At the end of each year, the Korea Fair Trade Commission (the KFTC) reports its work plans to the presidential office, assessing the KFTC’s performance during the course of the past year and setting out areas of focus for the coming year. The KFTC reported its work plans for 2011 (the 2011 Plan) to the presidential office on 15 December 2010 and to the National Assembly on 8 March 2011; it made key elements of those work plans publicly available on 10 January 2011. The 2011 Plan sets out the KFTC’s broad objectives to:
- foster stability in the day-to-day lives of average consumers by focusing on price stabilisation; and
- promote the development of small and medium sized businesses (SMEs).
This article describes the KFTC’s 2011 Plan and analyses its potential impact on key areas of enforcement, including abuse of market dominance, unfair business practices, unfair subcontracting, cartels, and the notification and review of mergers and acquisitions. This article also considers the 2011 Plan in the context of the KFTC’s overarching competition enforcement policies and its case work in 2010 to more fully analyse the resulting implications for businesses.
A new emphasis on price stabilisation
On 3 January 2011, Dong Su Kim was appointed as the new Chairman of the KFTC. Prior to his appointment, Mr Kim served as the Chairman of the Korea Exim Bank and as the vice minister of the Ministry of Strategy and Finance. Following his appointment, the new chairman highlighted the important role of the KFTC in ensuring price stabilisation to benefit day-to-day consumers. This broad policy goal is in line with the current administration’s focus on fighting inflation and the KFTC is one of many government agencies addressing this issue. On 13 January 2011, nine government ministries - including the Ministry of Strategy and Finance, the Ministry of Agriculture, Forestry and Fisheries, the Ministry of Knowledge and Economy - together with the KFTC, jointly announced comprehensive measures for price stabilisation (the Measures).
The Measures set out significant areas of focus for the KFTC, including:
- regular monitoring of the prices of 103 identified products with a disparity between domestic Korean and overseas prices, including goods or services directly linked to the everyday life of the average consumer (Consumer Goods);
- identification, and immediate investigation into the prices, of certain Consumer Goods, particularly those processed food products the prices of which have recently increased or are expected to increase;
- assessing and removing bottlenecks in distribution channels (particularly in the TV home-shopping and petroleum industries) or barriers to market entry (particularly in the health care, broadcasting and telecommunication, education and energy industries) that may eventually contribute to price increases; and
- increasing the number of Consumer Goods in respect of which companies must provide pricing information, together with comparative investigations into the domestic and overseas prices of 50 (food and beverage and other industrial) products.
Under the new leadership, the KFTC is expected to concentrate its capabilities on these key objectives. During his inaugural address, the new chairman emphasized reinforcing the KFTC’s ability to readily respond to macroeconomic issues such as price instability, in particular referring to price pressures caused by surges in global liquidity and raw material prices. He referred to certain of the issues addressed by the Measures, including indicating that the KFTC plans to become more active in stabilising prices through the enforcement of the Korean competition law (the Monopoly Regulation and Fair Trade Act (the MRFTA)). He also discussed the KFTC’s interest in resolving systemic problems within distribution channels and alluded to a comprehensive investigation into the pricing of Consumer Goods. The new chairman effectively instructed the KFTC to expedite these national objectives through personnel and organizational changes, which the KFTC has already implemented.
Protection for SMEs
The second key element in the KFTC’s 2011 Plan is its emphasis on promoting the development of businesses - particularly SMEs - through the reinforcement of its competition policies, such as monitoring abuse of market dominance practices, eg, abuse of intellectual property rights (IPR) that interferes with SME operations, unfair trade practices by large scale retailers and unfair subcontracting practices.
In his inaugural address, the new chairman emphasized the KFTC’s role as a counterweight that balances the coexistence and mutual growth of all economic constituents and that the KFTC will establish a policy plan under which small, medium and large sized businesses can all achieve ‘balanced growth.’
