Korea: Abuse of Dominance

Korea: Abuse of Market Dominance

Until recently, it appeared that the Korea Fair Trade Commission (KFTC) was not highly interested in abuse of market dominance cases, focusing instead on cartel enforcement.

However, since the KFTC's finding in 2006 of abuses of market dominance by Microsoft,¹ Korean practitioners have witnessed an increasing number of abuse of market dominance cases being enforced by the KFTC. In 2007, the Supreme Court of Korea released its decision in Posco,² which for the first time laid out elements for the determination of the abuse of market dominance.

Noting the significance of Posco in Korean competition law, this chapter briefly describes the Korean law prohibiting the abuse of market dominance and discusses the growing body of court precedents on the abuse of market dominance in Korea.

Abuse of market dominance under the Monopoly Regulation and Fair Trade Act of Korea

The abuse of market dominance is prohibited under article 3-2 of the Monopoly Regulation and Fair Trade Act of Korea (MRFTA). Article 3-2 enumerates five different types of conduct of dominant enterprises that would constitute abuses of market dominance under the MRFTA. These 'abusive acts' are:

• unreasonably determining, maintaining, or changing the price of products or services;
• unreasonably controlling the sale of products or provision of services;
• unreasonably interfering with the business activities of other enterprises;
• unreasonably impeding the entry of new competitors; and
• unreasonably excluding competitors, or seriously impairing the interests of consumers.³

In addition to the MRFTA, article 5 of the Enforcement Decree of the MRFTA (Enforcement Decree) and the KFTC Guideline on the Examination of Abusive Acts of Dominant Position (MDP Guideline) further clarify the enumerated 'abusive acts' under article 3-2 of the MRFTA. Generally, a refusal to deal is regulated under the 'abusive act' enumerated in paragraphs 3 and 4 while predatory pricing and exclusive dealings are enforced under the abusive acts enumerated in paragraph 5 of article 3-2(1).

If a dominant enterprise is found to have engaged in an enumerated 'abusive act', the KFTC may issue corrective action orders and impose administrative fines against such dominant enterprise. Administrative fines may be up to 3 per cent of the dominant enterprise's annual turnover (or if annual turnover is difficult to calculate, up to 1 billion Korean won). Corrective actions can include price reductions, discontinuance of the 'abusive act', a public announcement of the corrective action order or other actions deemed necessary by the KFTC to correct the abuse.

Comparison with article 82 of the EC Treaty and section 2 of the Sherman Act

In the EU and United States, abusive acts are governed under article 82 of the EC Treaty and section 2 of the Sherman Act, respectively.

The prohibition on the abuse of market dominance under the MRFTA is closer to that of article 82 of the EC Treaty than section 2 of the Sherman Act in that the MRFTA prohibits both exclusionary and exploitative abuses. However, the MRFTA is also distinct from the EC Treaty in that the MRFTA does not have a comprehensive provision that allows the KFTC to prohibit abusive acts other than those acts expressly enumerated under article 3-2(1).

Abuse of market dominance versus unfair trade practices under the MRFTA

Article 23 of the MRFTA prohibits enterprises from engaging in unfair trade practices that could impair fair trade. Article 23 violations may result in administrative fines of up to 2 per cent of the infringing enterprise's annual turnover (or if annual turnover is difficult to calculate, up to 500 million Korean won) as well as corrective action orders to discontinue the unfair trade practice, revise the offending terms of a contract, publicly announce the substance of the corrective action order or take other actions deemed necessary by the KFTC to remedy the violation.

Certain unfair trade practices that fall under the purview of article 23 including exclusive dealing, discrimination and refusal to deal, may also constitute abuses of market dominance prohibited under article 3-2. Despite the apparent overlap, however, they are distinguishable because article 23 does not require the infringing enterprise to have market dominance. In addition, article 23 generally looks to the impairment of fair trade while article 3-2 considers the exploitative or anticompetitive effects on the relevant market.

