E-Commerce Competition Enforcement Guide

Korea

Kim & Chang

In December 2016, the Korea Fair Trade Commission (KFTC) drew worldwide attention with its enforcement against Qualcomm, when it imposed a fine of 1.03 trillion won and ordered Qualcomm to take various corrective measures. In that case, the KFTC alleged that Qualcomm had abused its dominant position in modem chips and cellular SEPs.

Since the Qualcomm case, the KFTC has been stepping up enforcement in the information and communications technology (ICT) industry. The KFTC launched an ICT task force team with the initiation of the Qualcomm investigation, based on which it formed the knowledge industry division under its Anti-Monopoly Bureau in December 2016. The division mainly deals with abuse of dominance and unfair trade practice investigations and works to establish competition policies related to the ICT industry. At that time, the then-KFTC Chairman Jae-Chan Chung stated that: ‘[T]hrough the establishment of the Knowledge Industry Division, the KFTC will be able to systematically monitor unfair practices in the field of ICT and effectively respond to such practices in a timely manner.’[2]

As part of the KFTC’s drive to more actively regulate the ICT sector, it has recently focused on internet platforms and big data (data-driven industries). ICT was stated to be a high priority enforcement area in the KFTC’s business plan for 2018,[3] with online platforms and big data specifically mentioned as sectors that warrant vigilant monitoring. This trend is evident in the KFTC’s recent enforcement efforts against various data-driven internet technology giants, including Google, Apple and Facebook. The current KFTC Chairman Sang-Jo Kim recently stated that he intends to increase the intensity of investigations into global IT companies for their alleged abuse of dominance.[4]

In parallel, various policy and academic discussions relevant to internet platforms and big data sectors have also been taking place in the KFTC. For instance, the KFTC has initiated a study on the various data and competition issues associated with tech companies and big data, and is expected to release a report on its findings this year. The KFTC is thus maintaining considerable interest in the ICT sector and its enforcement efforts will continue.

In this chapter, we set forth a summary of the KFTC’s policy stance toward the ICT industry; applicable laws and proposed amendments; recent publicly disclosed investigations; and what to expect next.

KFTC enforcement plan for 2018

On 25 January 2018, the KFTC revealed its annual enforcement plan, introducing the KFTC’s five major initiatives for 2018. One of these initiatives was ‘fostering competition in innovation-based markets’, which is a key task being pursued by the KFTC to establish a fair market order in accordance with the current administration’s three major economic policy objectives of income-led growth, innovative growth and fair economy.

In the 2018 annual enforcement plan’s section on the promotion of competition in innovation-based markets, the KFTC specifically noted that it would aggressively monitor abuse of market dominance in the pharmaceuticals, online platform services and big data sectors, specifically noting the following:

  • Online platform services: The KFTC will aggressively monitor any activities that may exclude competitors in the online application markets.
  • Big data: The KFTC will research potential competition issues in the big data market.

The 2018 annual enforcement plan also includes a section concerning merger notification thresholds that could have implications for the tech industry. Currently, the threshold relates only to the amount of turnover associated with the parties to a merger, but the KFTC is considering a ‘size of transaction test’ that could potentially trigger a notification obligation even if the parties do not meet the Korean turnover requirements. The details are not clear, but the plan highlights how Facebook’s acquisition of WhatsApp was not notified in Korea or the EU due to WhatsApp having a small turnover, noting that this is an example of a blind spot in the current merger notification threshold system. Furthermore, the plan states that the guidelines for merger review will be amended to include criteria for reviewing horizontal and vertical mergers in the emerging technology markets, such as how to assess a horizontal merger between two parties with data-driven businesses, and how to assess the anticompetitiveness of a vertical integration between data-driven business and other products.

Applicable laws

In Korea, the Monopoly Regulation and Fair Trade Act (MRFTA) is the primary law governing competition matters. With regard to the ICT industry, the KFTC is focusing on two areas: abuse of a dominant position; and unfair business practices, which we describe below.

