The Asia-Pacific Antitrust Review 2019

Korea: Overview

19 March 2019

Trinity Legal

Over the past year, the Korea Fair Trade Commission (KFTC) has been involved in many cases to promote competition and safeguard consumers from anticompetitive mergers and business conduct that can hamper the economic growth in the long run. The KFTC's enforcement actions in 2018 have had far-reaching effects particularly in industries that have recently become critical sectors of Korea's economy including high-tech, bio or pharmaceutical, banking and finance, and fast-growing innovative industries. Cartel enforcement remained an enduring priority and active enforcement activities were constantly performed against abuse of market dominance and unfair trade practices.

On the other hand, levelling the playing field was another critical mission of the KFTC in 2018. The KFTC enforces 13 statutes including the Monopoly Regulation and Fair Trade Act (MRFTA), which is the equivalent of the US Sherman Act and the Treaty on the Functioning of the European Union. Except for the MRFTA, most of the other statutes enforced by the KFTC actually aim at levelling the playing field. For instance, the Fair Subcontract Act, the Large Retail Business Act and the Fair Franchise Act each aim to protect the small and weak from the large and big. In particular, since Sang Jo Kim took the wheel of the KFTC in June 2017, many changes have been observed in legislature and enforcement activities to ensure fairness in transactions.

There is believed to have been more active legislative efforts and robust enforcement activities in 2018 than any other year. As briefly sketched below, almost every corner of regulations and statutes within the jurisdiction of the KFTC has been looked at again and was, to a large extent, amended and revised to tighten regulations, increase sanctions and close the loopholes. The KFTC's enforcement activities seem to have largely been heightened throughout 2018 (the KFTC's statistical report for 2018 is yet to be released).

Monopoly Regulation and Fair Trade Act

Cartels

In 2018, Korea adopted punitive damages for cartel infringement. On 30 August 2018, the National Assembly, Korea's legislative body, passed a bill to enable injured persons to recover punitive damages for cartel infringement. Thus, the injured from cartels may seek monetary relief up to threefold the damages sustained in the consequence of unlawful cartels. The law imposes caps (up to three times) on punitive damages, which is different to the US Clayton Act, which provides automatic treble damages. However, the new law reduces the potential liability for damages for a leniency applicant if leniency is granted. A cartelist that has received leniency may limit its liability to actual single damages with joint and several liabilities. As a result, the MRFTA joined the group of the statutes within the KFTC jurisdiction that had adopted 'up to' treble damages (the Fair Subcontract Act, the Fair Large Retail Business Act, the Fair Distributor/Reseller/Consignee Act, the Fair Franchise Act and the Product Liability Act).

Korea took the first step to have a dual antitrust enforcement system. The Korean Ministry of Justice (MOJ) and the KFTC signed an agreement repealing the KFTC's exclusive criminal referral right and granting joint jurisdiction to the MOJ in respect of naked cartels such as price-fixing, output restriction, market division and bid-rigging. If being legislated into law, the prosecutors would be authorised to investigate naked or hardcore cartels independent of the KFTC's criminal referral. However, a concern was raised that companies engaged in hardcore naked cartels would hesitate to apply for leniency due to the possibility of being criminally sanctioned. The MOJ and the KFTC said they will jointly try to resolve or mitigate the concern.

The KFTC is considering the adoption of small firm cartel exemption. The proposed exemption under discussion does not grant a full immunity to small firms. Naked cartels or hardcore cartels by small businesses would still be subject to serious administrative fines and criminal penalties regardless of the size of the firms engaging in unlawful conspiracies.

The fight against cartels is always a top enforcement priority for the KFTC. Multiple domestic and foreign cartelists were caught for price-fixing and bid-rigging in 2018. According to the KFTC's Report for the National Assembly Audit in October 2018, over 40 bid-rigging cases in apartment maintenance industry were caught and sanctioned, with 920 million won being imposed for fines in total. Furthermore, KFTC enforcement continued against bid-riggings in the public procurements. A fine of 20.4 billion won was imposed on dam maintenance service providers for having conspired to rig bids for the Korea Water Resources Corporation, the governmental agency for comprehensive water resource development and for providing both public and industrial water. Cracking down on bid-riggings in the construction market continued as well. The KFTC imposed a fine of 15.7 billion won on ready-mix concrete companies and 119.4 billion won on rebar manufacturers for price-fixing. The KFTC was diligent in uncovering conspiracies involving foreign companies as well. The KFTC imposed a fine of 36 billion won on nine Japanese condenser manufacturers involved in price-fixing conspiracies.

