Hello, this is attorney Sang-yoon Eom of Cheongchul Law Firm.

Disputes in which a small or mid-sized manufacturer with accumulated technology and know-how supplies a buyer with drawings, prototypes, and technical data, after which the buyer uses those materials to manufacture the product itself or supply imitations through other channels, are a type we encounter quite often in subcontracting practice. Such disputes used to be handled along three lines: (i) trade secret infringement, (ii) breach of contract, and (iii) general tort. Since subparagraph (ka) (now subparagraph (pa)) was added in 2013 to Article 2(1) of the Unfair Competition Prevention and Trade Secret Protection Act (부정경쟁방지법 제2조 제1호 (카)목, 현행 (파)목), they can also be regulated as performance misappropriation, a form of unfair competition.

Even where performance misappropriation is established, however, the practical question of 'how to determine the protection period' can arise. Many lower courts have applied the trade secret protection period doctrine by analogy and limited the protection period for such performance uniformly to around 10 years, which often led to the conclusion that imitation deliveries made after 10 years could no longer be challenged as performance misappropriation. Recently, however, in Decision 2024Da226825 (on appeal from Daejeon High Court 2022Na13337), the Supreme Court declared that the protection period for such performance cannot be limited uniformly, and reversed and remanded the part of the lower court's judgment that had found the protection period to have expired. Below, we examine in turn the elements of performance misappropriation, the doctrine on determining the protection period at issue in this case, and the points to note in subcontracting practice.

Elements of Performance Misappropriation as Unfair Competition

Article 2(1)(ka) of the Unfair Competition Prevention Act, now subparagraph (pa) (부정경쟁방지법 제2조 제1호 (카)목, 현행 (파)목), was newly enacted by Act No. 11963 on July 30, 2013, and the Supreme Court has characterized it as 'a supplementary general provision designed to regulate unfair competition by reflecting changing commercial perceptions in a timely manner'. In other words, it is clearly a provision intended to comprehensively regulate new types of unfair competition not covered by the enumerated categories of the previous Act.

The elements of performance misappropriation are as follows (see Supreme Court Decision 2019Da282449, June 25, 2020, among others).

(i) Protected 'performance, etc.': This is determined by comprehensively considering the reputation or economic value the output has acquired, the customer appeal embodied in it, and its weight and competitiveness in the relevant business field.

(ii) Performance 'created through substantial investment or effort': The nature and degree of the right holder's investment or effort is assessed specifically and individually in light of the practices and realities of the industry to which the output belongs, and the infringed economic interest must be one that can be assessed as not belonging to the public domain.

(iii) 'Unauthorized use for one's own business in a manner contrary to fair commercial practice or competitive order': This is determined by comprehensively considering whether the right holder and the infringer are competitors or likely to become competitors in the near future, the fairness of commercial practices and competitive order in the industry, whether the performance could be replaced in the market by the infringer's goods or services, how widely the performance is known to consumers and traders, and the likelihood of confusion among them.

Performance misappropriation functions as a supplementary provision that fills the 'gaps' left by trade secrets and by intellectual property rights with clear registration requirements, such as patents, utility models, and designs. Accordingly, case law holds that in assessing whether it is established, courts must look closely at the nature of the output and industry practice, while rigorously examining whether the protected subject matter has passed into the public domain.

Facts of the Case: The Buyer's Imitation by ‘Converting the Drawings’

Korea Railroad Corporation (KORAIL) ordered the manufacture of distributed-power rolling stock from a rolling stock manufacturer (non-party Company 1), which in turn ordered transformers from the defendant (an intermediate buyer), and the defendant commissioned the plaintiff (a transformer manufacturer) to manufacture and supply those transformers.

On April 27, 2010, the plaintiff entered into a transformer manufacturing and supply contract with the defendant, supplied 16 EMU-180 transformers in early 2011, and supplied an additional 47 EMU-150 transformers from May 25, 2012. The drawings delivered to the defendant in this process were expressly marked 'contains confidential information', 'property of the plaintiff', and 'use without the plaintiff's approval prohibited'. The defendant, however, subsequently bypassed the plaintiff and took direct orders for EMU-150 transformers from (i) non-party Company 1, (ii) KORAIL, and (iii) non-party Company 2 (twice), and manufactured and delivered transformers that almost exactly copied the plaintiff's transformers and drawings (hereinafter the 'First through Fourth Deliveries').

The lower court held as follows.

(i) Because the First Delivery took place before subparagraph (ka) took effect, subparagraph (ka) cannot apply to it directly, but the defendant's gaining of unjust profit by using the plaintiff's performance without authorization constitutes a tort under the Civil Code.

(ii) The Second and Third Deliveries constitute unfair competition under subparagraph (ka).

