Korea: Abuse of Dominance

Since Posco 1 in 2007, a large portion of Korean competition law on abuse of dominance still remains less than clear, especially concerning the proper assessment standard on 'exploitative' abuses. As for 'exclusionary' abuses, however, there have been new decisions in 2009, such as Nonghyup2 by the Supreme Court of Korea and Qualcomm3 by the Korea Fair Trade Commission (KFTC).

This article seeks to briefly discuss the statutory bases for abuses of dominance under article 3-2, section 1 of the Monopoly Regulation and Fair Trade Act (MRFTA) and the Supreme Court of Korea's legal standard of assessing a dominant enterprise's refusal to deal as a form of exclusionary abuse under the MRFTA. It also discusses recent decisions by the Supreme Court of Korea and by the KFTC on exclusionary abuses.

Overview of Abusive Conducts under the MRFTA

Statutory Framework

Article 3-2, section 1 of the MRFTA applies to abuses of dominance. It itemises abusive conducts into five general categories, namely:

• price abuse;

• output restriction,

• hindering the business of other enterprises;4

• foreclosing new entrants from the market; and

• excluding competitors from the market or significantly injuring consumer welfare.

Detailed forms of conducts prohibited under each of these five conduct categories5 are then enumerated in increasing detail, first by the MRFTA Enforcement Decree and then by the KFTC Guideline on the Examination of Abusive Acts of Dominant Position (MDP Guideline). A violation triggers a remedial order that will include an administrative fine (up to 3 per cent of the relevant revenue over the violation period) as well as a cease-and-desist order tailored to remedy the competitive injury. (See the 2009 edition of the Asia-Pacific Antitrust Review for further discussion on the MRFTA's statutory framework).

Posco and its Implications

Posco is a seminal case decided by the Supreme Court of Korea concerning a dominant enterprise's conduct of 'hindering the business of other enterprises' (under article 3-2, section 1, item 3 of the MRFTA), specifically by perpetrating a 'refusal to deal' as prohibited under the MDP Guideline. In the case, the Supreme Court of Korea laid out the two elements of the offence: first, the dominant enterprise engaged in a conduct capable of restricting competition on the market; second, the dominant enterprise had the intent to restrict competition in the market by engaging in such a conduct. These elements were described as separate. In Posco, reversing the Seoul High Court's affirmation of the KFTC's finding of a violation, the Supreme Court of Korea stated that, in the context of assessing a dominant enterprise's refusal to deal, an injury to competitors in the absence of an injury to competition (eg, higher prices, restricted outputs, stifled innovation, and reduced number of competent competitors) could not support the finding of a violation. (See the 2009 edition of the Asia-Pacific Antitrust Review for further discussion of Posco.)

After Posco, many commentators and practitioners are still left in the dark as to the standard's precise scope of applicability. While the Posco standard may have been used in TBroad-I6 regarding the claims based on 'hindering the business of other enterprises' under article 3-2, section 1, item 3 of the MRFTA, and later in Nonghyup regarding the claims based on 'exclusion of competitors' under article 3-2, section 1, item 5 (first half) of the MRFTA, the applicability of Posco is not clear regarding all other abuses of dominances itemised under article 3-2, Section 1 of the MRFTA, particularly 'exploitative' abuses (ie, price abuse, output restriction and injuring consumer welfare), for which a different assessment standard seems to be required. Interestingly, the Seoul High Court did not apply Posco in assessing the 'injury to consumer welfare' claim in TBroad-II.7 An appeal from TBroad-II is currently pending before the Supreme Court of Korea.

Decisions in 2009

Nonghyup

The National Agricultural Cooperative Federation (Nonghyup) was a monopolistic distributor of food-crop chemical fertilisers, partly aided by the government subsidies on its fertiliser purchases. On 1 July 2005, the government stopped paying such subsidies as part of its plan to stimulate competition in the market. In January 2006, Nonghyup entered into exclusive supply-and-purchase agreements with 13 suppliers whereby the suppliers were required to sell 'bulk blender' fertilisers exclusively to Nonghyup. Also, as for other types of food-crop fertilisers, Nonghyup was to have the right to a contractual termination regarding all types of food-crop fertilisers or to an arbitrary change in the purchase prices if the suppliers were to supply the fertilisers to any distributor other than Nonghyup. Consequently, Nonghyup had a near-100 per cent market share in the first half of 2006.

