Korea, one of the world’s most wired countries, has been attracting many global e-commerce and ICT companies to the market, and Korea’s competition authority, the Korea Fair Trade Commission (KFTC), has been working to understand the changes in market dynamics and competitive landscape and modernise the relevant competition and consumer protection laws under its purview. In particular owing to the covid-19 pandemic that started in early 2020, non-face-to-face transactions through online commerce have increased rapidly, and online platforms are spreading across all industries. In tandem with this global change, the KFTC has started to engage in more in-depth discussions about the proper tools and directions to enforce competition law and actively regulate the ICT sector.
To assist companies in Korean e-commerce and ICT markets, this chapter will examine the KFTC’s 2020 annual enforcement plans (the 2020 Work Plan) and recent announcement on new legislation to actively regulate online platform service providers, and the adoption of the ‘transaction value (acquisition value) threshold’ in the KFTC Merger Review Guidelines (the M&A Review Guidelines), whose primary purpose is to review mergers and acquisitions between e-commerce and ICT companies. This chapter will also explain the Monopoly Regulation and Fair Trade Act (MRFTA) and other applicable laws that are relevant to those companies. We will also explain what to look out for in light of the KFTC’s ongoing investigations and recent decisions against ICT and e-commerce companies and discuss the likely enforcement direction the authority will take.
KFTC’s recent enforcement trends and the 2020 Work Plan
In March 2020, the KFTC announced the 2020 Work Plan. In the 2020 Work Plan, the KFTC acknowledged that mobile platforms are becoming the mainstay of commerce, changing the market environment and consumption patterns, and stressed the importance of establishing an industrial ecosystem and business environment where innovation is promoted and consumers’ rights are protected.
More specifically, the KFTC stated that it would closely monitor the abuse of monopoly power that prevents technological innovation and announced its plans to focus on monitoring (1) mobile platform service providers’ abuse of monopoly power through forced exclusive dealing in the mobile operating system (OS) and mobile app markets, (2) online platform companies’ discrimination against or exclusion of content providers as well as online travel agencies’ (OTA) demand for best rate guarantee (or lowest rate guarantee) from hotels (i.e., rate parity), (3) unfair imposition of patent royalties by standard-essential patent (SEP) holders and comprehensive licensing of the SEP together with unnecessary or unwanted intellectual property rights (IPRs), and (4) unlawful foreclosure of competitors’ entry into the market in the 5G transition in the semiconductor business.
To this end, the KFTC stated that it would establish a healthy trade order between platform service providers and online stores by enacting the Act on Fairness in Transactions on Online Platforms (Tentative) (the Online Platform Fairness Act) by the first half of 2021. Furthermore, the KFTC announced that by 2021 it would enact the Review Guidelines for Unilateral Conduct in Platform Markets (Tentative) reflecting the nature of two-sided online platform markets to enhance the regulatory predictability and transparency in the online platform industry. In May 2020, the KFTC formed a new task force to set the standards for enforcement in the online platform sector to enact laws, regulations and guidelines for regulating online platform service providers. In the first meeting, the task force selected certain topics for further discussions, including an approach to market definition in the online platform sector, the criteria to assess market dominance and anticompetitive effects, and the criteria for determining illegality of new types of behaviour, such as self-preferencing, preventing multi-homing and imposing platform most favored nation (MFN) clauses. Another KFTC task force (the ICT task force), which aims to regulate unfair business practices in the ICT space and comprises three subdivisions (i.e., online platforms, mobile services and IPRs), has been active since its creation in November 2019 and continues its discussions on major pending issues and problems in the ICT sector.
In addition, to protect the rights and interests of consumers, the KFTC announced its plan to (1) revise unfair terms and conditions (T&Cs) in the sharing economy (such as over-the-top (OTT) media services and e-book services), micromobility services (involving personal mobility devices like electric scooters), and ‘one-person’ media platforms or multi-channel networks (MCNs); (2) conduct a complete overhaul of the system and content of the E-commerce Consumer Protection Act (ECPA) regulating online platforms linking sellers and buyers of used items as well as social networking services (SNS) platforms; and (3) focus on monitoring and sanctioning deceptive consumer advertisements that use social influencer marketing and viral marketing.