Notwithstanding, because article 3-2 and article 23 are non-exclusive provisions, it is technically possible for a dominant firm in violation of article 3-2 to also be in violation of article 23. In fact, the KFTC has occasionally enforced article 23 against a dominant enterprise that may have conducted an abusive act prohibited under article 3-2 of the MRFTA. Before Posco, the prevailing view among legal commentators was that in such instances, article 3-2 should apply because article 3-2 can be considered as a specific provision vis-à-vis article 23.

Supreme Court in Posco

In 2007, the Supreme Court of Korea decided a seminal case regarding a refusal to deal by Posco, one of the largest steel makers in the world. The Supreme Court set forth the elements needed to support a finding of an abuse of market dominance under article 3-2 of the MRFTA. To such effect, Posco is comparable to US v Grinnell⁴ in the United States.

In 1999, Posco refused to supply hot-rolled coils to Hyundai Hysco Co Ltd (Hysco). Hysco intended to use the hot-rolled coils supplied by Posco to manufacture cold steel plates and sell them to its affiliates, Hyundai Motors Company and Kia Motors Corp. However, Posco also manufactured cold steel plates for similar purposes. Finding that Posco abused its market dominance under the paragraph 3 of article 3-2(1) of the MRFTA (unreasonably interfering with the business activities of other enterprises) by refusing to deal with Hysco, the KFTC issued corrective action orders and imposed an administrative fine of 1.64 billion Korean won against Posco. The KFTC ruling was affirmed on appeal to the Seoul High Court.

In its decision, the Supreme Court vacated and remanded the Seoul High Court's ruling, holding that the KFTC failed to prove that Posco's refusal to deal was 'unreasonable', a determination which should be made in light of the legislative purpose of the MRFTA to promote competition in a monopolistic or oligopolistic market. The Supreme Court held that a refusal by a dominant enterprise to deal with another enterprise would not, by itself, constitute a violation of article 3-2, unless the refusal caused anticompetitive effects on the relevant market. In doing so, the Supreme Court ruled that a refusal to deal would constitute a violation of article 3-2 of the MRFTA if both of the following conditions are met:

• the act in question was conducted with the intent or purpose to impair competitiveness in the relevant market; and
• the refusal would raise concerns about anti-competitive effects on the relevant market.

The Supreme Court further explained that indicators of anticompetitive effects to the relevant market can include price increases, reduced production, reduced consumer choices and reduction of market participants. The Supreme Court added that such intent and likelihood of anticompetitive effects may be inferred if the aforementioned anticompetitive effects are established.

After examining the facts of the case, the Supreme Court ruled that, although Hysco experienced difficulties in locating alternative hot-rolled coil suppliers due to Posco's refusal to deal, such refusal did not harm the competitiveness of the cold steel plates market. Hysco was able to continue its manufacture of cold steel plates despite Posco's refusal to supply hot-rolled coils, and there was no evidence indicating that Posco's refusal resulted in any price increases or production declines of cold steel plates. The Supreme Court concluded that because the KFTC failed to prove neither Posco's anticompetitive intent nor the likelihood of anticompetitive effects on the market for cold steel plates, Posco's refusal was not 'unreasonable' and therefore the KFTC erred in finding Posco in violation of article 3-2 of the MRFTA.

In its opinion, the Supreme Court also addressed the relationship between article 3-2 for abuse of market dominance and article 23 for unfair trade practices, holding that acts which affect competition should be enforced under article 3-2 as abuses of market dominance whereas acts simply affecting fair trade among trading parties should be enforced under article 23 as unfair trade practices.

Implications of Posco

Posco is significant in that it clarified the elements needed to determine the 'unreasonableness' of an abusive act under article 3-2 of the MRFTA. Nevertheless, not everyone was persuaded by the abuse of market dominance test set forth by the Posco court.