The KFTC found that these agreements constituted an 'unreasonable exclusion of competitors' under article 3-2, section 1, item 5 (first half) of the MRFTA, specifically taking the form of an 'exclusive dealing' stipulated by the MRFTA Enforcement Decree. This decision was affirmed by the Seoul High Court and later by the Supreme Court of Korea. In Nonghyup, applying Posco in the context of article 3-2, section 1, item 5 (first half) of the MRFTA - thus indicating that the application of Posco is not limited solely to claims based on a dominant enterprise's 'refusal to deal' - the Supreme Court of Korea held that because a dominant enterprise's exclusive dealing is conditioned upon exclusivity, the intent can often be inferred from the conduct itself.

Qualcomm

The KFTC's decision in Qualcomm concerned the company's conditional rebate practice, among other things. Specifically, given the dearth of precedents on rebates in Korea and thus the lack of a clear guiding standard of assessing them, it raised the interest among practitioners and scholars as to how the KFTC would assess Qualcomm's rebates.

As it turned out, the KFTC opted for a formalistic approach that was reminiscent of the decades-old enforcement practice of the EC Commission and the European Court of Justice, from which even those European authorities are nowadays departing in favour of the effects-based approach. Condemning Qualcomm's rebates as 'exclusionary', the KFTC seemed to viscerally condemn Qualcomm's rebate programme based primarily on its structural characteristics, at the expense of conducting an objective assessment grounded on the price-cost analysis to ascertain the actual effect on competition. In particular, the KFTC even espoused the controversial view that protection must be afforded to inefficient competitors. As seemingly a per se condemnation, this decision could signal a de facto prohibition on all conditional rebates by any enterprise that could be suspected of having dominance.

The KFTC's approach in Qualcomm appears to be at odds with the prevailing view taken in the United States, where a dominant firm's rebate is generally assessed under the 'price-cost' analysis to find whether the price at issue is predatory and thus genuinely capable of injuring competition by excluding competitors 'as efficient as' the dominant firm. The KFTC's approach also seemed at odds with the EC Commission's publication of the 2008 Guidance Paper, which clearly embraced as a preferable assessment tool a kind of effects-based analysis by which a dominant undertaking's effective price (based on CVS calculation) is compared to its cost.

As an appeal is now pending before the Seoul High Court, it will be interesting to observe what assessment standard will be used in this case.

Future

It is generally agreed that a single, unified standard of assessment cannot apply to both exclusionary and exploitative abuses: the two conducts are targeted at and create different results in the market. For instance, while a dominant enterprise's exclusionary abuse is targeted at diminishing competition by excluding certain of its critical competitors, its exploitative abuse aims to take advantage of counterparties or consumers by charging supracompetitive prices - but may not necessarily be targeted at excluding any competition. In fact, a dominant enterprise's exploitative abuse may invite more competition from both within and even outside the market.

It only follows that these conducts must be assessed under different standards. Given this observation, article 3-2, section 1 of the MRFTA, which itemises both types of abuses of dominance, needs clarifying by the courts. Thus far, the only guidance from the Supreme Court of Korea has been Posco, TBroad-I and, more recently, Nonghyup. These cases, however, pertain only to exclusionary abuses.

In light of this, the recent decision by the Seoul High Court in TBroad-II is particularly interesting. There, the Seoul High Court apparently chose not to apply Posco in assessing the 'injury to consumer welfare' claim - classic exploitative-abuse accusation. In TBroad-II, the Seoul High Court dealt with the alleged 'consumer harm' exclusively on factual grounds, without proffering detailed discussion on the proper standard of assessment or applicable criteria. It will be interesting to see what the Supreme Court of Korea has to say on TBroad-II.

Notes

1. Supreme Court of Korea (22 November 2007) Case No. 2002Du8626.

2. Supreme Court of Korea (9 July 2009) Case No. 2007Du22078.

3. KFTC Commission (30 December 2009) Decision No. 2009-281.

4. Thus, this particular abuse can be perpetrated even with respect to the enterprises that do not compete against the dominant enterprise in question.

5. A notable exception is the conduct of significantly injuring consumer welfare, on which neither of the Enforcement Decree or the MDP Guideline provides any elaboration whatsoever.

6. Supreme Court of Korea (11 December 2008) Case No. 2007Du25183.

7. Seoul High Court (18 December 2008) Case No. 2007Nu29842.

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