Korean Fair Trade Commission and the Contract

By now, most fans already heard the news that SM voluntarily modified the contracts of its artists, and the Korean Fair Trade Commission (KFTC) approved those changes, ordered to adjust the contract length of the trainees from 10,13 years to 7 years, and issued a warning. This post is about the details of the modifications, FTC's role in all this, and I will discuss TVXQ's contract with relation to FTC guidelines.

Here's the link to the Official Press Kit from FTC website.
http://www.ftc.go.kr/news/ftc/reportView.jsp?report_data_no=4141

The above file is in HWP (Hangeul - Korean word processor) file format, so unless you have an HWP viewer, you won't be able to see it. There are free viewers available on line, so you can download the program to view the file.

Back to the program...

Because of that news, again, some fans bash SM for using such an "unfair/slave" contract, and they claim the fact FTC "ordered" SM to change the contract proves that the contract is a "slave" contract.

Also, many fansites use biased news articles to spread the news to make the fans believe that FTC forced SM.

Here's an example of such an article:
http://www.allkpop.com/2010/12/fair-trade-commission-forces-sm-entertainment-to-revise-unfair-contracts

Here's the title of that article:
"Fair Trade Commission forces SM Entertainment to revise unfair contracts"


If you read the title, you get the impression that the contract was unfair, and FTC forced all the revisions. Also, the article itself left out many crucial details about it, making SM look bad.

Let's look at the press release from the actual source (FTC).

공정거래위원회(위원장 정호열)는 (주)에스엠엔터테인먼트(이하 에스엠)가 연예인 및 연습생과 불공정한 전속계약을 체결한 행위에 대해서는 자진시정을 감안하여 경고조치하고, 자진 시정하면서 연습생과 일률적으로 3년 연장 계약한 행위에 대해서 시정명령을 의결하였음

It says, "Considering the fact that SM modified the contracts of their entertainers and trainees voluntarily, FTC decided to issue a warning on signing unfair contracts, and ordered SM to revise the 3 year extensions applied to all of its trainees."

Ok, it does say unfair contracts, but I'll get to that later.
So in summrary, the above FTC statement says SM voluntarily changed the contracts of its artists, and only the contract for the trainees are ordered to be changed by FTC.

If you read the article from AllKPop, you'd think all the changes made by SM were ordered by FTC, but that's clearly not the case. Everything was changed voluntarily, and only one was ordered to be changed, and that was changing 10-13 years term of the trainees to 7 years.

Here's the news article from a Korean portal site that basically reproduces the FTC's official press release unlike the AllKPop article.
http://media.daum.net/entertain/broadcast/view.html?cateid=1005&newsid=20101223131003884&fid=20101223131217527&lid=20101223131003884

The title of the above article translates to
"FTC recognizes SM's modifications to the exclusive contract"

Sounds quite different than the one from AllKPop, doesn't it? I don't think I've seen any translated articles with titles similar to the above. Most of the articles in English had titles like the one on AllKPop, criticizing SM. If you can read Korean, both types of articles are on the web, so fans can read both, or if you're inclined, you can directly go to the source like I did, but international fans do not have that luxury unless you search for the correct info on your own with google translator which we all know is difficult. Also, the biased articles use phrases like "forcing artists to sign on for a long period of time" to make it sound worse than it actually is even though those words are never used in the FTC press kit.

Now let's look at the details of the changes. What parts of the contract did FTC considered "unfair"?

 * The info in Korean is from the original press release downloaded from the FTC website.
   This proves my advanced skill of using ctrl-c, ctrl-v combination keys

① 장기의 전속계약기간 설정행위

자진시정 전(前)	에스엠은 소속 연예인 및 연습생(이하 “연예인 등”)과 전속계약기간을 “계약 체결일로부터 13년” 또는 “데뷔 일로부터 10년”이상으로 정함
자진시정 후(後)	에스엠은 전속계약기간을 “데뷔 일로부터 7년”으로 시정함

1. Lengthy exclusive contract term

Before voluntary change: 13 years after signing the contract or 7 years after debut

After voluntary change: 7 years after debut

② 과도한 위약금조항 설정행위 

 

