Fair regulation vs excessive pressure... Issues in ISDS/Article 301 ‘Coupang Incident’

Claiming ‘targeted regulation’… As a task to prove proportionality
“We need to resolve the misconception that certain companies are disadvantaged.”

After Coupang's large-scale personal information leak incident, U.S. investment companies simultaneously pulled out the International Investment Dispute Dispute (ISDS) and trade retaliation (Article 301 of the Trade Act) cards regarding the government's response. They argue that the investigation by the government and the National Assembly is 'targeted regulation' that goes beyond its essence. With the possibility that issues surrounding individual companies may escalate into trade risks for the nation's core industries as a whole, the government, which has emphasized 'laws and principles', is put to the test of having to prove 'proportionality of regulations' in accordance with international norms.

According to the Ministry of Justice and the industry on the 23rd, Coupang's U.S. investments, Greenox and Altimeter, submitted a letter of intent for ISDS arbitration against the Korean government on the 22nd (local time). They predicted billions of dollars in damages, saying that the response of the Korean government and the National Assembly after Coupang's personal information leak incident violated the 'fair and equitable treatment obligations' under the Korea-U.S. Free Trade Agreement (FTA).

At the same time, the level of pressure was increased by requesting the Office of the United States Trade Representative (USTR) to conduct an investigation based on Article 301 of the Trade Act. This provision stipulates that the U.S. government can take retaliatory measures, such as tariffs, if it determines that there is unfair behavior against U.S. companies in overseas markets. USTR will decide whether to initiate an investigation within 45 days of receiving the petition.

Investment companies argued that the government and National Assembly's response was intentional excessive regulation targeting specific foreign companies. The fact that it has expanded beyond personal information leaks to overall management, including labor, finance, and customs duties, was put forward as the basis for 'target regulation.' While the response of the Korean National Assembly and government resulted in billions of dollars in losses, it was also reported that the issue was that no Coupang customer claiming financial damage has been confirmed to date.

The Ministry of Justice's position is that it will establish a joint response system centered on the 'International Investment Dispute Response Team' to review legal issues and respond proactively. It is expected that the government will argue that it was a strict response in accordance with laws and principles, considering the large impact of the personal information leak incident and the social responsibility of platform companies.

The key issue is ‘proportionality of regulation’… “The key is to prove the appropriateness between damage and sanctions.”

A key issue is expected to be whether the government's sanctions were within an allowable range under international trade norms in light of the principle of 'proportionality of regulations'. Dong-hoo Son, an American lawyer at SJKP, said, “The ISDS arbitral tribunal takes the principle of proportionality, which is a balance between the public interest purpose of regulation and harm to investors, as its core standard.”

At the same time, he pointed out that the investigation that started due to the leak of personal information was expanded to cover the entire company, including labor, finance, and customs, and that the possibility of a trillion-level fine being imposed without the actual financial victims being identified could become an issue of violation of the principle of fair and equitable treatment (FET) under international law. He said, “An investigation that seeks to purge all areas of a company under the pretext of a specific incident may be seen as retaliatory harassment or a violation of reasonable expectations by investors,” and added, “This could be used as a decisive basis to prove the government’s malice in the ISDS Arbitration Tribunal.”

He added, “The government will assert its preventive deterrence and unique regulatory authority against market order disturbances, but in international practice, large fines without proven specific damage are a difficult subject to defend logically.” He added, “How to prove the appropriateness between the ‘specificity of the damage’ and the ‘level of sanctions’ will determine the success or failure of the lawsuit.”

The emergence of a ‘complex issue’ that is shaking the entire industry and trade… A diplomatic solution is urgent

There is a possibility that this issue will expand beyond the controversy over the level of sanctions against individual companies and expand into a 'complex issue' that will shake Korea's overall industrial policy, corporate regulation, and trade strategy. The analysis is that the government's regulatory judgment has shifted to a phase where it is intertwined with trade risks.

Attorney Son pointed out, "The strategy of combining ISDS arbitration and USTR investigation can have a 'regulatory cooling effect' on policy decision-makers," and added, "The risk of retaliation and astronomical compensation that would follow if enforcement of domestic law is enforced acts as a practical psychological and political binding force on policy decisions." At the same time, he explained, “USTR’s retaliatory measures are not simply limited to the industry of the victim company,” and “in the case of Korea, it is a possible scenario for semiconductors or automobiles to be on the (retaliation) list.”

The problem is that the issue is spreading into an international dispute without sufficient investigation of the truth and political agreement domestically. As the possibility of the government investigation becoming drifting increases, the stage of the dispute appears to be moving to the international arena without strengthening internal logic and institutional arrangements.

Experts suggest that diplomatic communication is urgently needed to resolve the misunderstanding that it is 'bashing a specific company' and to convince people that this measure is a legitimate enforcement of domestic law. Professor Lee Jeong-hee of the Department of Economics at Chung-Ang University said, "There has always been a trade controversy about foreign companies being disadvantaged, but in practical terms, cases where trade between countries becomes a major problem due to one specific company are rare." He added, "It remains to be seen whether the U.S. government will actually take retaliation, but diplomatic efforts are desperately needed at the government level to continue to make people understand that 'we are not trying to disadvantage specific companies, but to hold them accountable for damage to domestic customers.'"
 

Reporter Go Hyeon-sol (sol@mt.co.kr)

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Legal regulation vs. excessive pressure... Issues in ISDS·Article 301 ‘Coupang Incident’ (Shortcut)