Within a few days of the new chairman taking office, the KFTC established a price monitoring task force (the Taskforce) to carry out the comprehensive investigation into pricing discussed in the Measures and in the new chairman’s inaugural address. The Taskforce consists of members from the Anti-Monopoly Bureau, the Cartel Investigation Bureau and the Consumer Policy Bureau. Each bureau will be responsible for different products and will conduct investigations accordingly. In order to reinforce pricing control over specific products, the KFTC plans to reorganize the Anti-Monopoly Bureau and the Cartel Investigation Bureau based on industry.
The Taskforce plans to focus its attention on Consumer Goods with ‘irrationally high’ prices or that show sudden price increases. For products with higher domestic prices in comparison to overseas prices, the KFTC plans to analyse the cause of such differences and establish improvement measures. The KFTC has identified in particular 22 such products (eg, flour, instant noodles, beef, pork, sugar and detergent).
The first phase of the Taskforce investigation began on 10 January 2011 against approximately 40 food and beverage companies, price increases by which are deemed to affect general consumer prices. The Taskforce is investigating whether the target companies engaged in possible anti-competitive activities such as pricing cartels, abuse of market dominance, and/or unfair business practices. In several cases, the Taskforce conducted on-site investigations (so called ‘dawn raids’) of the target companies.
Given that the Measures specified that comparative investigations should be initiated into 40 food and beverage products on a quarterly basis and into other industrial products on a semiannual basis, the Taskforce may initiate a further round of investigations later this year.Considering the focus of the government and the KFTC chairman on price stabilisation, this policy is likely to inform the KFTC’s enforcement actions during 2011, eg, in the context of investigations into abuse of market dominance or other unfair business practices that may affect consumer prices, pricing cartels, and the review of mergers and acquisitions involving consumer goods. The KFTC is also likely to continue to focus on protecting SMEs from abuse of market dominance, together with other unfair business and subcontracting practices.
Abuse of market dominance
The MRFTA prohibits the abuse of a dominant market position; a company is presumptively dominant if it has a market share of 50 per cent or more in the relevant market, or where it is one of up to three competitors (excluding any competitor with a market share of less than 10 per cent) that have an aggregate market share of 75 per cent or more on the relevant market. The MRFTA provides a list of conduct that constitutes an abuse, including pricing abuse, output restriction, obstruction of competitors’ business activities, blocking market entry, exclusion of competitors and damaging consumer interests.
During 2010, the KFTC focused on potential abuse of market dominance through the exercise of IPR, issuing Guidelines on the Exercise of Intellectual Property Rights (the Guidelines) and launching two sector enquiries.
The Guidelines came into effect on 7 April 2010 and provide guidance on when enforcement of IPR may constitute a violation of the MRFTA. The Guidelines apply not only to agreements made by domestic business entities but also to agreements made by foreign business entities within or outside Korea, if such agreements affect the Korean market. Although the Guidelines focus on patent rights, they will be applied by analogy to the exercise of other IPR, such as utility models, designs, trademarks and copyrights. Under the Guidelines, certain exercises of IPR may (depending on the circumstances) be found unfair, including:
- refusal to grant a licence or restriction of the scope of, or imposition of conditions on, the granting of a licence;
- patent pools;
- exercise of patent rights in relation to technology standards;
- abuse of patent infringement actions;
- settlements reached in the course of a patent dispute; and
- assignment of patent rights that constitute a major business.
Subsequently, the KFTC initiated two sector inquiries into potential IPR abuses in the pharmaceutical and information technology (IT) industries, issuing questionnaires to both foreign and domestic companies with direct or indirect relationships with the Korean pharmaceutical and IT industries.The KFTC indicated that it was investigating those activities that may restrict competition; the KFTC referred to conduct in the pharmaceutical sector such as reverse payments, or pay for delay, and in the IT sector such as:
- sales of tie-in products that are irrelevant to the patented technology;
- delaying entry of competitors into the market by filing groundless patent litigation; and
- setting royalties at an unreasonably high rate without justifiable reason or charging discriminatory royalties.
