“Class action system could threaten survival of venture firms and startups” ... Startup sector concerned over class action bill

[Financial News] As discussions in the National Assembly on introducing a class action system gather pace, voices of concern are emerging from the venture and startup sector over a slowdown in investment and increased litigation burdens. While they support the goal of actively providing redress for consumer harm, critics warn that even a single class action could place a significant burden on the operations of early-stage companies that lack capital and legal staff.
 These views were expressed at a discussion forum held on the 7th by the Korea Startup Forum (Kospo) in Seminar Room 3 of the National Assembly Members’ Office Building, under the theme “The Survival Crisis Facing Ventures and Startups Due to the Introduction of a Class Action Law.” The forum was hosted by National Assembly member Cho Jung-hun of the People Power Party and co-organized by Kospo, the Korea Venture Business Association (KOVA), and Startup Alliance. 
 Of the 14 class action-related bills currently pending before the National Assembly’s Legislation and Judiciary Committee, 11 adopt the U.S.-style “opt-out” approach. Under this system, a ruling also applies to victims who have not stated that they wish to be excluded from the lawsuit.
 In particular, nine bills would allow retroactive application to cases predating the law’s implementation. Provisions are also being pursued to expand class actions, currently limited to securities cases, to all claims for damages. 
 The venture and startup sector is concerned that if the law is enacted along these lines, the burden of damages could become excessive relative to a company’s size. While supporting the legislative aim of providing redress to victims, they argue that the right to defend themselves and the capacity to respond of early-stage companies with limited capital and legal staff must also be taken into account. 
 Koo Tae-eon, an attorney at Lin Law Firm who delivered the main presentation, said, “We are not opposed to introducing a class action system in itself.” He argued that “combining an opt-out approach, application across all sectors, and retroactive application with no time limit in a single bill undermines the assumptions on which venture investment is based.”
 Koo said that venture firms have average total assets of around 8.5 billion won, and projected that if compensation per person were multiplied by the number of users of a popular service, potential damages could run into the trillions of won.
 Han Seok-hoon, an adjunct professor at Yonsei University Graduate School of Law, also explained that under an opt-out system, victims who did not participate in a lawsuit could still be bound by its ruling, potentially infringing individuals’ right of access to the courts. He added that substantial expansions in the size of the class, the amount claimed, and the scope of res judicata could increase companies’ legal burdens.
 The view is that an improved European- and Japanese-style collective action system, based on an opt-in model in which victims participate directly, the basis for liability is established first, and redress is then provided to actual victims, would be more appropriate in Korea. 
 Professor Han expressed concern, saying, “The U.S.-style class action system has the drawback of being used by law firms specializing in class actions to pursue their own interests rather than provide redress to victims, due to abusive litigation and a costly legal process. Germany, France, and Japan have not adopted it; instead, they have adopted an improved collective action system that incorporates procedures for providing redress to victims.” He added, “Ventures and startups competing through innovative technologies are easy targets for class actions, but their limited capital makes it difficult to build the capacity to respond, leaving them inevitably exposed to these harms without protection.” 
 Participants proposed defining the areas to which the system would apply, introducing it in stages, and revising the criteria for court approval. The aim, they said, is to uphold the purpose of protecting victims while enabling companies and investors to anticipate the litigation risks they may have to bear.
 Korea Startup Forum President Choi Ji-young said, “The startup sector, too, supports the legislative aim of providing redress to victims,” but stressed that “for startups that find it difficult to have even one dedicated lawyer, a single class action becomes a matter of survival.” She added, “I hope the National Assembly will work with us to consider how to design a system the innovation ecosystem can sustain.” 

[email protected] Lee Ju-mi Reporter