In terms of cartel enforcement, the KFTC said in its Report for the National Assembly Audit that it would continue forging its alliances with foreign antitrust watchdogs regarding information and workforce exchange.

Merger control

In November 2018, the KFTC announced its proposed amendments to the Merger Review Guidelines to address the competitive impact of mergers between companies in the innovation industries or companies owning big data. If finally promulgated, this would be another round of changes to the merger control regime following the notifiable thresholds increase in 2017.

With respect to the merger control in the innovation market, the proposed amendments provide an alternative approach to relevant market delineation. The Merger Review Guidelines say that market share:

May be computed based on the size of R&D expenditure, the size of specialized assets, and capabilities for innovation activity, the number of patents registered and referenced in the relevant area, the number of players that substantially participate in innovation competition.

According to the corresponding press release, the traditional method of market share calculation, depending on the revenue or turnover generated by the parties, does not work often because the highly rated startups, commonly referred to as 'unicorns', do not generate revenues exceeding the thresholds at the time of the merger. The proposed revisions aim to hunt the acquisitions of such unicorns. Moreover, the Merger Review Guidelines elaborate how to assess the competitive impact of mergers involving big data. This was a bold move in a situation where competition law regimes have no consensus yet over whether antitrust law has a role to play in regulating big data. The amendment proposal was released in November 2018 for public comment.

During the first half year of 2018, the number of the reported deals increased but the total of the transaction values was diminished compared with the same period of 2017. According to the KFTC press release, the number of intragroup deals within large business conglomerates for restructuring dramatically grew. It is also notable that the number of foreign firm's acquisitions of domestic firms grew as well, notwithstanding the trade war uncertainty relative to the corresponding period of the past year.

The largest merger notified to the KFTC during the first half year of 2018 was Qualcomm's acquisition of NXP Semiconductors, a Dutch company known for automotive and internet of things chips. The transaction value of the merger amounted to 52.8 trillion won. In addition to the size of the deal, the transaction drew attention due to its potential competitive concern. The two companies initially entered into a deal in October 2016 and the deadline to close the deal was extended many times since then, as the companies waited for the notified countries to approve or reject the transaction. The KFTC issued a conditional approval. However, Qualcomm has finally given up on purchasing NXP Semiconductors having received no response from the Chinese authority.

The KFTC issued a conditional approval for the merger of industrial gas groups Praxair and Linde, which was notified to the KFTC on 14 August 2017. The transaction size was approximately 73 trillion won. The KFTC imposed structural remedies to address competitive concern after consummation of the merger, requiring the merging companies to sell off certain assets within Korea and abroad.

Abuse of market dominance

In the 2018 Action Plan, the KFTC announced that it would carefully monitor abusive conduct in the pharmaceutical or bio mobile application platform, new growth engine and big data industries.

To uncover competition issues in the pharmaceutical and bio industry, in May 2017, the KFTC embarked on a survey of 32 domestic and 39 multinational pharmaceutical companies, requesting information of patents associated with drugs sold in the market after being approved by the Ministry of Food and Drug Safety, patent licensing agreements and patent litigations. This survey pursued information over six years from 2010 to 2016. Investigation is still under way and no specific enforcement activity is reported yet in this regard.

As part of investigation of the mobile application platform market, the KFTC reached out to game developers to see whether they had been forced to launch their games exclusively in a certain platform. Google Play, which claimed 61.2 per cent market share, became the target. The KFTC reportedly obtained evidence suggesting that Google engaged in exclusive dealing with game developers. The investigation is still under way.

There were a few remarkable cases addressing abuse of market dominance in 2018. Among others, Qualcomm's appellate lawsuit kept continuing before the Seoul High Court. In 2016, the KFTC imposed global portfolio-wide remedies and a record fine of 1.03 trillion won, concluding that Qualcomm abused its dominant power in the 2G (CDMA), 3G (WCDMA) and 4G (LTE) standard essential markets as well as the market for CDMA modem chipsets. Apple, Samsung Electronics, Intel, MediaTek, Huawei initially participated in the suit as intervenors, but Samsung Electronics walked away from the fight, settling with Qualcomm in the beginning of 2018. Instead, LG Electronics joined the legal battle reportedly due to shaky and fragile negotiations with Qualcomm in the United States since the KFTC's administrative decision was issued. So far, the KFTC and Qualcomm have had 11 hearings and interrogations since October of last year. It would likely take several more years for the court to come up with the final verdict.