In addition to generally applicable provisions under the MRFTA, there are also various special competition-related laws under the KFTC’s purview, such as the Regulation on Standardised Contracts Act (RSCA), the Fairness in Subcontracting Transactions Act, the Fairness in Distribution Transactions Act, the Fairness in Franchise Transactions Act, and the Fairness in Large Retail Business Transactions Act. In particular, the KFTC frequently uses the RSCA to scrutinise companies’ terms and conditions according to Korean legal standards; this is particularly relevant to global tech companies, which often use one set of universal terms and conditions to apply to all users worldwide.

Finally, while not within the KFTC’s jurisdiction, online service providers doing business in Korea are subject to: the Information Communications Network Usage Promotion and Data Protection Act, a comprehensive statute governing online services that governs many aspects of the content that can be provided by online platforms and other service providers, including data and privacy protection; and the Telecommunications Business Act, regulating the licence requirements for telecommunications infrastructure service providers (network operators) and value-added service providers (usually content providers), the content and manner of the provision of the telecommunications services, and certain required and prohibited conduct to protect fair competition in the telecommunications service industry and consumer interest.

We provide a brief summary below of the provisions of the Korean fair trade laws that are important for players in the ICT industry.

Abuse of a Market Dominant Position under the MRFTA

Article 3-2 of the MRFTA provides for five types of abuse of dominance (plus a general catch-all provision) that are regulated in Korea as follows. As a general matter, a ‘rule-of-reason’ like balancing test applies to all types of abuse of dominance, although the bar for the KFTC to prove that the anticompetitive impact outweighs efficiencies is generally considered lower than in jurisdictions such as the US.

  • Unfair pricing: Unfair pricing is unfairly fixing, maintaining or altering the price of a good or service fee. This involves substantially increasing, or failing to substantially decrease, the price of products or services, without reasonable justification, in comparison to shifts in supply and demand, or fluctuation in those expenses related to pricing and required to supply the products or services (corresponding to the norms of the relevant or similar industry).
  • Unfair output restriction: Unfair output restriction is unfairly controlling the sale of goods or the provision of services. This involves: significantly decreasing the supply of products or services in comparison to contemporary trends of supply (i.e., the supply trend for a considerable period of time as classified by product, region, customer or season), without reasonable justification; or decreasing the supply of products or services despite a shortage of supply in the downstream distribution channels without reasonable justification.
  • Unfair business interference: Unfair business interference is unfairly interfering with the business activities of another enterprise. This involves directly or indirectly engaging in the following conduct:
    • interference with purchasing of raw materials necessary for manufacturing by another enterprise, without reasonable justification;
    • recruitment of personnel essential to the business operations of another enterprise, by providing or promising to provide excessive economic benefit compared to customary practice;
    • refusal, cessation or restriction of the use of, or access to, inputs essential for the production, supply or sale of products or services by another enterprise, without reasonable justification; or
    • any other act that inflicts hardship upon the business operations of another enterprise as set out in the KFTC guidelines (e.g., refusal to deal, discriminatory pricing, coercion of unfavourable terms and conditions).
  • Unfair obstruction of market entry: Unfair obstruction involves directly or indirectly engaging in the following conduct, resulting in the restriction of market entry by a competitor:
    • entry into exclusive supply contracts with distributors without reasonable justification;
    • purchase of rights (e.g., intellectual property rights, licences and permits) necessary for the continuous business operations of an existing enterprise;
    • refusal or restriction of the use of, or access to, facilities essential to the production, supply or sale of products or services of a new competitor, without reasonable justification; or
    • any other act that impedes market entry by a new competitor as set out in the KFTC guidelines (e.g., refusal to deal, unfair manipulation of the supply of essential raw materials, or abuse of civil and administrative procedures to impede attempts to enter the market).
  • Unfair exclusion of competitors: Unfair exclusion of competitors is engaging in unfair transactions to eliminate competitors. This involves: supplying products or services at an unreasonably low price or purchasing products or services at an unreasonably high price (in comparison to ordinary transactions), resulting in the potential exclusion of competitors; or transacting with a party on condition that the party shall not engage in transactions with competitors (i.e., exclusive dealing).
  • Catch-all: In addition to the above five types of abusive acts, Article 3-2(1) paragraph 5 of the MRFTA provides a catch-all provision, which regulates ‘acts that may significantly harm the interests of consumers’.