The 2011 Plan sets out the KFTC’s intent to continue its focus on IPR abuse, expanding its sector inquiries into other industries that it deems especially at risk of IPR abuses, such as the machinery and chemical industries. To further its efforts, the KFTC plans to establish and operate an IPR abuse complaint centre.
The KFTC plans to concentrate in particular on abuses of IPR that interfere with the business activities of SMEs and intends to promulgate guidelines to effectively regulate such abuses, including those uncovered during the KFTC’s pharmaceutical and IT sector inquiries, such as exclusive cross licensing and unjust conditional licensing arrangements (specifically, licence agreements that ‘tie’ to the patented product products and technology unrelated to the licensed patent).
Moreover, the 2011 Plan highlights certain industries for investigation by the KFTC into abuse of market dominance, such as the oil refining, automobile, beer, coffee and plate glass industries, in which monopolies and oligopolies are prevalent.
Given these developments, companies exercising IPR in Korea, particularly multinational companies that license IPR to Korean SMEs, should become familiar with the Guidelines and review their licensing policies and practices in order to address potential issues, for example, by ensuring that the terms and conditions in their standard licenses comply with the Guidelines. In particular, the KFTC may focus its efforts on companies that have been involved in past IPR disputes in Korea.
Unfair business practices
The MRFTA regulates several categories of ‘unfair business practice,’ broadly corresponding to vertical restraints, including unfair refusals to deal, discriminatory treatment, forced transactions (eg, tying), unfair exclusion of competitors, unfair solicitation of customers, interference with the business practices of another entity, abuse of a ‘superior bargaining position’ and resale price maintenance (RPM).Even if a vertical restraint is imposed by a foreign company with no business presence in Korea, the MRFTA may be applied on an extraterritorial basis if the restraint has an impact on the Korean market.
The KFTC’s approach in assessing vertical restraints varies with the type of vertical restraint under investigation. Safe harbour exceptions for companies with market shares not exceeding 10 per cent are applied to refusals to deal, discriminatory transaction terms (excluding price discrimination), exclusive dealing and territorial or customer restraints.
The Korean Supreme Court (the Court) held on 25 November 2010 that minimum RPM should be assessed under the rule of reason. Prior to this ruling, unlike maximum RPM, minimum RPM had been deemed per se illegal. In this decision, the Court held that even where a minimum RPM practice appears to restrict intra-brand competition, such practice may be justified as it may promote inter-brand competition in the relevant market, thereby increasing consumer welfare, depending on (for example) the degree of inter-brand competition fostered, whether competition other than price is promoted - such as service competition by distributors - whether product diversity is increased and whether such practices could promote market entry.
The Court ruled that the burden of proof lies with the company engaged in minimum RPM to justify the practice but held that, in the case at bar, there was no such justification. By placing the burden of proof on the company engaging in minimum RPM, the Court appears to have sided with the European Commission’s position requiring persuasive evidence of market efficiencies as opposed to the US Supreme Court’s position outlined in Leegin Creative Leather Products, Inc v PSKS, Inc. As a result of the Court’s decision, the KFTC’s approach to RPM practices will change; in the future the KFTC will need to conduct a more nuanced review and consider evidence that a particular minimum RPM practice has pro-competitive effects.
The MRFTA regulates a type of vertical restraint known as abuse of a ‘superior bargaining position,’ arising from the concern in Korea that large companies deal in an arbitrary manner with smaller business partners (often SMEs). The scope of this type of vertical restraint is very comprehensive in that, if a company deemed to have a ‘superior bargaining position’ forces its transaction counterparty to accept any ‘unfair’ conditions, that conduct may be deemed illegal. No finding of market power or dominance is required to establish the requisite ‘superior bargaining position.’
During 2011, the KFTC plans to investigate potential unfair trade practices by distributors, including internet platforms that offer distribution networks to content providers, eg, exclusive dealing, discriminatory treatment and cost-shifting activities. The KFTC also plans to enact a statute on fair distribution transactions in order to protect suppliers of large scale distributors through various means, including imposing the burden of proof on large scale distributors to establish that specific practices (eg, product returns, etc) are justified.
