Korea: Abuse of Market Dominance
This is an Insight article, written by a selected partner as part of GCR's co-published content. Read more on Insight
In 2010, the Supreme Court of Korea issued the following four important abuse of market dominance cases: CJ Hellovision (Supreme Court of Korea, 2008Du16407 decision date 25 March 2010), TBroad II (Supreme Court of Korea 2009Du1983 decision date 27 May 2010), Hyundai Motors (Supreme Court of Korea 2008Du7465 decision date 25 March 2010) and Kia Motors (Supreme Court of Korea 2008Du17707 decision date 8 April 2010).
CJ Hellovision and TBroad II are notable cases as the Supreme Court of Korea departed from Posco for the determination of an exploitative abuse. The conducts in these cases are accused as ‘those impairing the welfare of consumers’, a form of exploitative abuse.1 It became evident from these two cases that the standard of unreasonableness set out in Posco may not apply to an exploitative abuse case.
In Hyundai Motors and Kia Motors, both defendants (Hyundai Motors Company Ltd (Hyundai Motors) and Kia Motors Corp (Kia Motors)) gave disincentives to independent dealers competing with distributors directly operated by the defendants. Interestingly, however, the Supreme Court of Korea found the interference by Hyundai Motors illegal, but denied the unreasonableness of the interference by Kia Motor because the degree of anti-competitive intent and effect present in two cases were different.
Overview of Abusive Conducts under the Monopoly Regulations and Fair Trade Act (MRFTA)
Article 3-2, section 1 of the MRFTA applies to abuse of dominance. It classifies abusive conducts into five categories:
- price abuse;
- output restriction;
- interference with the business of other enterprises;
- foreclosing of market entry; and
- excluding competitors from the market or significantly impairing consumer welfare.
Detailed forms of the conducts prohibited under each of these five categories are enumerated in the MRFTA Enforcement Decree and the KFTC Guideline on the Abusive Practices of Market Dominant Position (MDP Guideline). A violation triggers a remedial order that may 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.2
The test of ‘interference with the business of other enterprises’ by a dominant enterprise was laid out in Posco. There, a refusal to deal case, the Supreme Court of Korea held that both anti-competitive effect (the dominant enterprise engaged in a conduct capable of restricting competition in the market) and intent (the dominant enterprise had the intent or purpose to restrict competition in the market by engaging in such conduct) are required to ascertain the existence of an abusive conduct which impairs the business of other enterprises.
Since Posco, the Supreme Court of Korea applied the prongs set out in Posco in two exclusionary abuse cases, TBroad I and Nonghyup,3 and confirmed applicability of the Posco tests in exclusionary abuses. However, applicability of the Posco test in exploitative abuses remained unclear until the Supreme Court of Korea released its decisions in CJ Hellovision and TBroad II.
In CJ Hellovision, CJ affiliated system operators (SOs) excluded popular programmes from their standard cable package, but included them only in their premium cable packages. The Korea Fair Trade Commission (KFTC) decided that such conducts of SOs significantly impaired consumer welfare (the latter part of paragraph 5 of section 3-2 (1) of the MRFTA).
With respect to such decision of the KFTC, the Supreme Court of Korea held that in order to impute a violation of the latter part of paragraph 5 of section 3-2 (1) of the MRFTA, the burden is on the KFTC to prove the following elements:
- a conduct which raises a concern of impairing consumer welfare;
- significant impairment of consumer welfare; and
- unreasonableness of the conduct in question.
In determining the significance of impairment of consumer welfare, the Supreme Court of Korea held that the degree of significance should be determined in light of the totality of all of the relevant factors present in each case, which include the nature of the goods or services; the scope of consumer groups whose welfare have been impaired; transacting conditions with other enterprises in a similar market; difference in costs borne by the dominant enterprise before and after the conduct in question; and the difference between the price of goods or services and their economic values. Applying this standard, the Supreme Court of Korea in CJ Hellovision held that the harm to consumer welfare was not significant enough to constitute an abuse in violation of article 3-2 of the MRFTA because only a small number of cable subscribers changed their services from the standard package to the premium package.
In TBroad II, TBroad affiliated SOs had induced group subscribers to convert their group-based subscription contracts to more expensive individual-based subscription contracts. The defendants offered cable services at a low price to group subscribers residing at a same apartment complex, but from 1 December 2005, the defendants refused to renew group-based subscription contracts. The KFTC decided that such conducts of the defendants significantly impaired consumer welfare (the latter part of paragraph 5 of section 3-2 (1) of the MRFTA), and such decision was upheld by the Seoul High Court. Reversing and remanding the decision of the Seoul High Court, the Supreme Court of Korea held that the Seoul High Court erred in determining the unreasonableness without considering the significance of the abusive conduct.