The Korean Supreme Court, in its landmark ruling in the POSCO case,[5] held that in abuse of dominance cases an anticompetitive intent may be presumed when the KFTC is able to show that an anticompetitive effect actually materialised. However, if an actual anticompetitive effect is not established, the court noted that the KFTC may still evaluate the various factors and circumstances of the case to determine whether the act was undertaken with the intent or purpose of artificially influencing the market order by restraining free competition in the market; and whether the act can be objectively viewed as one that could have such an anticompetitive effect. Following the POSCO decision, the courts have generally adopted effect-based approaches.

A company is presumed to have a market dominant position if the company’s market share is 50 per cent or more, or the aggregate market share of the top three enterprises (excluding those with less than 10 per cent) is 75 per cent or more.

The abuse of dominance cases are reviewed under the rule of reason analysis by the KFTC. Under the rule of reason analysis, the anticompetitive effects and the pro-competitive effects of a certain action are evaluated as a whole by examining factors such as increase in price of goods, reduced output, impediment to innovation, reduced number of effective competitors and reduced diversity, etc.

Unfair business practices under the MRFTA

Article 23 of the MRFTA prohibits any of the following acts as unfair business practices when they are likely to impede fair business:

  • unfairly refusing to deal or unfairly discriminating among transaction counterparties;
  • unfairly excluding competitors;
  • unfairly coercing or inducing business from competitors’ customers;
  • unfairly abusing one’s bargaining position in a transaction;
  • undertaking business under terms and conditions that unfairly restrict another’s business activities or disrupt another’s business activities;
  • assisting a person with a special interest relationship or other company by providing advance payment, loan, manpower, real estate, securities, goods, services, right to intangible property, etc. or by transacting with such a person under substantially favourable terms; or
  • undertaking any other act that threatens to impair fair business.

Unlike an abuse of dominance, there is no requirement to show dominance in the relevant market; nonetheless, the KFTC generally must show that the relevant conduct (in some cases the conduct prohibited as an unfair business practice overlaps with that prohibited as an abuse of dominance) results in or is likely to result in unfairness or in some cases anticompetitiveness to establish the existence of an unfair practice. Given the lower standard of proof compared to abuse of dominance cases, in most abuse of dominance cases the KFTC will add unfair business practice allegations as alternative claims.

Unfair business practice cases are also reviewed under the rule of reason analysis by the KFTC. In that context, ‘anticompetitiveness’ refers to a meaningful reduction or the likelihood of a reduction in the level of competition in the market or the number of competitors, and is therefore a much less stringent standard than the POSCO standard for abuse of market dominance, while ‘unfairness’ means unfairness in the method of competition or details of a transaction. Unfairness in the method of competition refers to the use of undesirable methods other than price and quality that hinders or is likely to hinder fair competition. Unfairness in the details of a transaction refers to the infringement or the likelihood of an infringement on fair trade by hindering the counterparty’s freedom of decision or by forcing a disadvantage.

Unfair clauses in terms of services under RSCA

Under the RSCA, a user (customer) must be provided with the opportunity to become aware of the terms of service to which he or she will be subject and be sufficiently informed of their content before he or she decides whether to give his or her consent to them. Moreover, the RSCA authorises the KFTC to review provisions in the terms of service that are unfair to the customers and issue corrective recommendations or orders to amend unfair terms and conditions.

The KFTC engages in regular monitoring of online service providers’ terms of service that are available on their websites. They may find it particularly necessary to examine whether any clauses of the terms of service are unfair or unreasonably unfavourable to users if a global online service provider uses the same terms of service for all users worldwide, as there is a risk that the terms do not meet Korean legal requirements. In some cases, online service providers have decided to create a ‘Korea addendum’ to their terms of service to set forth different provisions applicable only to Korean users.