Some legal commentators believe that the Supreme Court's requirement of intent element may have set the standard of proof too high. Noting the difficulties associated with demonstrating the existence of intent and that the intent can be inferred from the objective factors, commentators questioned whether the independent proof of intent element is necessary in addition to the likelihood of the anti-competitive effects from the abusive act in question.

With respect to the relationship between articles 3-2(1) and 23, some commentators and practitioners have noted the KFTC's Unfair Trade Practice Guideline may have been invalidated by the Posco court. While the Supreme Court in Posco held that acts with anticompetitive effects on the market should be enforced under article 3-2 as abuses of market dominance while acts affecting fair trade among trading parties should be enforced under article 23 as unfair trade practices, the KFTC's Unfair Trade Practice Guideline provides that article 23 of the MRFTA governs business practices with unfair or anticompetitive effects. Nevertheless, despite the Supreme Court ruling in Posco, it is projected that Korean courts would not overturn a KFTC decision to enforce unfair trade practices with anticompetitive effects under article 3.

In addition to these valid comments, commentators and practitioners questioned the scope of applicability of the Posco test. In Posco, the Supreme Court did not specify whether the same test for finding an abuse of market dominance would apply to abuses other than a refusal to deal. In particular, the Supreme Court was silent as to whether the same test would apply to other types of 'abusive acts', including exploitative abuses concerning the interests of consumers rather than competition in the market. Since Posco, Korean courts have released a few decisions addressing this point.

Post-Posco cases

TBroad-I

In 2008, the Supreme Court applied the same test to another case involving an abuse of market dominance, this time by cable television companies. In TBroad-I,⁵ TBroad GSD Broadcasting Co Ltd along with other cable system operators (TBroad-I) unilaterally changed the channel number assigned to Woori Home Shopping Co Ltd (Woori) in response to Woori's refusal to pay higher service fees. As a result, Woori experienced a significant loss of profits. Finding that TBroad-I had abused its market dominance in violation of article 3-2(1)(3) of the MRFTA (unreasonably interfering with the business activities of other enterprises), the KFTC issued correctional action orders and administrative fines. On appeal, the Seoul High Court affirmed the KFTC order.

On further appeal, the Supreme Court remanded and vacated the Seoul High Court decision, holding that the Seoul High Court erroneously defined the relevant market and TBroad-I as dominant firms. In addition, the Supreme Court examined the presence of elements set forth in Posco. Upon failing to find any anticompetitive intent of TBroad-I or the likelihood of anticompetitive effects to the relevant market, the Supreme Court held that the KFTC erred in finding TBroad-I in violation of article 3-2 of the MRFTA.

TBroad-II

In the same year that the Supreme Court released its TBroad-I decision, the Seoul High Court came out with another decision regarding an abuse of market dominance by TBroad GSD Broadcasting Co Ltd and its affiliates (TBroad-II).

In TBroad-II,⁶ TBroad-II had unilaterally changed the terms of cable subscription agreements between TBroad-II and residents of various multi-unit residential buildings by terminating or refusing to renew the collective agreements and inducing them to individually subscribe to a basic package with a higher subscription fee. Without reference to the test set forth by the Posco court, the KFTC found that TBroad-II's conduct seriously harmed the consumers' interests and imposed administrative fines against TBroad-II for violation of the second half of the paragraph 5 of article 3-2(1).

On appeal, TBroad-II argued that such change of cable subscription terms does not constitute an abusive act in that increase of cable subscription fee was necessary to prevent their losses, and article 3-2(1)(5) of the MRFTA is not enforceable because the Enforcement Decree and the MDP Guideline do not set out specific abusive acts constituting serious impairment of consumers' interests.