(iii) The protection period for the transformer technology in this case should be 10 years from the plaintiff's first delivery (early 2011), so the Fourth Delivery, made under the contract the defendant concluded with non-party Company 2 on May 11, 2021, after the protection period had expired, can hardly be regarded as unfair competition.

In conclusion, the lower court recognized the defendant's obligations of injunction and destruction and liability for damages only for the First through Third Deliveries, and dismissed the claims regarding the Fourth Delivery on the ground that the protection period had expired.

Doctrine on Determining the Protection Period

Under case law, an injunction against trade secret infringement must be limited, within the time frame necessary to achieve its purpose and taking into account the rapid pace of technological development and the infringer's human and material resources as shown in the proceedings, to a period corresponding to the time the infringer or other fair competitors would need to acquire the trade secret by lawful means such as independent development or reverse engineering; a permanent injunction is impermissible because it would be punitive in nature and would conflict with the public interest in promoting free competition and allowing employees to use their knowledge and abilities (Supreme Court Decision 96Da16605, December 23, 1996, among others).

In this case, however, the Supreme Court held that the trade secret protection period doctrine cannot be mechanically applied by analogy when determining the protection period for performance, etc.

That is, the Supreme Court upheld the lower court's findings on the First, Second, and Third Deliveries (dismissing the defendant's appeal), while reversing and remanding only the finding on the protection period for the Fourth Delivery. In other words, the Supreme Court held that the protection period for 'performance, etc.' under subparagraph (ka) cannot be uniformly limited by mechanically applying the trade secret protection period doctrine by analogy.

The circumstances cited by the Supreme Court are as follows.

(i) The plaintiff manufactured custom transformers tailored to the contract requirements based on technology and know-how in rolling stock transformer manufacturing accumulated over a long period, and its technical capability is recognized in papers and surveys in the relevant field.

(ii) The defendant breached its contract with the plaintiff by using the transformer technical information without authorization beyond the purpose of the contract, and manufactured and delivered transformers that almost exactly copied the plaintiff's transformers.

(iii) The plaintiff and the defendant are competitors in manufacturing and supplying rolling stock transformers, and without the imitation, the defendant would have found it difficult to fully acquire EMU-150 transformer technology in a short time.

(iv) Even looking at the period around early 2021, which the lower court treated as the boundary of the protection period, the end dates of the Third and Fourth Deliveries were only about two months apart, the delivered products were identical, and there was no meaningful change in the technical features or in the defendant's technical capability. Therefore, no substantial difference in protective value can be found between the two deliveries.

(v) The transformers the defendant delivered through the Fourth Delivery up to August 31, 2023 still almost exactly copied the transformers first provided by the plaintiff in early 2011, and there is no evidence that they belong to the public domain, so there is a strong possibility that the transformers in this case constitute performance that remains competitive and worthy of protection well beyond 10 years.

Taking these grounds together, the Supreme Court reversed and remanded the primary claim regarding the Fourth Delivery on the ground that the lower court had misunderstood the legal doctrine on limiting the protection period for 'performance, etc.'

This decision is expected to serve as a useful precedent in 'technology theft by buyers' disputes arising in subcontracting practice. In it, the Supreme Court held that the protection period for performance must be determined comprehensively, considering (i) the degree of technology and know-how accumulated in the performance, (ii) whether the performance remains competitive in the industry, (iii) whether it has passed into the public domain, and (iv) whether the infringer's continued imitation is reproducing the same performance without technical change. Accordingly, an argument that the matter should simply be judged in the same way as a trade secret in the same case is unlikely to be accepted.

It is doubtful, however, whether the Supreme Court has, by this decision, rejected any limitation on the protection period for performance altogether. This too appears to be a matter that could be decided differently if, depending on the case, there is a reasonable need to limit the protection period.

Meanwhile, the pattern in which a buyer uses drawings, prototypes, or technical data received from a subcontractor to exclude the subcontractor and supply directly, or to supply imitations through other channels, may also constitute misuse of technical data under Article 12-3 of the Fair Transactions in Subcontracting Act (하도급법 제12조의3). Accordingly, subcontractors should examine multiple overlapping causes of action, namely (i) trade secret infringement, (ii) performance misappropriation as unfair competition, (iii) prohibition of technical data misuse (Subcontracting Act), and (iv) breach of contract, while buyers should bear in mind that confidentiality markings and use restriction clauses attached when drawings are delivered become key factors in the later assessment of the 'protective value of the performance'.

Since the performance misappropriation provision was designed as a supplementary general provision, both whether it applies and the protection period should be 'assessed case by case'. Now that this decision has held that the trade secret protection period doctrine is not to be mechanically applied by analogy to other areas, the performance misappropriation provision is likely to be used more actively as a remedy for subcontractors in subcontracting practice.