Hello. This is Attorney Lee Young-kyung of Law Firm Cheongchul.

In this column, we will examine the Subcontracting Act violations related to technical data by ADT Co., Ltd. (㈜에이디티) sanctioned by the Korea Fair Trade Commission (KFTC). This case clearly shows what problems arise when a prime contractor includes an unfair special contract clause that unilaterally takes the subcontractor’s technical data rights in the subcontracting process, fails to issue a written request for technical data, and does not execute a non-disclosure agreement. In particular, because protection of technical data is directly linked to the competitiveness of small and medium-sized subcontractors, this KFTC measure has important practical implications under the Subcontracting Act.

This column is based on the KFTC’s press release, and please note that the content of the final disposition may change depending on court judgments resulting from appeals by the parties.

[Question]

If a prime contractor inserts a clause in a subcontract that effectively vests the subcontractor’s technical data in itself, and while requesting technical data does not execute a separate written request or non-disclosure agreement, would that constitute a violation of the Subcontracting Act?

[Answer]

Yes. The KFTC determined that ADT Co., Ltd. set an unfair special contract clause that unilaterally restricted the subcontractor’s technical data rights, and while requesting 162 items of rotor assembly line mechanical and electrical drawings over a total of eight occasions, failed to issue a written request for technical data and failed to execute a non-disclosure agreement; each act was found to violate the Subcontracting Act, and the KFTC decided to impose corrective orders and an administrative fine of KRW 112 million.

1. Facts

According to the press release, ADT, a factory automation equipment manufacturer, outsourced the manufacture of a rotor assembly line to Subcontractor A on June 13, 2022, and included problematic clauses in the contract regarding technical data rights. The contract provided that all outputs and intellectual property created, produced, or acquired in the course of performing the contract would belong to the purchasing prime contractor, and also included a clause allowing the prime contractor, etc. to use free of charge and perpetually even the supplier subcontractor’s pre-existing technology. In addition, although technical data were mutually exchanged in the manufacturing outsourcing process, the confidentiality obligation was imposed only on the subcontractor.

It did not stop there. From July 25, 2022 to June 23, 2023, ADT requested from Subcontractor A 162 items of rotor assembly line mechanical and electrical drawings over a total of eight occasions, but did not issue a written request for technical data stating the purpose of the request, rights attribution relationship, compensation, and payment method. It also did not execute a non-disclosure agreement including matters such as the list of officers and employees who would receive and retain the technical data, confidentiality obligations, prohibition of use beyond the intended purpose, and compensation in case of violation. Page 4 of the press release includes actual images of mechanical and electrical drawings, showing that the data at issue were technical data at the level of specific design drawings.

2. Issues and Relevant Law

There are three key issues in this case. First, whether a contractual clause unilaterally attributing the subcontractor’s technical data rights to the prime contractor constitutes an unfair special contract clause; second, whether requesting technical data without first providing a written request containing legally required items is unlawful; and third, whether receiving technical data without executing a non-disclosure agreement is unlawful.

Article 3-4(1) of the Subcontracting Act provides that “a prime contractor shall not set contractual terms that unfairly infringe upon or restrict the interests of a subcontractor.” In addition, Article 12-3(2) of the Subcontracting Act requires that when a prime contractor requests technical data, the parties must pre-negotiate and determine the purpose of the request, rights attribution relationship, compensation, etc., and then provide a written document stating such details. Article 12-3(3) further requires that by the date the technical data are provided, the parties execute a non-disclosure agreement including the scope, list of officers and employees retaining the data, confidentiality obligations, prohibition of use beyond purpose, and compensation for violations. Along with these provisions, the press release explains that under the KFTC Notice on Unfair Special Contract Clauses, representative types of unfair clauses include “agreements attributing to the prime contractor ownership, use, or other rights to information, data, goods, etc. obtained by the subcontractor in preparing for or performing subcontract transactions” and “agreements imposing confidentiality obligations only on the subcontractor.”

3. KFTC’s Judgment and Implications

The KFTC divided ADT’s conduct into three categories and found all of them unlawful. First, it viewed as an unfair special contract clause the contractual terms that unilaterally attributed rights to technical data and outputs to the prime contractor without just compensation and imposed confidentiality obligations only on the subcontractor, thereby unfairly restricting the subcontractor’s rights. Furthermore, it found that repeatedly requesting technical data without providing a written request for technical data containing legally required items, and failing to execute a non-disclosure agreement, each constituted a violation of the Subcontracting Act. Accordingly, the KFTC decided to impose an administrative fine of KRW 112 million along with corrective orders.

The significance of this measure is clear. A prime contractor cannot freely control a subcontractor’s technical data merely because it inserted a broad rights-attribution clause in the contract. Also, in the process of receiving technical data, it must document why the data are needed, how rights are to be allocated, whether compensation is provided, who will retain the data, and how external leakage or use beyond purpose will be prevented. Ultimately, this case reaffirms that protection of technical data under the Subcontracting Act is both a matter of substantive rights and a matter of procedural compliance. Manufacturing and automation equipment industries dealing with technical data should review both contract wording and technical data request procedures.