Another notable case involves Siemens, a global medical technology company. Siemens, Siemens healthcare and Siemens Healthineers were accused of abusing their dominant position in the primary market for their equipment – magnetic resonance imaging (MRI) systems and computed tomography X-ray (CT) systems. In January 2018, the KFTC imposed an administrative fine of 6.2 billion won on Siemens, for excluding its competitors in the secondary servicing market, which are independent service organisations (ISOs) engaged in repairing and servicing Siemens's equipment. The KFTC found that Siemens hampered ISOs' entry in Siemens's equipment service market by following a discriminatory policy against its customer hospitals that had purchased services from ISOs and by sending misleading or unwarranted warnings to its customer hospitals that servicing from ISOs could incur the issue of further updates and could lead to an unlawful infringement of Siemens's copyrights.

It was recently reported that eBay Korea filed in October 2017 a complaint accusing NAVER, the leading internet search engine in Korea, of abuse of its dominance. According to the media, eBay Korea alleged in its complaint that NAVER had unfairly been favouring vendors using its sales platform (such as NAVER Store Farm) or accepting NAVER Pay, its online payment service in terms of the position in the search results. Interestingly, most of eBay Korea's traffic comes from NAVER. Many consumers search for an item they want to buy through NAVER in Korea. However, it will likely be a tough journey for eBay as the KFTC failed to prove NAVER's dominance before the Korean Supreme Court in 2014.

Unfair trade practices

Under the MRFTA, a non-dominant firm can be sanctioned for its unilateral conduct. This is a unique aspect of the Korea's competition law. Proscribed unfair trade practices are as follows:

  • unfairly refusing to deal or discriminating against a certain business counterpart;
  • unfairly coercing or inducing customers of competitors to deal with oneself;
  • trading with a business counterpart by unfairly taking advantage of its superior bargaining position; and
  • trading under terms and conditions that unfairly restrict business activities of a business counterpart or disrupting business activities of other companies.

According to KFTC practice, in many cases where a particular act constituted both the abuse of a market-dominant position and the unfair trade practice, all of the relevant regulations on both issues will be used in the review of legality. However, for the issuance of corrective measures such as an administrative fine, regulations on the abuse of a market-dominant position will be applied.

According to the media reports, Apple was accused of unfairly shifting its advertising and repair costs to the local telecommunication companies. The KFTC sent its examination report (equivalent to the EU Commission's Statement of Objection) with its findings over to Apple Korea in April 2018, alleging that Apple advertised and repaired its high-tech products at the cost of the local telecommunications companies, which Apple would have had to bear the costs of otherwise. In December 2018, the KFTC held a first full-Commission hearing, where four standing commissioners and five non-standing commissioners heard the case. Ordinarily, a few more full-Commission hearings are held before the final decision is released. The key issue is whether Apple is in the superior bargaining position over the local telecommunication companies, SK Telecom, KT and LG U-Plus. In the second hearing held on 20 January 2019, Apple's expert witnesses reportedly testified that Apple does not have a superior bargaining position and Apple's restrictions on advertising is essential and necessary to maintain Apple's brand image, presenting economic analysis while the KFTC's expert witnesses testified otherwise. The final verdict is anticipated to be released a few months later. Much attention is being drawn to this case because this is a battle between a large firm from the United States and large domestic firms. It is more common that a large firm is accused of abuse of its superior bargaining position against a small firm. This is not the case.

Reform and modernisation efforts

On top of enforcement efforts, the KFTC created the Competition Law Reform Special Committee (Reform Committee) to effectively respond to the radical changes of the economic landscape due to the fourth industrial revolution. The Reform Committee consisted of 23 members including professors, lawyers and economists, who were elected on the basis of expertise and independence according to the KFTC's press release.

After five-month studies, the Reform Committee submitted to the KFTC the recommendations for legislative action it considered to be appropriate. The report recommended, particularly with respect to traditional competition law violations, that:

  • administrative fines for the MRFTA violations be increased (for example, for cartel violations, from 10 per cent to 20 per cent of the relevant volume of commerce);
  • criminal penalties for some MRFTA offenses (such as anticompetitive mergers) be removed;
  • the KFTC's exclusive right to refer the MRFTA offence to the Prosecutor's Office for criminal prosecution be removed;
  • the transaction value-based thresholds for premerger notification;
  • the market share thresholds to infer dominance in the relevant market be reduced from 50 per cent to 40 per cent and the present approach to collective or shared dominance be revised;
  • information exchange or sharing between competitors be a violation of the MRFTA;
  • the limitation period be streamlined – currently, the limitation period expires in five years of the beginning date of investigation or in seven years of the end of the offence but the Reform Committee recommended the removal of five-year limitation period; and
  • the injured person be able to file an injunction before the court to enjoin anticompetitive conduct.