자진시정 전(前)	에스엠은 소속 연예인 등과 전속계약을 체결하면서 “총투자액(홍보비 및 기타 어떤 형태로든 지급되거나 사용된 제반비용)의 3배, 잔여계약기간 동안의 일실이익의 2배를 배상해야”하는 등의 위약금조항을 설정함
자진시정 후(後)	에스엠은 “계약해지 당시를 기준으로 직전 2년간의 월 평균 매출액에 계약 잔여기간 개월 수를 곱한 금액(을의 연예활동 기간이 2년 미만인 경우 실제 매출이 발생한 기간의 월 평균 매출액에서 잔여기간 개월 수를 곱한 금액)을 지급”으로 시정함

2. Excessive Breach of Contract

Before voluntary change: 

Three times the invested amount, two times the potential profit for the remainder of the terms

*Blogger's note: The above is identical to TVXQ's contract, and I'll get to that also

After voluntary change: 

Calculated at the time of the termination of the contract, average monthly revenue of previous 2 years multiplied by the remaining number of months (if the Artist's contract period is less than 2 years, average monthly revenue during the period where actual revenue was generated multiplied by the remaining number of months)

③ 일방적인 스케줄조항 설정행위

자진시정 전(前)	에스엠은 소속 연예인 등과 전속계약을 체결하면서 “에스엠이 제작하는 인터넷방송에 에스엠의 요구가 있을 경우 언제든지 출연, 에스엠 방송 제작물에 최우선 출연”등의 조항을 설정함
자진시정 후(後)	에스엠은 위 조항을 모두 삭제하고, “연예인은 에스엠의 매니지먼트 활동에 대하여 언제든지 자신의 의견을 제시할 수 있고, 필요한 경우 연예활동과 관련된 자료나 서류 등을 열람 또는 복사해 줄 것을 에스엠에 요청할 수 있고, 에스엠이 부당한 요구를 하는 경우 거부할 수 있다”는 조항을 신설함

3. Unilateral Scheduling

Before voluntary change: 

The Artist always needs to make an appearance on the Internet programs produced by SM at the Company's request.

SM produced media productions have priority of appearance.

* Blogger's note: Same as TVXQ's contract, Article 9, clause 4 & 5

After voluntary change: 

Eliminated the original clauses and added the following clauses:

"The Artist can express own opinion about SM's management at any time. The Artist can request SM to provide data or documents to view or copy that are related to the entertainment activities. The Artist has the right to refuse unjust requests by SM." 

* Note: AllKPop's translation of the last clause is incorrect. The Article from AllKPop says: "SM has the right to refuse should the request be unjust." which is totally opposite of my translation. I think anyone can see mine is the correct one. LOL

Phew!!! That took a while, but anyways, here's the summary.

SM changed 3 clauses from the original contract: length of terms, breach of contract penalty and one sided scheduling. The one ordered by FTC for SM to change is regarding trainees. SM tacked on 3 more years on some trainees contract, and FTC ordered to remove it.
So SM only had to change 3 clauses to get it approved.

All 3 clauses are identical to TVXQ's contract, so does that prove SM's wrongdoings?
Not so fast, and here's why.

First, we need to look at the FTC's standard contract.
Here's the link to download the file (again in HWP file format)
http://www.ftc.go.kr/info/bizinfo/stdContractView.jsp?std_agrmt_no=70&currpage=1&searchKey=1&searchVal=%B0%A1%BC%F6&stdate=&enddate=

The link above has a sample contract drafted by FTC for the purpose of using as a guideline when writing contracts for Entertainers, specifically singers. The website has other sample contracts approved by FTC.

Here's the copy of the section that deals with the contract term. My translations are in blue.
 

제3조 (계약기간 등)  Article 3 (Contract duration etc)

① 이 계약의 계약기간은

   _______년 _______월 _______일부터 _______년 _______월 _______일까지

   ( _______년 _______개월 )로 한다. Actual contract dates, from 00/00/00 to 00/00/00

② 제1항에 따른 계약기간이 7년을 초과하여 정해진 경우, 을은 7년이 경과되면 언제든지 이 계약의 해지를 갑에게 통보할 수 있고, 갑이 그 통보를 받은 날로부터 6개월이 경과하면 이 계약은 종료한다.

