S. Korean Defense Scandal to Test Competition Law

When Loral Corp. hired Linda Kim in 1995 to handle its bid to supply the government of South Korea with airplane radar systems, the company was banking on her connections at the Blue House -- Seoul’s presidential residence -- and with other influential officials.

What Loral didn’t count on was that the former model, lounge singer and Los Angeles nightclub owner would drag the company into an ongoing controversy over her alleged affair with the South Korean defense minister who awarded the contract. Love letters from the minister to Kim, now 49 and living on a horse ranch in Saugus, were splashed across the front pages of South Korean newspapers after the pair became implicated in a separate bribery scheme.

The scandal stayed confined to South Korea until 1999, when the broker who competed against Kim for the radar contract filed suit in Los Angeles. He maintained that the rival system he represented -- made by a Canadian company called MacDonald, Dettwiler & Associates -- was considered by South Korean project managers to be superior to Loral’s, not to mention $50 million cheaper. The suit alleged that Loral won the bidding unfairly, relying on sex and bribes.

The suit reaches a pivotal stage today when the California Supreme Court hears arguments over whether Lockheed Martin Corp., which acquired Loral in 1996, should face trial over the allegations that it won the contract through unfair and illegal means.

Lockheed has denied that it used Kim to gain unfair advantage in the radar contest. “The underlying bribery allegations are without merit, and we intend to defend ourselves vigorously,” a Lockheed spokesman said, declining to comment further.

The case is being closely watched by many corporations -- and not just because of its salaciousness. The matter is being seen as a key test of California’s unfair-competition statute, and whether the law can be used to force companies doing business in the state to disgorge profits from ill-gotten gains.

The suit relies on South Korean news accounts that detailed U.S. intelligence reports linking Kim to officials in charge of South Korea’s defense contracts. Among them is a 1998 article that said she appeared to have control of an important national project “under her skirt.”

The episode has drawn the attention of federal authorities, who are using a grand jury in Los Angeles to pursue a criminal investigation. A spokesman for the U.S. attorney’s office declined to comment, but Raytheon Corp. and Lockheed disclosed the receipt of subpoenas this year seeking information on deals with South Korea, including Loral’s radar contract.

Raytheon sold South Korea the Hawker 800XP reconnaissance planes that were equipped with Loral’s radar. In quarterly reports to securities regulators, the companies said they were cooperating with the inquiry.

The focus of the federal investigation is unclear. The U.S. Foreign Corrupt Practices Act forbids U.S. companies from bribing foreign officials. Another federal law caps broker commissions to $50,000 per contract, far less than the $10 million the suit alleges Loral paid Kim to represent the company in its radar bid. According to a 1996 Loral memo obtained by The Times, the company appeared willing to pay Kim an initial commission of at least $5 million.

Kim did not return telephone calls Tuesday. Her lawyer said Kim had not received a subpoena from the grand jury and had not been questioned by law enforcement authorities.

In 2000, Kim served one month of a one-year Korean prison sentence for bribing government officials on behalf of another company, Texas-based E-Systems, which won a $216-million contract.

The E-Systems deal was decided at the same time and by the same officials who were considering Loral’s radar bid. Both companies used Kim to advance their proposals.

Kim, who owned the popular Flamingo nightclub in Los Angeles’ Koreatown until it closed in 2001 and was once caught up in a brouhaha over an exchange of gifts with City Councilman Nate Holden, has denied having an affair with the former South Korean defense minister.

In interviews with South Korean reporters, the former defense minister acknowledged having had an inappropriate relationship with Kim, but said it didn’t affect his decision making.

According to a 1995 Loral memo obtained by The Times, the firm engaged Kim because it thought that she had extraordinary access to key decision makers at the “highest levels of the Korean government, up to and including the Blue House.”

The May 1995 memo, addressed to Frank Lanza, then-president of Loral, says: “No one within the Loral Corporation has access to the people that Dr. Kim has access to. She can easily gain access to extremely important decision makers in the Korean Government.... [She] can help us carry our message to the correct people at the appropriate time in the process.”

At issue before the state Supreme Court today is whether Korea Supply Co., Kim’s rival broker, can to sue to recover the $30-million sales commission it could have earned on the deal.

The court also will decide whether Korea Supply can force Lockheed to disgorge its profit if the broker proves sex and bribes helped it obtain the contract.

“Our system was found to be far superior to the Loral system,” said John Ahn, chairman of Korea Supply, a privately held South Korean company with an office in Buena Park.

“Our price was much lower than the Loral system; therefore, under the fair-competition rule, we won the game,” Ahn added. “We believe that the illegal lobbying by Linda Kim made the decision [go] the reverse way. They selected the higher price and the less capable equipment. We are now trying to vindicate our rights and entitlements.”

Lockheed is fighting Korea Supply’s effort to force it to give up its profit. Several corporations and trade groups have come to its aid, filing briefs out of fear that the suit could lead to a dramatic and costly expansion of sanctions available under the state’s unfair-competition law.

Lawyers for the corporate interests contend that the only remedies available under the state law are injunctions and restitution. Profits, they assert, are off-limits.

“If a frustrated competitor can get what amounts to a damages remedy under the statute, which is what Korea Supply is after, that has the potential to severely distort existing tort law and provide a means to obtain windfall recoveries against people doing business in California,” said James C. Martin, a Los Angeles lawyer who filed a friend-of-the-court brief on behalf of the Washington Legal Foundation and the National Assn. of Independent Insurers. “For any company doing business in this state, that’s problematic.”

But Maxwell Blecher, a lawyer for Korea Supply, said it was not a stretch for the court to decide that California judges have the discretion to force disgorgement of ill-gotten gains, especially in egregious cases of unfair business practices with clear-cut victims, such as his client.

“What we’re asking the court to do in this case doesn’t present a significant departure from present law,” Blecher said. “Lockheed wound up with money to which they are not entitled. They shouldn’t be enjoying the fruits of conduct that is clearly improper. There isn’t any moral justification for them to keep the money.”

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California’s unfair-competition law

Summary

Section 17200 of the California business code, often called the unfair- competition law, prohibits “any unlawful, unfair or fraudulent business act or practice” that can hurt California consumers. It is controversial for the broad way judges have interpreted it.

Background

1872: Law established. Originally just outlaws “unfair” competition.

1963: Legislators add the word “unlawful,” widening the statute’s scope.

1999: The California Supreme Court rules that “unfair” in the statute means conduct violating antitrust laws and “otherwise significantly threatens or harms competition.”

2000: The state Supreme Court rules that profits covered by 17200 can be given only to specific individuals the company has hurt and cannot be put into a fund for all potential victims. In a related suit, the court rules that withheld wages can be recovered under the statute and that companies still can be sued up to four years after the alleged incident.

Proponents argue that the law:

* Protects the public.

* Was used successfully in suing the tobacco industry.

* Requires attorneys to disclose more information than in other business lawsuits.

* Has a longer statute of limitations.

Opponents say:

* Private attorneys can sue without a client if they say the suit is in the public interest.

* Attorneys have to show only a potential harm by a company and do not have to show specific people were injured.

* Private attorneys can bring a suit even if prosecutors already have closed their case.

* The law gives plaintiffs’ lawyers undue leverage to negotiate higher settlements.

Sources: California Law Revision Commission, Times research

Researched by Times librarian John Jackson

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Times staff writers Peter Hong and Peter Pae contributed to this report.