As noted earlier, some of the Reform Committee's recommendations have been included in the proposed pending bills. The pending bills adopt:

  • the transaction value-based thresholds for premerger notification;
  • the offence of information sharing between competitors;
  • the dual enforcement of the MRFTA by the KFTC and the prosecutors against naked or hardcore cartels;
  • the injunctive remedy; and
  • lifting of criminal sanctions for consummation of anticompetitive mergers, certain unfair trade practices, certain offences by trade association and resale price maintenance.

The bill was released on 24 August 2018 for public comments.

Other statutes enforced by the Korea Fair Trade Commission

Fair Subcontract Act

The Fair Subcontract Act was amended in January 2018 to strengthen protection of subcontractor's rights and enhance subcontractor's negotiating power.

The amended Fair Subcontract Act has expanded the scope of protection for subcontractor's technology information by altering the definition of 'technology information.' Under the Fair Subcontract Act, the prime contractor is prohibited from demanding the subcontractor's technology information without justification to ban appropriation. The amendments redefined the statutory term of technology information to heighten protection for subcontractors. Prior to the amendments, technology information referred to information that is being kept confidential by the subcontractor's substantial (or best) efforts. The amendments lowered the commitment standard by replacing 'substantial' with 'reasonable' so as to expand the scope of the statutory protection.

The amendments have expanded the cause for subcontract price adjustment. Prior to the amendments, the prime contractor and the subcontractor must agree in writing that the subcontract price be equitably adjusted in the event of 'price change of raw material' during the performance of the contract. The amended Fair Subcontract Act has enabled contract price adjustment in the event of 'any cost change' including materials price increase. Accordingly, subcontractors are expected to get paid a fair price in the case of any cost change that was not considered when creating a bid for a project.

The Fair Subcontract Act bans the prime contractor from unfairly interfering with subcontractor's business. The amendments were made to the Enforcement Decree, a set of rules promulgated by the administrative agency following the President's signing generally under the authority granted by statute. The Enforcement Decree provides the list of offences constituting 'unfair interference with subcontractor's business' under the Fair Subcontract Act. Under the newly created provision, the prime contractor is banned from:

  • compelling the subcontractor to exclusively deal with him or herself or a company he or she designates;
  • restricting exportation of the subcontractor's technology information abroad; and
  • demanding the subcontractor's confidential business information including but not limited to cost data.

The Fair Subcontract Act prohibits the prime contractor's retaliatory action against subcontractor's filing a complaint with the authority, applying for mediation and responding to the authority's survey. The amended Fair Subcontract Act newly proscribes the prime contractor's retaliatory action against its subcontractor in case of a cooperation of subcontractor with the authority's investigation. Furthermore, the amendments added retaliatory action as a new cause for treble damages.

Prior to the amendments, the injured subcontractors could seek 'up to' treble damages for unreasonable pricing, unreasonable cancellation of order, unreasonable return of goods or services, unreasonable price reduction and unreasonable request for technology information.

According to the KFTC's Report for the National Assembly Audit, beyond these alterations, the KFTC is considering the abolishment of its exclusive right to make criminal referral of the case involving the prime contractor's appropriation of the technology information acquired from the subcontractor. In addition, another revision to the Fair Subcontract Act is being discussed to escalate the cap of the punitive damages from 'up to threefold' to 'up to tenfold' to deter the offence of appropriation of the subcontractor's technology information.

The Fair Subcontract Act aims to level the playing field between prime contractors and subcontractors. The chairperson of the KFTC repeatedly stressed through various media channels that the amendments would likely contribute to ensuring fairness in subcontract transactions, particularly between large conglomerates and small- and medium-sized enterprises (SMEs) by strengthening the subcontractors' negotiating power. According to the recent survey performed by the KFTC, which 5,000 large businesses and 95,000 SMEs responded to, 94 per cent of the respondents replied that subcontract practices had been improved both from the perspective of a prime contractor and a subcontractor.

No official statistical information for 2018 has become available yet, but more subcontract disputes were reported to the KFTC than any other years. It is also notable that the number of treble damage cases has gradually increased since the Fair Subcontract Act adopted up to threefold damages in 2011. Few courts have awarded more than actual damages suffered by the plaintiff or subcontractor yet and this trend will not likely change soon.

Fair Large Retail Business Act

The Fair Large Retail Business Act and its Enforcement Decree were reshaped in 2018 to strengthen protection of the rights of small vendors.

