Business circles: "Class action lawsuits are like laying the groundwork for professional litigators"

Concerns Raised Over Government's Expansion Across All Sectors
"Small Businesses Face Risk of Bankruptcy Due to Litigation Costs"

[Asia Economy Reporters Changhwan Lee and Dongwoo Lee] The government’s plan to expand the class action system to all sectors has raised significant concerns in the business community.

Companies are most worried that professional litigants will run rampant, leading to an excessive number of lawsuits that could severely impact corporate management activities. Small and medium-sized enterprises (SMEs) may face bankruptcy due to the surge in litigation costs and punitive damages.

According to the business community on the 24th, the biggest concern regarding the Ministry of Justice’s proposed Class Action Act and amendments to the Commercial Act, which will be announced for legislative notice on the 28th, is the clause that removes the representative party requirement in the class action system.

Under the existing class action system, anyone involved in three or more class actions over three years could not serve as a representative party or plaintiff’s litigation agent. This was a measure to prevent professional litigants. However, by removing this clause, it is said that the government has paved the way for litigants who abuse the system to harm corporate management activities.

Kyungsang Lee, Head of the Economic Research Department at the Korea Chamber of Commerce and Industry, pointed out, "Even applying the class action system only to the securities sector imposes a tremendous burden on companies, but by removing the representative party requirement, companies could face an unprecedented litigation crisis."

◆ Introduction of Discovery System Also a Concern for Companies: "Fear of Soaring Litigation Costs"

The introduction of the discovery system is another toxic clause cited by companies. The Ministry of Justice plans to introduce the discovery system, which is implemented in the United States, to enhance the effectiveness of the class action system. The discovery system allows parties in a lawsuit to request the opposing party to disclose various evidence related to the case before the formal trial proceeds.

This could significantly increase companies’ litigation costs. Additionally, failure to produce evidence could work against the company. The Ministry of Justice has named this the Korean-style discovery system.

Hwanik Yoo, Director of Corporate Policy at the Federation of Korean Industries, explained, "This class action system requires compensation regardless of whether the injured individual has joined the lawsuit or not," adding, "In a situation where the amount in controversy and the target parties are completely unknown, companies face increased uncertainty, including expanded litigation costs."

Alongside this, the punitive damages system included in the Commercial Act amendments is also a concern. The punitive damages system requires companies to compensate victims beyond the actual damages if they engage in antisocial illegal acts during business operations.

The government has announced that it will hold companies liable for up to five times the damages. Analysts predict that many SMEs will go bankrupt due to unaffordable litigation costs and damages.

Concerns have also been raised in academia. Youngsoo Jang, Professor at Korea University Law School, said, "From the companies’ perspective, compensating for damages even in parts not involved in the class action will be a practical burden," adding, "The core issue is expanding punitive damages to require compensation several times greater than the confirmed damages."

Professor Jang argued, "From the contract parties’ standpoint, the profit gained from damages could exceed the profit from properly fulfilling the contract," and warned, "There is a serious concern about moral hazard, such as intentionally creating difficult contracts to push for damages claims."