Proposed amendments of the MRFTA

Despite the KFTC’s active enforcement efforts, there has been criticism that the existing MRFTA, which was enacted in 1980 and has remained largely unchanged in its overall structure, has limitations in responding to the rapidly changing economic environment, involving various new types of anticompetitive conduct, especially in new industries that would not have been contemplated when the MRFTA first came into force. Accordingly, the KFTC promoted a major overhaul of the MRFTA this year, with the goal of revamping and modernising the law to implement a fair and innovative competition system reflecting the dynamic nature of the current economic environment.

On 24 August 2018, the KFTC published an amendment bill setting forth the proposed amendments of the MRFTA. The KFTC plans to submit the final draft of the bill to the National Assembly in November 2018. The proposed amendments cover a wide variety of issues, including due process, ensuring the independence of the KFTC Commissioners, abolishing the KFTC’s exclusive right to make criminal referrals, updating certain enforcement procedures, and strengthening regulation of conglomerates and holding companies.

The proposed amendments do not include any specific revisions to the unilateral conduct provisions (i.e., abuse of dominance and unfair business practice), contrary to expectations that they would be reorganised so as to address effectively the various new types of abusive conduct restricting competition in a rapidly changing economic environment such as that of the ICT sector. However, the proposed amendments do contemplate new provisions on information exchange and reforming the merger review system, which has meaningful implications in the regulation of the data and ICT sector.

Information exchange

Concerning information exchange, the proposed amendments:

  • supplement cartel regulations to regulate more effectively acts of information exchange;
  • allow the legal presumption of agreement when there is apparent uniformity in the acts of competitors and the necessary information for such acts was exchanged; and
  • add a new type of prohibited practice – the ‘act of exchanging information on prices, production volume, etc., that substantially restricts competition’.

The existing laws strictly require the existence of an explicit or implicit agreement, making it effectively impossible for the KFTC to take enforcement action against novel forms of cartel activity, such as arrangements in which there is no agreement but competitors’ pricing information is monitored and applied through algorithms or other digital means (so-called digital cartels or algorithm cartels). The proposed amendments are expected to allow the KFTC to address those concerns about new types of cartel activities and expand its enforcement against collusive practices in which it cannot establish the existence of an explicit or implicit agreement.

Merger review

In terms of merger filing obligations, the proposed amendments introduce a size of transaction threshold that would trigger a filing obligation in Korea when the price of acquisition is high, even if the company being sold fails to meet the existing worldwide assets or sales revenue threshold (currently 30 billion won).

Under the current merger filing system, which requires only the size of the total revenues or total assets as filing requirements, mergers between companies with substantial potential but low turnover (e.g., a data-driven internet company) could potentially be exempt from the merger-filing requirement in Korea (as with the Facebook/WhatsApp acquisition mentioned above). With the proposed amendments’ use of acquisition price as an additional standard for merger filing, the KFTC anticipates avoiding such omissions in its merger review.

Recent investigations against global tech companies

Google

Since 2016, Google has been subject to KFTC investigations for allegedly abusing the dominance of its Android operating system.[6] A probe that started in July 2016 focuses on, among other things, whether Google unreasonably required Android mobile phone manufacturers not to support the creation and distribution of incompatible versions of the Android operating systen, as a condition for licensing Googe’s applications. Previously in 2013, the KFTC had closed an investigation into allegations that Google was preventing mobile service providers and smartphone makers from installing other search engines on Android phones before selling them.

In April and August 2018, the KFTC conducted onsite investigations on Google Korea for alleged abuse of its dominance over local game developers, by pressuring them to launch their mobile games exclusively or first on the Google Play platform.[7] The investigation reportedly began in April 2018, with the KFTC surveying local mobile game companies to review whether they were pressured or asked to either ‘launch their games only through specific app marketplaces,’ or to ‘not launch their games via other app marketplaces’.[8]

Apple

In April 2018, it was reported that the KFTC was preparing to impose sanctions on Apple for shifting its advertising and repair costs to local telecom carriers.[9] The KFTC had begun its investigation in 2016, and conducted onsite investigations of the Apple Korea office in June 2016 and November 2017.[10]