A new offence was created. Large retailers (for example, department stores and hypermarkets) must not unreasonably compel vendors to keep the agreed business hours under the amended Fair Large Retail Business Act. A violation may result in an administrative fine of up to 500 million won or the rent paid by the injured vendor.

The Fair Large Retail Business Act has permitted a court to triple the amount of the actual damages to be awarded to the vendors injured by the large retail business engaging in:

  • price cut without justification;
  • full or partial return of the ordered goods without justification;
  • use of the vendor's employees without justifications; or
  • retaliatory action against the vendor for the vendor's filing of a complaint with the KFTC, applying for mediation to the Korea Fair Trade Mediation Agency, responding to the KFTC's survey, and cooperation with the KFTC's on-site investigation.

Thus, any injured vendor may seek up to three times the amount of the actual damages for damage or loss suffered from the large retailer's violation of the Fair Large Retail Business Act.

Fair Distributor/Reseller/Consignee Act

The Fair Distributor/Reseller/Consignee Act aims to level the playing field in a relationship between supplier and its distributor, reseller or consignee. To that end, the statute basically requires written contract obligations and prohibits abusive conduct by a supplier against its distributors, resellers or consignees. The statute was enacted in 2015 and came into force one year after the enactment.

There were some legislature developments in 2018. Among other things, the KFTC promulgated the guidelines on 21 December 2018, which elaborate conduct that shall be unlawful under the statute. For example, the statute and its enforcement decree prohibit the supplier's unilateral adding of new terms to an existing contract without mutual assent, but the guidelines interpret that the supplier's unilateral changing of terms may constitute an offence as well. The guidelines provide specific conduct that shall constitute an offence proscribed by the statute on top of offences listed in the enforcement decree. The enforcement decree and guidelines are granted the statutory authority to provide information on which conduct falls under unlawful offence under the Fair Distributor/Reseller/Consignee Act.

Fair Franchise Act

There were a few key amendments over 2018 to the Fair Franchise Act and its enforcement decree. To begin with, the KFTC promulgated a new enforcement decree expanding the scope of items that must be included in the franchise disclosure document (FDD). The amendments to the enforcement decree were proposed to address franchisors' 'double-dipping' concerns. Franchisees raised concern that franchisors were exploiting franchisees by reaping extra profits at franchisees' cost from selling goods or services at excessive prices in addition to the initial franchise fee. To this end, the amended enforcement decree requires franchisors to disclose:

  • whether franchisor engages in double-dipping practice;
  • the average portion of a franchisor's yearly revenue represented by sales of source-restricted goods or services per franchisee;
  • the average percentage of the portion of a franchisor's yearly revenue represented by sales of source-restricted goods or services per franchisee to the total yearly revenue; and
  • the price ceiling and floor of the key source-restricted goods or services.

Additionally, the franchisor must disclose:

  • identification of affiliated persons or entities including spouse;
  • the categories of goods or services that must be purchased from affiliated persons or entities; and
  • the preceding year's revenue of affiliated persons or entities from sales of source-restricted goods or services.

Further, the amended enforcement decree tightens regulations against franchisor's exploitation by requiring disclosure of rebate or subsidy information. Under the amended enforcement decree, franchisors must disclose:

  • the identification of goods or services of suppliers that provide subsidies or rebates to franchisors or its affiliates; and
  • the amount of rebates or subsidies paid to franchisor or its affiliates by suppliers.

Under the amended enforcement decree, franchisors must disclose relevant information if franchisors sell the goods or services that are being sold by a franchisee in any exclusive territory.

Beyond extra ingredients to the FDD requirements, the amended enforcement decree allows a franchisee that has suffered loss for the preceding three months to shorten its business hours after midnight until 6am. Prior to the amendments, the franchisee had to suffer losses for the preceding six months so that it could reduce its business hours and close after 1am.

The KFTC in its press release stated the amended enforcement decree would likely help prospective franchisees to render better business decisions by providing more information about the franchisor, the franchise system, the business the prospective franchisee will conduct and the terms of the franchise agreement. The KFTC also stated that its enforcement efforts would be stepped up to uncover franchisor practice of compelling its franchisee to buy from suppliers approved by franchisor goods or services that are not deemed to be an integral part of the franchise system.

Conclusion

In 2018, a lot of legislative patchwork was carried out to close loopholes, create new offences and raise the penalty level. The KFTC is likely to continue tightening regulations, increasing penalties, and closing loopholes to encourage competition, ensuring it levels the playing field and becomes more responsive to dynamic markets.

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