Amendment to the M&A Review Guidelines adopting the transaction value threshold
In light of the recent increase of mergers and acquisitions in the online commerce or platform industry, the KFTC has expressed its plan to analyse the economic effects of mergers and acquisitions in such a new industry from various angles through, inter alia, consumer surveys, economic analysis and external expert reports. In addition, the KFTC has announced its plan to actively encourage the use of voluntary pre-merger notifications (in which parties to a contemplated merger request the KFTC to conduct a preliminary review of the merger in advance), which will enable the KFTC to pay more attention to understanding and reviewing market conditions and data, which will, in turn, reduce the time needed for formal merger review.
The KFTC is also contemplating amending the MRFTA to adopt the transaction value threshold in merger control so that the KFTC can identify in advance those mergers and acquisitions that may raise potential competition concerns where the target company, although it does not yet satisfy the relevant turnover threshold, has substantial competitive market potential. Under the proposed amendment to the MRFTA, even if the target company does not meet the current threshold, the transaction would be subject to merger notification if (1) the transaction value exceeds a certain amount and (2) the target company is engaged in a significant level of activities in the Korean market. This proposed amendment is being discussed to fill the gap in regulations after several high-profile acquisitions, such as Facebook’s US$22 billion acquisition of WhatsApp in 2014 and Microsoft’s US$26.2 billion acquisition of LinkedIn in 2016, were able to escape the scrutiny of the KFTC on the grounds that the target companies did not meet the Korean turnover threshold for foreign-to-foreign mergers.
The KFTC is still working to define the specific criteria of the transaction value threshold and the ‘significant level of activities in the Korean market’ requirement and has commissioned research thereon. For the transaction value threshold, the KFTC may refer primarily to the transaction value thresholds in Germany (€400 million) and Austria (€200 million) in prescribing the details, including the specific threshold amount and valuation methods, and adjust the transaction value thresholds in light of the Korean market situation. For the ‘significant level of activities in the Korean market’ requirement, it is expected that the specifics will be defined in the Enforcement Decree after taking various factors into account, including the number of employees and R&D personnel in the target company, the budget allotted to and amount spent on R&D, the number of visitors to the target’s websites, the number of patents owned by the target company, the number of people in receipt of goods or services from the target company, and the target company’s management’s expertise.
If this transaction value threshold is adopted in merger control, even if the target company has a Korean turnover of less than 30 billion won, if the transaction may potentially affect the competition in the Korean market, the KFTC would have the basis to proceed with the merger review. However, it still remains open what criteria will be used to set the appropriate transaction value threshold and how the qualitative standard of the ‘significant level of activities in the Korean market’ requirement will set quantitatively, warranting further discussions on these topics.
Applicable antitrust laws for e-commerce and ICT companies
The primary law that regulates anticompetitive practices in Korea is the MRFTA, and particularly for e-commerce and ICT companies the KFTC has mostly focused on regulating their abuse of dominance and unfair business practices. In addition to the MRFTA, the following laws are relevant to e-commerce and ICT companies: the Regulation of Standardised Contracts Act (RSCA), the Fair Labelling and Advertising Act (FLAA) and the ECPA. Recently, the KFTC expressed that it is facing challenges in effectively regulating ICT companies and online platform service providers based on the current MRFTA and related laws and regulations, and that it plans to enact the Online Platform Fairness Act. If the Online Platform Fairness Act is enacted and implemented, it is expected to have a profound effect on the business direction and trade practices of online platform service providers operating in Korea.
We will further elaborate on those applicable laws that e-commerce and ICT companies would be worth paying attention to when engaging in business in Korea.
Abuse of dominance and unfair business practices under the MRFTA
The MRFTA regulates single-firm conduct and prohibits the abuse of dominance (Article 3-2) and unfair business practices (Article 23), and these regulations often become an issue for global IT and e-commerce companies as they often exercise market power with their advanced technology, IPRs and exclusive control over data.
First of all, Article 4 of the MRFTA provides that, in the case of an abuse of dominance, if in the relevant market, (1) a single firm’s market share is 50 per cent or more or (2) a total market share of three or fewer firms is 75 per cent or more (provided, that any firm with less than a 10 per cent market share will be excluded), such firm(s) will be presumed to have market dominance. Further, the types of conduct that would constitute an abuse of dominance can be classified largely into five types:
- unfairly setting, maintaining or changing price;
- unfairly adjusting the sale of products or provision of services;
- unreasonably interfering with other firms’ business activities;
- unfairly interfering with the market entry of new competitors; and
- excluding other competitors through predatory pricing or exclusive dealing or any other conduct that gives rise to a concern of markedly hindering consumer interests.