2. After surpassing 7 years from the contract term agreed from clause 1, the Artist can notify the company to terminate the contract at any time, and the contract expires 6 months after the notification.

③ 다음 각 호의 어느 하나에 해당하는 경우에는 제2항의 규정에도 불구하고 갑과 을이 별도로 서면으로 합의하는 바에 따라 해지권을 제한할 수 있다.

 3. If any of the following clauses apply, the right to terminate the contract specified in clause 2 can be modified with separate contract agreement between the Artist and the Company.

  1. 장기의 해외활동을 위해 해외의 매니지먼트 사업자와의 계약체결 및 그 계약이행을 위하여 필요한 경우

1.If long term contract is needed for foreign activities, and to sign and fulfill the contract with a foreign management company

  2. 기타 정당한 사유로 장기간 계약이 유지될 필요가 있는 경우

 2. When a longer contract period is needed for other valid reasons

Interesting, right? The FTC's recommended criteria for the duration of terms is as above. It doesn't specify actual limit to the term (you can write a 100 year contract if you wanted to), but it does give the artist right to cancel the contract after 7 years, basically setting the effective term to 7 1/2 years or more. But then, if you look at clause 3.1, the Artist who works overseas can sign a separate contract that limits the right to terminate the contract, effectively making the term limitless. Even for non-overseas artist, the clause 3.2 can be applied to extend the exclusive term for over 7 years.

So according to that, TVXQ's contract definitely complies with the FTC guideline.

Now for the breach of contract penalty, the FTC contract is identical with the SM's new one. Then how about TVXQ's contract? That guideline form FTC was drafted on July 7, 2009. TVXQ's final amendment was on Feb 2009. I couldn't find the old FTC standard contract, but I found a blog about FTC contract, and the author still thinks the newly drafted Termination Penalty is excessive, but the blogger states that at least it's better than the older one, and guess what? The old clause is identical to the TVXQ's!!!

Here's the blog http://nanmu.tistory.com/162

And here's the quote from the blog:

"믈론 계약 위반에 따른 위약벌을 두는 것은 이해할 수 있다. 기존의 총 투자비의 3배나.. 일실이익의 2배 같은 징벌적 위약벌이 아닌 것만 해도 나아진 거라고 볼 수 있을지 모른다"

"Of course it is understandable the need to have a breach of contract penalty. I guess you can say that it is better than the previous clause that pays 3 times the investment, and 2 times the potential profit."

That means that TVXQ's penalty clause was written in compliance to the FTC's guideline since it was written before the new rules were set.

I couldn't find anything about the 3rd clause that was modified, but I'm guessing that complies with the old guidelines too.

So SM was complying with the FTC's guideline when signing deals, but received a "unfair contract" warning from FTC, does that make sense?

It's because of the way Korean FTC works. When a Korean actress committed suicide (for many reasons but "slave" contract was considered to be one of the reason. I don't know the details of her contract so I cannot comment on that), FTC was under the pressure from public to act on it, so a new standard contract was drafted. I believe SM also modified TVXQ's contract during that time using the new FTC guideline.

Then as you all know, this "slave" contract became an issue again because of CJS's lawsuit against SM. On top of that, 120,000 TVXQ fans filed a petition to FTC urging them to resolve the "slave" contract issue. So being under the pressure, FTC had to do something, and that's why the contract was modified

It's just a FTC's face-saving maneuver. SM was complying with the FTC's standard contract all along, but still had to go through the negative publicity. If I were SM, this whole situation would drive me nuts.

I wonder when the FTC will give itself a warning for drafting an "unfair" contract or order to change the contract currently on their own website.

That's why many Korean Entertainment companies are urging FTC or the court to make a standard contract protected by law so they don't have to rewrite their contract every time FTC changes their mind.

Only fault I can find from SM is not writing a contract that's far better than the FTC's, but I'm not sure if you can bash SM for that. After all, it's a business, and it's to be expected for SM to protect its own interest first. BTW, I agree with the blogger above, that the breach of contract clause is still kinda excessive, but FTC approved it, so I guess it's fair until it's unfair. 

Also, note that the distribution of the profits was never modified, so at least the FTC "recognizes" that profit distribution was fair.

So much drama, so much politics...Is your head spinning yet?