In TBroad II, the Supreme Court of Korea further developed the test for the conduct impairing consumer welfare from CJ Hellovision. The Supreme Court of Korea clarified the relationship between significance of impairment and unreasonableness in the latter part of paragraph 5 of section 3-2 (1) of the MRFTA by holding that the unreasonableness of a conduct should be determined after the significance of such conduct has been confirmed.
With respect to the factors to be considered for the determination of significance of a conduct impairing consumer welfare, the Supreme Court of Korea in TBroad II specified factors similar to those in CJ Hellovision. With respect to the unreasonableness, the Supreme Court of Korea held that an unreasonable conduct requires presence of both subject and objective elements. The subjective element requires a proof that a dominant enterprise had the intent or purpose to realise excessive monopolistic profit by engaging in the conduct in question. The objective element requires a proof of the effect of impairment of consumer welfare from consideration of various factors including the nature of the product, duration of the conduct in question and structure and characteristics of the relevant market. In TBroad II, the Supreme Court of Korea held that a conduct of a dominant enterprise is more likely to be deemed as an unreasonable one attempting to realise excessive, monopolistic profit if the conduct raises a concern of impairing consumer welfare and the degree of harm is significant.
In Hyundai Motors, Hyundai Motors gave disincentives to independent dealers against distributors directly managed by Hyundai Motors by engaging in the following conducts:
- restricting relocation of independent dealers’ sales outlets by requiring a prior approval from Hyundai Motors and delaying or refusing nine requests from independent dealers;4
- restricting hiring by independent dealers by requiring a prior registration with Hyundai Motors and delaying or refusing 170 requests from independent dealers;5 and
- requiring independent dealers’ to meet sales targets by sending warnings, threatening not to renew dealership and requiring pre-orders and payment of deposits for unsold automobiles.
The KFTC decided that such conducts of Hyundai Motors unreasonably interfered with business of other enterprises (paragraph 3 of section 3-2 (1) of the MRFTA).
In its appeal, following the reasoning of Posco, the Supreme Court of Korea held that only the first two conducts of Hyundai Motors constitute interferences with business of other enterprises.
With respect to the first two conducts, the Supreme Court of Korea held that Hyundai Motors interfered with competition because:
- Hyundai Motors was concerned that the competitiveness of its distributors may weaken from relocation of independent dealers’ sales outlets and hiring of sales workforce;
- independent dealers may lose their competitiveness if their relocations are delayed or competent sales workforce cannot be secured; and
- such interference was conducted against about 100 independent dealers out of its 400 independent dealers.
From these facts, the Supreme Court of Korea concluded that the first two conducts of Hyundai Motors were unreasonable in that Hyundai Motors had the intent or purpose to arbitrarily distort existing market order and those conducts raised an objective concern of restricting competition.
With respect to the third conduct of Hyundai Motors, the Supreme Court of Korea found that Hyundai Motors intended to maximise profits by setting a sales target rather than to curtail competitiveness of independent dealers or exclude them from the market. Accordingly, the Supreme Court of Korea concluded that the last conduct of Hyundai Motors was not unreasonable in that Hyundai Motors did not have the intent or purpose to arbitrarily distort existing market order and such conduct did not raise an objective concern of restricting competition.
In Kia Motors, Kia Motors have delayed or refused relocation of three independent dealers’ sales outlets. In this case, the Supreme Court of Korea held that there is no evidence to support that anti-competitive effect has occurred, or Kia Motors was engaged in such conduct with the intent or purpose to maintain or strengthen its dominant position in the relevant market. Therefore, the Supreme Court of Korea denied the unreasonableness of Kia Motors’ conduct.
It appears that the Supreme Court of Korea rendered different decisions in Kia Motors and Hyundai Motors, which had almost identical fact patterns, because the number of independent dealers involved in the interfering conduct was relatively minor in Kia Motors (three independent dealers) compared to that in Hyundai Motors (about 100 dealers representing more than 20 per cent of Hyundai Motors’ independent dealers).
- The concept of impairment of consumer welfare is not used in the determination of exploitative pricing and limiting output practices.
- See 2009 and 2010 editions of the Asia-Pacific Antitrust Review for detailed discussion on the MRFTA’s statutory framework.
- See 2009 and 2010 editions of the Asia-Pacific Antitrust Review for detailed discussion on TBroad I and Nonghyup cases, respectively.
- Hyundai Motors explained the delays and refusals were caused by disputes with its labour union or delay in negotiation with its labour union.