Second, unfair business practices under Article 23(1) of the MRFTA can be considered illegal based on two different criteria: anticompetitive effects and unfairness of means of competition or transaction terms. The following types of unfair business practices are evaluated based on their anticompetitive effects: (1) unfair refusal to deal, (2) unfair discrimination, (3) unfair exclusion of competitors, (4) tying, (5) transaction based on restrictive conditions, and (6) unfair support. Then there are four types of unfair business practices whose illegality is evaluated based on the unfairness of the means of competition or transaction terms and these are (1) unfair solicitation of customers, (2) coercion of employees to purchase or sell a firm’s products or services, (3) interference with other firms, and (4) abuse of a superior bargaining position.
While the types of violations based on the abuse of dominance and unfair business practices overlap and may be similar, the former requires a dominant market position, whereas the latter can be established without such market power. Also, as noted above, unfair business practices depending on the type may only require proving unfairness and do not require proof of anticompetitiveness. As such, when the KFTC regulates single-firm conduct, it tends to apply both provisions and if a firm concerned does not have market dominance, the KFTC regulates the illegal conduct through the legal framework applicable to unfair business practices.
Regulations on unfair T&Cs under the RSCA
For the past several years, the KFTC has been closely monitoring whether global ICT companies’ T&Cs for Korean consumers are unfair and thus hinder consumer welfare. According to the RSCA, a firm must prepare the T&Cs in a way that is easily understandable and clearly explain such T&Cs to customers. If an agreement is executed in violation of such obligation, the firm is not allowed to claim that the T&Cs are valid contract terms. Further, any T&C clauses that do any of the following would be presumed unfair and thus, null and void:
- that are unfairly unfavourable to customers;
- that customers are unlikely to expect in light of the totality of circumstances;
- that would restrict the basic contractual rights to the level that the objective of such contract cannot be obtained;
- that unfairly set the scope of indemnification of a firm;
- that unfairly impose onerous obligations for damages on customers;
- that unfairly restrict customers’ exercise of rights to terminate; and
- that unfairly prohibit customers from bringing a legal action or unfairly designate the court of jurisdiction in case of any dispute.
Interested parties or consumer rights organisations, among others, may request that the KFTC review T&Cs, and if the KFTC determines that such T&Cs are unfair under the RSCA, the KFTC may either recommend or order that the T&Cs be deleted, revised or otherwise amended, as appropriate.
Violation of the ECPA
The ECPA is enacted to protect consumers’ rights and interests and trust in the market in the context of e-commerce and transactions through mail or telecommunication orders. In particular, the ECPA requires online shopping mall operators to indicate certain prescribed information, to comply with restrictions imposed by the relevant law concerning the collection and use of consumer information, and to strictly ensure the rights of consumers to withdraw their offers within a certain period. Also, the ECPA prohibits e-commerce business operators from providing false or exaggerated information, soliciting or transacting with consumers in a deceitful manner, interfering with consumers’ withdrawal of offers, arbitrarily supplying products and charging for such products when there was no such request from consumers, or coercing consumers to purchase goods via email or phone despite the fact that consumers expressly refused to make a purchase.
KFTC’s investigation into e-commerce and ICT companies and its recent decisions
Review of Delivery Hero’s acquisition of Woowa Brothers (Baedael Minjok)
In December 2019, it was announced that Delivery Hero AG, the German operator of Korea’s second and third most popular food delivery apps, Yogiyo and Baedaltong, would acquire an 87 per cent stake in Woowa Brothers (Woowa), the Korean operator of Korea’s most popular food delivery app, Baedal Minjok (Baemin), for roughly €3.6 billion. The transaction would be a horizontal merger between two leading companies in the Korean food delivery app market, creating a company with a 99 per cent market share in the food delivery app market. Following the merger filing by the parties, a lot of attention remains focused on the conclusion of the KFTC’s review of the transaction.