Online service providers’ terms of service

In July 2018, it was reported that the KFTC is conducting a probe into major online service providers’ terms of service concerning the collection and use of users’ personal information.[11] According to reports, the KFTC has asked several domestic and global companies, including Google, Facebook and Naver, to provide materials relating to their terms of service, with a focus on provisions that ask users to consent to the collection and use of their personal data.[12]

In a prominent case involving a platform operator’s terms of service, the KFTC issued a corrective order against Airbnb in November 2016, after which Airbnb agreed to revise the terms of its strict cancellation policies for Korean users only, by allowing 100 per cent refunds for bookings cancelled more than 30 days before the reservation date, and allowing 50 per cent refunds for bookings cancelled within 30 days, even to the day before the reservation date.[13] This is in contrast to the globally applicable strict cancellation policy that bans full refunds; allows a 50 per cent refund for cancellations made at least seven days in advance; and offers no refunds for cancellations made within seven days of the reservation date.[14]

Study on data and competition policy

The KFTC recently initiated a nine-month research programme (contracted to a third party) on data and competition, which is expected to explore the relationship between data and competition policy and how the MRFTA may address issues caused by today’s data-driven society. This may be a precursor to a KFTC investigation into data-driven industries – in previous cases, the KFTC commissioned similar research projects in other industries, which were then followed up with investigations into those fields.

The stated research topic is ‘Survey and Comparative Research Regarding the Status of Competition-related Issues in the Big Data Field’. The research will focus on the following: the major foreign competition regulators’ research into the market status of big data; the review and analysis of the current status of competition issues in the domestic big data field (including transaction structures, transaction terms, methods of collection, analysis and use of data, and profit models); and the policy implications of competition enforcement relating to big data (including the assessment of foreign cases, and the review of criteria for defining the market and evaluating market dominance). The researchers are expected to report to the KFTC by the end of 2018.

What to expect

The KFTC is maintaining considerable interest in the ICT sector, with a focus on data-driven industries and internet platforms. With the newly revised MRFTA and the forthcoming results of the study on data and competition policy, which may subsequently be reflected in law or a specific enforcement agenda, the KFTC will likely obtain more flexibility and regulatory grounds to investigate and take enforcement action against the particular competition issues that arise in the digital field.


Notes

[1] Youngjin Jung is a partner, and In-Sang Kim and Hee Won Marina Moon are attorneys, at Kim & Chang.

[2] This can be found in the former Chairman Chung’s message on 30 December 2016 available at: http://www.shinailbo.co.kr/news/articleView.html?idxno=548775.

[4] This can be found in the Chairman Kim’s message in the recent KFTC press conference held on 17 June 2018 available at: www.sedaily.com/NewsView/1S0UFCKPLH.

[5] Supreme Court Decision (en banc) 2002Du8626 (22 November 2007).

[6] ‘Google Korea gets fresh KFTC site inspection over suspected Android dominance abuses,’ MLex, 5 April 2018.

[7] ‘Google Korea faces antitrust probe for abusing game firms,’ The Korea Times, 26 August 2018,
https://www.koreatimes.co.kr/www/tech/2018/08/133_254496.html.

[8] ‘Google Play under FTC investigation in Korea for alleged abuse of market position,’ The Korea Herald, 16 April 2018, www.koreaherald.com/view.php?ud=20180416000718.

[9] ‘Apple likely to face sanctions over unfair practice in Korea,’ The Korea Herald, 8 April 2018,
http://www.koreaherald.com/view.php?ud=20180408000154. x.

[10] id.

[11] ‘Exclusive: KFTC is addressing “unfair collection and use of personal information” by content providers such as Google and Facebook,’ ETNews, 16 July 2018, http://www.etnews.com/20180716000353 (Korean-language site).

[12] id.

[13] ‘Airbnb will ease “strict policy” refunds in South Korea—is a worldwide move next?’ Forbes.com, 4 April 2017, https://www.forbes.com/sites/elaineramirez/2017/04/04/airbnb-will-ease-strict-policy-
refunds-in-south-korea-is-a-worldwide-move-next/#117ea1b634c9
.

[14] id.

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