.

    Well I’m sure you guys remember the article we read about Lee Soo Man’s little trip away from Korea when the Interpol was looking for him. One of the reasons for the PO’s case against him was because of reported sexual bribes by using idols-particularly female idols. It is very possible that SM has dirt as well as friends in high places. Photos, videos, recordings, witnesses etc. of any high officials who have used these idols as glorified prostitutes certainly don’t want the public to find out.

    Really, there are far more lucrative Korean companies the government can leech out of in exchange for turning a blind eye.
    SM Ent. is definitely not one of them but then again other industries in Korea have democratized and expanded outside of the country while the entertainment industry is still in the dark ages.

    “but I have to constantly remind myself that this is a very small, intimate country. Those in power seek/threaten to ruin not only a single person’s career, but entire families…and sadly, in such a closed environment that threat can have very real consequences.” This is the power SM has over many in the entertainment world, yes, but it doesn’t explain any of their connections with the government.

    It would make sense if SME were such a behemoth of a company but they aren’t. For high officials to risk being seen as corrupt especially to foreigners like us they would have to be hiding something major. Money just doesn’t cut it out for me. They make the whole song and dance about respecting idol’s rights and they pass out their little verdicts but what changes have any of us seen? Nothing. Believe me SME’s hold extends far from mere “friends in high places.” Just wish I could know what it is.

    Think we can have the New York Times explore this one for us? LOL!

    • ‘Believe me SME’s hold extends far from mere “friends in high places.”’

      Most likely the individuals have investments in SM or SM provides funding for their political campaigns. There might be the fear if LSM or SM were to go down many people will go down with them. SM might know the dirty laundry of powerful individuals in the country who would do anything to protect themselves and their interests.

      • @oo

        Yes, the ‘female idol as party-favors for big-wigs’ scenario did give me pause. This alone would almost guarantee that any and all highly placed officials caught in his sleazy little web would do ANYTHING that reptile LSM asked of them, from then on to avoid the risk of exposure and ruin. We were talking about “career suicide” over the weekend. Now ~that~ would be career suicide for any public figure.

    • This whole thing reminds me of the new drama “City Hunter” ‘s plot/story. People in power did something despicable and could end their precious careers. They’re covering their tracks and protecting their flabby behinds by using any means available. SME may or may not have been part of whatever they did or may be providing that means…I don’t really care. What’s clear is that they’re part of it.

      What’s frustrating is that the courts and the Fair Trade Commission can’t do anything. It’s ridiculous. Oh to have a real, live City Hunter exposing them. Wouldn’t that be something. ^^

      Sorry, I can’t provide a more intelligent comment. Just random musings for now. Stayed up late to keep up with the guys’ Japan Charity Concert updates. 🙂

      • @Bluefyre
        “What’s frustrating is that the courts and the Fair Trade Commission can’t do anything. It’s ridiculous. Oh to have a real, live City Hunter exposing them. Wouldn’t that be something. ^^”

        I hear you–I feel the same way. I just can’t seem to finally accept that this is just the way it’s going to be in SK as regards SM’s massive and continuing illegal wrongdoing. It’s just so hard to believe that this company is an untouchable criminal empire, and yet all evidence (of the last 10 years!) points to the fact that it is.

  4. hahaha!!! reply again? no new? tsk tsk tsk, you better shut this blog down, you’re just making yourselves funnier each time. fewer and fewer people believe each time you post. i think it would be interesting if for once you talk about ths 6.25 meeting, hahaha! how junsu’s father, yoochun’s mother and jaejoong’s sister manipulated everything to make Changmin and Yunho the bad guy.tsk tsk tsk!

    • Stupid,

      I have one sentence for you, since your comment and username reeks of your need for it:

      Go back to school.

    • Again with the freaking meeting? There is a post about it on this site. Go read it and reply to anyone you diasgree with or better yet if this is such a “ridiculous” site you can start your own. You can dissect that meeting all you want.

      I sincerely doubt that either JYJ or Homin give a damn about this. They have moved on with their careers. Why can’t you move on with your life? This post isn’t about Homin or any of the SM idols, it is about SM THE COMPANY.


    • Guys, just ignore her. It’s the same person trolling using different but similar emails like gomez___@yahoo and all with IP addresses in the Hong Kong region. The last 10 trollish comments were all from her ^^;;

      @stupid: since so few people care for what we post, why do you care? You seem a tad bit obsessed, just saying =))))

    • “an educated person is one who talks about facts and data”

      got it babe?? It seems like ur brain is nothing to fill
      try harder babe~ try harder than before ..

  5. @stupidjyjfiles

    hahahahahahahahahahahahahahahaha!!! Yes! Ladies and Gentlemen, let’s hear it for that golden oldie, that blast from the past, that never to be forgotten gem of modern incriminating evidence, the 6-25 meeting!! The meeting that wouldn’t go away!

    OMG, you are priceless! I just wrote your exact list of ‘The Old and The Useless’, so beyond belief that you show up here still nattering on about stuff NOBODY here cares about anymore simply because there’s NOTHING more we need to say about any of it.

    Get some new material, dude.

    • @stupid…hahahaha you are so stupid…really stupid as still holding on to an old and staled issue as a subject of your debate…and really really stupid because you don’t realized that it’s already a CLOSED CASE!!!..and Changmin & Yunho fathers failed in their fight to blamed it to Junsu, Yoochun and Jaejoong!!…hahaha so stupid you, stupid…tsk.tsk.tsk…

      Gosh, you really are one stupidhominbias, stupid!!

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