Considering which perspective to take in reviewing the transaction, initially the KFTC took a prudent stance that a balanced approach would be necessary, saying that a decision of the competition authority may create innovation but at the same time deter innovation. However, as Woowa announced its plan to change the fee structure, substantially raising the fees paid by member restaurants using the Baemin platform while lowering the fees paid to riders and delivery agents, the KFTC announced that it would closely examine whether the transaction may raise concerns over monopolistic harm. In the end, due to strong opposition from restaurant owners and riders in addition to increasingly unfavourable public opinion, Woowa withdrew the proposed fee structure change. This series of events seems to have encouraged the KFTC to see that platform service providers with an overwhelming market position may unilaterally act on price and other transaction terms.
The main issues with the transaction are how to define the relevant market and whether the transaction will create serious anticompetitive concerns even considering the current and potential competitors. The first issue concerns whether the relevant market should be defined narrowly as the food delivery app market or broadly as the offline delivery and dining market. Depending on how the relevant market is defined, the parties’ market shares change markedly, and hence, the parties and many stakeholders (e.g., franchise owners or non-profit organisations) are raising conflicting opinions to the KFTC. The second issue concerns how the dynamic nature of the food delivery app market and how the potential increase in the competition level with the participation of current and potential competitors should be considered in reviewing this merger. In fact, many e-commerce companies with financial power and competitiveness are actively entering the food delivery app market and expanding their market shares therein and thus there are some who think that this represents a positive factor in the KFTC’s merger review.
The KFTC is currently conducting a detailed market analysis by commissioning research on ‘economic analysis of mergers between delivery app service providers’ for the Korea Academic Society of Industrial Organization. In addition, since a number of stakeholders related to the transaction are presenting opinions on the transaction, it is expected that it will take a considerable amount of time for the results of the merger review to come out. The KFTC will likely reach the final decision considering dynamics and changes in competition in the relevant market as well as policy determination.
Cases concerning the abuse of a dominant market position and unfair business practices
The KFTC is conducting multiple investigations to determine whether the most popular Korean portal site Naver’s use of its superior bargaining position in the search engine market to give preferential treatment to its shopping, real estate, video streaming services over other companies’ competing services would constitute abuse of dominance and abuse of a superior bargaining position. It is understood that Naver operates its search engine system so that its services are placed at the top of search results. It is understood that the KFTC will hold a plenary meeting soon and examine the alleged violations by Naver. It is expected that the Naver case will be the first KFTC decision to adjudicate whether the preferential behaviour of a dominant platform service provider would constitute abuse of dominance or abuse of a superior bargaining position.
Furthermore, in June 2020, the KFTC determined that a food delivery app service provider’s best-rate guarantee, prohibiting member restaurants from selling food at a lower price through another platform (e.g., other delivery apps or phone), and termination of contracts with those member restaurants in breach of the best-rate guarantee requirement and that failed to remedy the breach would constitute unfair business practices arising from the abuse of its superior bargaining position. It was the first case in which the KFTC determined that online platform service providers’ unilateral demand for lowest-rate guarantee is an act of unfairly interfering with others’ business activities through abuse of a superior bargaining position and price control (restricting member restaurants’ right to decide their price).
Cases concerning global ICT companies’ violations of the RSCA
In recent years, the KFTC has imposed corrective measures on e-commerce and platform service providers to revise and amend their unfair T&Cs. If the KFTC determines that T&Cs are in violation of the RSCA, the KFTC recommends that firms voluntarily amend such provisions, and if the firms fail to comply with the recommendation, the KFTC imposes binding remedial orders. If the firms fail to comply with the remedial orders, the KFTC may make criminal referrals of the firms and their representatives for non-compliance. In light of these KFTC enforcement trends, it is necessary to pay attention to the types and details of T&Cs that the KFTC found unfair on several occasions when creating their T&Cs. Below is a summary of recent cases where the KFTC found that global ICT companies or platform service providers had unfair T&Cs.