Against such arguments by TBroad-II, the Seoul High Court held that TBroad-II failed to provide evidence supporting that they were suffering losses under the original collective agreement terms, and the change of cable subscription terms seriously impaired consumers' interests because viewers residing in multi-unit buildings were left with no choice but to not watch cable TV or to pay cable fees two to nine times higher. In terms of enforceability of the latter half of paragraph 5 of article 3-2(1), the High Court held that it is enforceable against an abusive act of seriously impairing consumers' interests even if the specific types and criteria of such act are not provided under the Enforcement Decree or the MDP Guideline. Here, the Seoul High Court did not apply the test set forth by the Posco court. Presently, the case is pending before the Supreme Court.

Melon

In Melon,⁷ SK Telecom Co Ltd (SKT) was found to have engaged in both exploitative and exclusionary abuses. SKT used proprietary digital rights management (DRM) technology in its MP3 mobile phones which restricted its MP3 mobile phones to play only DRM music files purchased and downloaded from melon.com (Melon), a music file downloading website operated by SKT. Finding that the use of the DRM system forced SKT consumers to purchase MP3 music files from Melon, the KFTC found that SKT had abused its market dominance in violation of article 3-2 of the MRFTA. Specifically, the KFTC found SKT to have engaged in abusive acts enumerated in paragraph 3 (unreasonably interfering with the business activities of other enterprises) and the second half of paragraph 5 (seriously impairing the interests of consumers) of article 3-2(1) of the MRFTA and issued correctional action orders along with imposing an administrative fine of 330 million Korean won.

On appeal, the Seoul High Court struck down the KFTC decision on the grounds that although SKT's use of DRM technology impaired the consumers' interests, the degree of such impairment was not serious, and use of DRM technology is not unreasonable in light of the fact that DRM is a widely used copyright protection technology. Further, the Seoul High Court applied the test set forth by the Posco court and held that such use of DRM cannot be regarded as SKT's abuse of market dominance because the KFTC failed to prove that use of DRM would or intended to distort the competitiveness of the relevant market. Presently, the case is pending before the Supreme Court.

Other cases

In addition to these, there are currently several abuse of market dominance cases pending before the Seoul High Court and the Supreme Court of Korea. For instance, an appeal of the KFTC's finding of an abuse of market dominance by Intel from its rebate programme is now before the Seoul High Court. In addition, the legality of exclusionary behaviour by an online shopping website owner is being challenged before the Supreme Court of Korea.

The future

Posco is monumental in Korean competition law in that it clarified elements of abusive acts prohibited under paragraph 3 of article 3-2(1) of the MRFTA. Yet, while the Supreme Court in TBroad-I affirmed the validity of the Posco test in the article 3-2(1)(3) case, it is unclear whether the same court would apply the Posco test to other types of abusive acts, especially to exploitative abuses. With the increasing focus on abuse of market dominance cases by the KFTC, it is anticipated that there will be further opportunity for courts to clarify the scope of the Posco test.

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Notes

1. KFTC (24 Feb 2006) Decision No. 2006-42. The KFTC ordered corrective actions against Microsoft and imposed a 32.49 billion Korean won fine for violating the Monopoly Regulation and Fair Trade Act by tying its Windows Media Service to the Windows server operating system, and by tying its Windows Media Player and instant messaging program to the Windows PC operating system, holding that such tie-in sales constitute abuses of market dominance. Microsoft appealed the KFTC's ruling to the Seoul High Court, but later withdrew its appeal.
2. Supreme Court of Korea (22 Nov 2007) Case No. 2002Du8626.
3. Paragraphs (1) - (5) of section 1 of article 3-2 of the MRFTA.
4. 384 US 563 (1966).
5. KFTC Commission (28 March 2007) Decision No. 2007-152 and 2007-153; Seoul High Court (8 Nov 2007) Case No. 2007Nu10541; Supreme Court of Korea (11 Dec 2008) Case No. 2007Du25183.
6. Seoul High Court (18 Dec 2008) Case No. 2007Nu29842.
7. KFTC Commission (6 Feb 2007) Decision No. 2007-44; Seoul High Court (27 Dec 2007) Case No. 2007Nu8623.