Given its focus on protecting SMEs from abuses by larger and more powerful companies, the KFTC may potentially be more receptive to complaints by SMEs, particularly if IPR is involved and/or they are engaged in the manufacture and/or sale of consumer goods. Thus, large multinational companies dealing with SME counterparties in Korea should ensure that they are familiar with the types of conduct that are prohibited under the MRFTA; in particular, when renewing or amending contracts with Korean SMEs companies would be well advised to consider the potential implications of the abuse of a superior bargaining position provision.
The KFTC in 2010 amended the Fair Subcontract Act (the FSA) and its Enforcement Decree to increase the protection of SMEs from larger and more powerful companies. The two main amendments to the FSA are designed to ensure that:
- the FSA applies not only to the relationship between a principal contractor and its subcontractor, but also to relationships further down the contracting chain; and
- the absence of a formal agreement between a contractor and subcontractor does not oust the KFTC’s jurisdiction under the FSA.
It establishes a presumption that a subcontract has been executed where a subcontractor sends written notice to a contractor requesting confirmation of the terms and conditions of an oral agreement if the contractor does not respond within 15 days of that notice. The amendments also prohibit appropriation and use of the subcontractor’s core technology (ie, IPR and related information) by the contractor.
The KFTC subsequently announced a number of policies to promote fair competition in subcontractor transactions as well as cooperation between large corporations and SMEs. For example, the KFTC proposes to facilitate subcontractors’ requests for a price adjustment based on increases in raw material prices by allowing the Small-to-Medium Sized Companies Cooperation Association to file adjustment applications on behalf of individual subcontractors, thus reducing fears of retaliation. The KFTC also plans to impose the burden of proof on a primary contractor that reduces the payment for goods delivered by a subcontractor to show that the reduction is not unfair (currently the KFTC must prove unfairness).
With respect to IPR, the KFTC proposes to increase protection for SMEs’ core technology from appropriation by primary contractors by preventing primary contractors from unilaterally conducting audits of a subcontractor’s business place under the pretext of reviewing production costs. Primary contractors will be required to request from subcontractors in writing information on production costs or other technical materials. Such requests must include the purpose of the request and the consideration to be given in return for the information, together with provision for confidentiality and attribution of rights. Additional protection against unfair appropriation or misuse of technology will be granted to SME subcontractors; where a primary contractor uses an SME’s technology, it will have to prove that it did not act with gross negligence or commit wilful misconduct in so doing. The KFTC further plans to allow courts to directly recognize and determine the amount of damages in such cases, making it easier for SMEs to recoup damages.
In its 2011 Plan, the KFTC affirmed its intention to focus on investigating subcontracting transactions between large businesses and SMEs. The KFTC plans to initiate investigations into industries where subcontracting is prevalent to seek out improper behaviour such as unfair reductions of unit prices and misappropriation of technological know-how. As discussed above under Abuse of Market Dominance, the KFTC also plans to promulgate guidelines regulating abuses of IPR that interfere with the business activities of SMEs, including misappropriation of technological know-how.
In light of recent trends at the KFTC, it is likely that it will apply the FSA more strictly against contractors. Particularly as they seek improved production efficiency through cost reductions that may pressure suppliers, companies subject to the FSA should ensure that their compliance programmes will identify and prevent conduct that could potentially infringe the provisions of the FSA prohibiting unfair subcontracting payment terms and the unfair unilateral reduction of a subcontractor’s unit prices.
The MRFTA prohibits entities from engaging in certain concerted acts and collaborative behaviours that substantially restrain competition in a particular field of trade. The MRFTA further specifies that entities may not agree by contract or any other means to jointly engage in any act that substantially restrains competition in a relevant area of trade, such as price fixing, customer or territorial market allocation, or restriction of other companies’ business activities.