Remedial order on Netflix for its unfair T&Cs
The KFTC announced that it had examined the T&Cs of Netflix, a global online streaming service provider, and corrected the following six types of clauses as follows: (1) a clause that allowed Netflix to change fees or membership types without the consent of its members and to allow the change to become effective from the next billing cycle as long as the change is notified to its members was revised to require Netflix to provide notice to and obtain consent from its members regarding the change, (2) a clause that described the grounds for terminating or suspending membership in a broad and abstract manner was revised to make them more specific and reasonable, (3) a clause that caused a member to take full responsibility for activities conducted through his or her account regardless of whether the member actually used the account was revised to allow the member to only take responsibility when he or she used the account, (4) a clause that released Netflix from all liability for damage was revised to require Netflix to be liable for damage caused by wilful misconduct or negligence and conduct with knowledge, (5) a clause that prohibited any unilateral assignment or transfer of a contract with members to a third party was revised to require certain procedures under the relevant laws to be followed and to indicate that a Netflix member may cancel his or her membership if the member does not consent to the transfer or assignment, and (6) a clause that prescribed the overall effectiveness of the contract based on the remaining clauses in the event certain clauses are found to be invalid was deleted.
Remedial order on Baemin for its unfair T&Cs (June 2020)
The KFTC investigated and examined the T&Cs of Baemin as there was a significant increase in complaints by consumers and some consumers had officially filed a request for review of the T&Cs to the KFTC. Accordingly, the KFTC reviewed Baemin’s T&Cs and corrected the following clauses: (1) a clause that broadly indemnified Woowa’s liability for damage as a business operator was amended to impose liability on Woowa in accordance with the principle of liability for negligence under the Civil Act, (2) a clause that allowed termination of a contract to be effective upon Woowa’s notice of termination without prior notice to consumers was deleted, requiring users of the Baemin platform to be notified before termination, (3) a clause that allowed Woowa to simply publish a notice on the website or notice page to amend or cease its services on the platform was changed to one requiring Woowa to notify the change or cessation of the services to the users in advance, and (4) the practice of publishing information on all matters to the general public by posting the notice on the website regardless of the importance of the content was changed, requiring matters that have a material impact on consumers to be communicated individually to them.
Cases concerning violations of the FLAA and the ECPA
As online marketing becomes more influential on consumers’ choices than traditional advertising media, the number of consumer complaints about the harm caused by misinformation or deceptive online advertising is increasing. To prevent such harm to consumers, the KFTC regulates false, exaggerated, deceptive or misleading advertising or provision of false information on the internet as a violation of the FLAA or ECPA. For example, the KFTC considered the following as deceptive advertising and in many cases, has imposed remedial orders and administrative fines: where business owners engaged in deceptive practices by posting paid-for advertising posts online using professional advertising agencies, famous bloggers or social media influencers without disclosing that they were paid for, or by obliging their employees to post promotional material without disclosing that the people posting were employees and thereby misleading the consumers to believe the posts expressed independent and voluntary opinions on products or services.
Further, the KFTC continues to monitor that online shopping mall operators fulfil their obligations to provide information about the business and products as prescribed under the ECPA, to guarantee consumers’ rights to withdraw their offers and not to provide false or exaggerated information or deceitfully induce consumers to purchase products or services. For example, the KFTC has imposed a remedial order and administrative fines on Twitch for not indicating its trade name, the name of the representative and other business identification information on its website and the first page of its mobile app, for not indicating or disclosing ways users can withdraw their offers to purchase ‘bits’ and ‘subscriptions’ that are being sold on the website, and for not notifying minors of their right to cancel agreements executed without the consent of their legal representatives. The KFTC also imposed a remedial order and administrative fines on hotel booking app operators and food delivery app operators for engaging in the provision of deceitful information. It found that they violated the ECPA when they made consumers’ negative feedback of their services private so that other consumers could not see it, or when they paid to make their names appear at the top of the apps.
KFTC’s future enforcement directions and take-away
As clearly described in the KFTC’s 2020 Work Plan, it is expected that the KFTC will review and respond more strictly to e-commerce and online platform companies’ anticompetitive practices and practices that hinder consumer welfare. The KFTC will keep an eye on foreign competition authorities’ implementation of policies to regulate platform service providers. In particular, major foreign competition authorities have recently been engaging in active discussions to newly define regulatory frameworks for the online platform industry. Therefore, it is expected that the KFTC will take into consideration the EU and US regulations on the platform industry and their authorities’ enforcement when it enacts the Online Platform Fairness Act and related guidelines. That said, it is also expected that the KFTC will try to actively regulate e-commerce and ICT companies even before the new regulatory frameworks are created through the MRFTA, RSCA and ECPA. The cases where the KFTC proactively ordered the revision of unfair T&Cs of multiple global IT and platform companies demonstrate that even if global companies’ use certain T&Cs or internal policies in other countries, this will not prevent the KFTC from working to protect the interests of Korean consumers if such policies or terms violate Korean law. Since the KFTC continues to take a proactive approach to enforcing competition law by imposing significant sanctions, it is necessary to observe closely the KFTC’s enforcement trends concerning the e-commerce and platform industry.
