[Exclusive] "It's an Idol Avatar, But Not Cute" Contract Termination... SM Subsidiary Engulfed in Lawsuit

To Develop 'MyHome' Service for Idol Avatars and Fan Interaction
Collaborated with a Startup, but Unilaterally Terminated the Contract
Court Rules in Power Abuse Dispute: "DearU Must Pay 284 Million Won in Damages"

It was belatedly revealed that DearU, a subsidiary of SM Entertainment, was ordered by a court to pay damages after unilaterally terminating a contract with a partner company without payment. DearU operates the application 'Bubble,' which allows direct communication between over 600 idols from 157 agencies and their fans, and has around 2 million paid subscribers worldwide. The company had commissioned the software developer SeeUsLab to create a new service called 'MyHome,' which features 3D avatars and personal spaces. However, after demanding contract termination on the grounds that the product was "not cute," DearU became involved in a legal dispute.

Demo screen of the 'MyHome' service jointly developed by DearU and SeeUsLab. DearU·Yuanta Securities Research Center

According to industry sources on June 13, the Civil Division 30 of the Seoul Central District Court (Presiding Judge Jung Chanwoo) ruled partially in favor of SeeUsLab this past February in a damages lawsuit filed against DearU. The court stated, "DearU is liable for damages because it notified contract termination without just cause. DearU must pay SeeUsLab 284.66 million won for development costs, including labor expenses." MyHome is a metaverse-based service where fans interact with avatars of their favorite stars. During its IPO at the end of 2021, DearU announced that MyHome would become a major source of revenue in the future.

The contract signed by both parties in early 2022 stipulated that DearU would plan all content for MyHome, while SeeUsLab would develop and deliver both paid and free services accordingly. At that time, it was agreed that sales revenue would be split 30% to DearU and 70% to SeeUsLab. An industry insider commented, "There was already controversy within DearU over the fact that the partner company would receive 70% of the revenue."

The collaboration between the two companies stopped in November of that year. Regarding the reason for the contract termination, a DearU representative said, "SeeUsLab failed to meet the agreed development schedule, and the final product was of such poor quality that it was not suitable for commercialization." However, the court found, "The delays were inevitable due to additional work requested by DearU," and regarding the quality, "DearU only presented subjective evaluations such as 'not cute' or 'does not meet user expectations.' It is difficult to conclude that the product was so substandard that the contract could not be continued."

The court also pointed out that DearU did not properly pay the development costs. Initially, SeeUsLab claimed 126 million won for additional work, but DearU objected, saying the amount was excessive. SeeUsLab then lowered the claim to 70 million won, but ultimately did not receive payment. The court stated, "DearU could have negotiated the development costs. Notifying contract termination in response to the cost estimate cannot be considered a legitimate exercise of the right to terminate."

A SeeUsLab representative said, "Seventy employees were fully dedicated for a year, resulting in significant losses," and added, "We have appealed the first trial verdict in order to claim the expected profits and license fees." The company is a startup that has participated in metaverse development projects for the Seoul Metropolitan Government and the Ministry of Science and ICT, and has supplied technology to Samsung and LG.