Kakao Did Not Inform Users of Melon’s Early Termination Clause... Supreme Court Rules Penalty Surcharge Unlawful

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The Supreme Court has ruled that the Fair Trade Commission’s (FTC) imposition of a penalty surcharge on Melon, Kakao Entertainment’s music platform, for failing to properly inform consumers about the early termination option, was unjustified.

The Supreme Court’s Second Division (Presiding Justice Park Youngjae) on November 13 upheld the lower court's decision that the FTC’s corrective order against Kakao was lawful in the lawsuit filed by Kakao seeking cancellation of the corrective order and penalty surcharge. However, the court overturned and remanded the part regarding the 'penalty surcharge order', ruling that the requirements for such a disposition were not met.

The court stated, "The penalty surcharge order did not meet the requirements for disposition and is therefore unlawful," and added, "The lower court’s ruling that the penalty surcharge order did not violate relevant laws misunderstood the legal principles regarding the grounds for imposing a penalty surcharge in lieu of business suspension."

In January last year, the FTC imposed a penalty surcharge of 98 million won on Kakao, claiming that between May 2017 and May 2021, Melon processed all consumer cancellation requests as 'general cancellation' and failed to sufficiently inform consumers of their right to 'early termination.'

Subsequently, Melon was part of Kakao until May 2021, after which it was spun off and merged with Kakao Entertainment. Kakao argued that the FTC’s investigation began in January 2021 and that corrective measures were completed by July 2021, making the penalty surcharge excessive, and therefore filed a lawsuit.

In January this year, the Seoul High Court ruled against the plaintiff, stating that the penalty surcharge should be imposed on the company prior to the spin-off. Fair trade cases proceed under a two-tier system with the Seoul High Court and the Supreme Court.

The first trial court found that Kakao benefited from violations of the Electronic Commerce Act and that a penalty surcharge could be imposed in lieu of business suspension under the relevant laws.

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