1 Ye Sun Han is a partner and Hyunah Kim is a foreign attorney at Shin & Kim.
2 The 2020 KFTC Work Plan, Korea Fair Trade Commission (Mar. 2020), available at http://www.ftc.go.kr/www/selectReportUserView.do?key=10&rpttype=1&report_data_no=8493/.
3 Dae-hee Lee, Ruling Party, Government, and Presidential Office Decide to Enact the Online Platform Fairness Act by First Half of Next Year, Yonhap News, 31 July 2020, https://www.yna.co.kr/view/AKR20200731039651001?input=1195m.
4 This can be found in the KFTC’s press release on May 25, 2020, available at http://www.ftc.go.kr/www/selectReportUserView.do?key=10&rpttype=1&report_data_no=8566.
5 The practice of a platform service provider with multiple activities and businesses in both upstream and downstream markets using its position in one market to favour its activities in another.
6 The practice of prohibiting customers from simultaneously using multiple platforms.
7 The clauses where an online platform requires suppliers to offer lower or at least identical prices on its platform than other sales channels.
8 This can be found in the KFTC’s press release dated 19 Nov. 2019 available at http://www.ftc.go.kr/www/selectReportUserView.do?key=10&rpttype=1&report_data_no=8361 (At the meeting dated 15 November 2019, the ICT Task Force’s online platform division discussed investigations concerning the practice of online platforms where they vertically integrate multiple services to expand the services that they provide and where they use their market dominance to prohibit their online stores from doing business with other platforms).
9 The 2020 KFTC Work Plan, Korea Fair Trade Commission (March 2020).
11 A transaction is subject to notification if it meets the following thresholds: (1) during the immediately preceding business year, a party to the transaction has total worldwide assets or turnover (including assets or turnover of its affiliates) of at least 300 billion won and the other party has total worldwide assets or turnover (including assets or turnover of its affiliates) of at least 30 billion won and (2) in the case of a foreign-to-foreign merger or Korean-to-foreign merger, the Korean turnover of the target foreign company must be at least 30 billion won.
12 Yeongnam University Industry-University Cooperation Foundation, Study on Preparation of Secondary Law Concerning Transaction Value Based Merger Notification Threshold (24 November 2019).
13 RSCA, Article 3.
14 id. Article 6.
15 id. Articles 7, 8, 9 and 14.
16 ECPA, Article 10.
17 id. Article 11.
18 id. Article 21.
19 ‘Baemin, Delivery Fees ↑Rider Fees↓ to Escape the Deficit’, Maeil Business Newspaper, 8 April 2020, https://www.mk.co.kr/news/business/view/2020/04/365844/.
20 ‘KFTC Targeting Naver…Three Agenda Related Only to Naver’, Aju Business Daily, 13 July 2020, https://view.asiae.co.kr/article/2020071311295570043https://view.asiae.co.kr/article/2020071311295570043.
22 Article 17-2(2)(6) of the RSCA.
23 This can be found in the KFTC’s press release on 16 January 2020, available at http://www.ftc.go.kr/www/selectReportUserView.do?key=10&rpttype=1&report_data_no=8440.
24 This can be found in the KFTC’s press release on 9 June 2020, available at http://www.ftc.go.kr/www/selectReportUserView.do?key=10&rpttype=1&report_data_no=8580.
25 KFTC Decision Nos. 2015-009, 2015-010 (13 January 2015), KFTC Decision Nos. 2015-030, 2015-031 (3 February 2015), KFTC Decision Nos. 2017-306, 307, 308 (26 September 2017), KFTC Decision Nos. 2019-288, 289, 307, 308, 309 310, 311 (16 Dec. 2019).
26 KFTC Decision No. 2019-101 (29 October 2019).
27 KFTC Decision Nos. 2017-069, 070 (30 May 2017), KFTC Decision Nos. 2016-083, 084, 085, 086, 087, 088 (22 August 2016).