The KFTC aggressively investigates and enforces the MRFTA against cartels and increasingly imposes fines, including on an extraterritorial basis where agreements impact the Korean market. During 2010, the KFTC investigated foreign and domestic companies participating in the air cargo cartel, resulting in total fines of 119 billion won on 19 companies. Most recently, in February 2011, the KFTC imposed fines of 56.5 billion won on 13 electric cable companies for price-fixing and bid rigging, seven of which were referred to the prosecutor’s office for criminal prosecution. In Korea, if a criminal case is successfully brought, a fine is generally imposed; however, in 2007, key executives of two Korean detergent companies were sentenced to one year’s imprisonment (suspended for two years). Thus, criminal prosecution and imprisonment of individuals found to have participated in cartels cannot be ruled out.
In addition to the ongoing investigations by the Taskforce, the KFTC specified in its 2011 Plan its intent to continue to actively investigate cartels involving products and services used in everyday life, such as agricultural, meat and poultry and agrochemical products, processed foods, vaccines, fertilizers and automobile maintenance services. The KFTC also plans to focus on bid rigging affecting the public sector and to continue to actively pursue international cartels that trigger price increases of everyday necessities and raw materials. In particular, the KFTC has announced that it will expand surcharges on companies and recommend that the prosecutor’s office bring charges against individuals that participate in any bid-rigging act.Thus, companies active in the above sectors or that are involved in the manufacture and/or sale of everyday consumer goods should be aware that implementing price increases in Korea could potentially trigger increased scrutiny by the KFTC; moreover, such companies may want to reconsider their pricing policies where there is a significant disparity between pricing in Korea and overseas.
Filing notifications for mergers & acquisitions
Certain business combinations (including share acquisitions, business or asset transfers, mergers and formations of a joint venture) must be notified if:
- either the acquiring or acquired party has worldwide assets or annual turnover of 200 billion won or more;
- the other party has worldwide assets or annual turnover of 20 billion won or more; and
- in the case of an offshore transaction (ie, where the target is a non-Korean entity), each of the acquiring and acquired parties has turnover in or into Korea of 20 billion won or more.
Generally, a post-closing filing is triggered in Korea; however, if a transaction involves a party with total assets or turnover of 2 trillion won or more, a pre-closing filing may be triggered. There is no deadline for submission of a pre-closing filing; however, a post-closing filing must be submitted within 30 calendar days after the transaction closes. The statutory review period for a pre-closing filing is an initial 30 calendar days, which may be extended by the KFTC by a further 90 calendar days; although there is no statutory deadline in the case of a post-closing filing, the KFTC generally adheres to a similar time frame (ie, 30 days followed by 90 days).
Parties that violate the notification obligation, ie, fail to timely submit a filing, are subject to fines. The KFTC routinely issues fines for such violations and is likely to continue to do so; for example, in 2010 the KFTC imposed a fine in 19 such cases.
The KFTC indicated in its 2011 Plan that it intends to be especially strict in reviewing large global business combinations. The KFTC will also continue to actively pursue cooperation with foreign competition authorities to effectively enforce its corrective orders and indicated that its preference is for structural remedies. The KFTC further set out proposals to amend its business combination review guidelines and emphasized the importance of direct evidence in analysing anti-competitive effects. The KFTC indicated that it will in particular consider potential anti-competitive effects arising from the combined entity’s purchasing power.
Thus, parties planning global transactions that potentially raise substantive issues on the Korean market may be subject to stricter scrutiny by the KFTC in the future, especially where the transaction involves consumer goods or has a potential impact on SME vendors. Such transactions may result in additional and more detailed information requests from the KFTC as a result of the emphasis on direct evidence. Where a pre-closing filing is triggered, this could impact timing because, although the statutory waiting periods remain unchanged, KFTC information requests suspend the waiting period until the party has complied. Moreover, the KFTC may be more likely to impose structural remedies in the future where a restriction to competition as a result of the transaction is identified, regardless of whether a pre- or post-closing filing is required. Thus, parties involved in global transactions that trigger a filing obligation in Korea would be well advised to consider their filing strategy at an early stage in the process.