Liquidated (Penalty) Damages Necessary in Most Korean NDA and Non-Compete Agreements

For any company engaged in negotiations, agreements, pre-M & A due diligence, OEM outsourcing or other activities with a Korean business or individuals that may lead to you disclosing your companies intellectual property, know-how or other proprietary information, always include in your no-competition, non-use, non-circumvention and non-compete agreements a liquidated damages (Penalty Damages) clause. Without a Penalty Damages Clause – good luck in proving damages when a breach occurs.

If the other party refuses to sign the clause, this is good sign that the party will breach. The clause is of course, only triggered when a breach occurs. I, recently, had a client that was very worried about losing “goodwill.” Easy solution, blame the “lawyer.”

For companies that are not engaged in active, continuous and substantial business in Korea, the chance of finding evidence of damage, after a breach, is remote – best. The reason stems from proof of market potential in Korea, the fact that the counter-party is in control over the evidence and Korean litigation realities that make it difficult to obtain evidence to satisfy the judge that damages have occurred. Often, a breach will be established, but damages are not enough to even justify filing the case unless the plaintiff has a proven Korean track record and a rat from the defendant’s camp.
Don’t forget my other basic recommendations in the post entitled: Outsourcing: Legal Basics

1. Request and obtain the company’s business registration number and perform a credit check on the company. A basic credit check can be obtained through the Korean Investors Service (http://www.kisrating.com/).

2. Register all your intellectual property rights (copyright, patents, trademarks etc.) in Korea. Registration will help to prevent your competitor, a disgruntled distributor, or your manufacturer from counterfeiting your goods and exporting your product from Korea to your customers and potential customers. Registration in the United States and Europe does not guarantee that your intellectual property rights are protected in Korea. IP treaties only provide you a window of time to register in a member state.

3. Your Korean license, distribution, OEM agreements and other agreements used in other nations are not adequate for Korea. All “standard” distribution, license, OEM agreements and other agreements should only be used as guides in Korea. Korea has a unique legal system with unique business risks. If you are planning to deal only through a purchase order (PO), you are a goat waiting to be milked.
4. All agreements, to avoid any initial misunderstandings, should be drafted in English and Korean. A well drafted Korean OEM agreement is not complete until it is translated. Even the best English speaking Koreans, are ill prepared to understand agreements of this nature. Clear misunderstandings upfront and avoid legal fees down the road.
5. Know-how, trade secrets and the like should be protected through a written agreement. A standard non-disclosure agreement (NDA) is not enough. This agreement should be signed prior to any course of dealing and normally should include confidentiality, non-use, non-circumvention, non-competition clauses with Penalty Damages Clauses.
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