Korea: Overview

Throughout 2011, the Korea Fair Trade Commission (KFTC), Korea’s competition authority, continued its active enforcement of Korean competition law, focusing on monitoring cartels and unfair trade practices. The KFTC has also exerted its efforts on encouraging shared growth through cooperation between large corporations and small and medium-sized enterprises (SMEs) and is looking at the practices of large corporations in its subcontracting activities. The year 2011 also witnessed several changes and amendments to the Monopoly Regulation and Fair Trade Law (MRFTL), the main law governing antitrust matters in Korea, and various notifications published by the KFTC, which included introduction of a consent decree system, amendment to a review standard and filing rules applicable to merger notification filings and changes to the cartel leniency programme.

In addition to describing and analysing the recent changes effected in 2011 within the framework of the KFTC’s enforcement practices, this article also discusses future enforcement plans for 2012 recently announced by the KFTC.

Major developments in 2011

Encouraging shared growth through cooperation between large corporations and SMEs

During 2011, the KFTC has emphasised the promoting of development of SMEs through the enforcement of its competition policies. The KFTC has vigorously implemented laws and policies that protect SMEs from abuses by larger and more powerful companies. For example, under the MRFTL, a type of vertical restraint known as ‘abuse of superior bargaining position’ that usually affects dealings between large companies and SMEs have been applied to protect SMEs. Also, the Fair Subcontract Act (FSA) protects SMEs from larger and more powerful companies in subcontracting transactions.

In relation to these regulations, the following changes were introduced during 2011, which overall strengthened the protection of SMEs.

Introduction of treble and punitive damages under the FSA

On 11 March 2011, amendments to the FSA, which included imposition of treble and punitive damages, were passed by the National Assembly.

In line with the overall policy encouraging shared growth, these amendments aimed to encourage cooperation between large corporations and SMEs and eradicate unfair subcontracting practices between large corporations and SMEs. Further, another purpose of these amendments was to enhance business conditions for SMEs by establishing fair subcontracting relationships even among SMEs. In order to achieve these goals, the amendments expand the scope of SMEs and the subcontract transactions subject to the FSA. In addition, under the amendments, the Korea Federation of Small and Medium Business was granted the right to request for adjustment to subcontracting prices, as well as requiring the KFTC to conduct surveys regarding subcontract transactions, publish the results of such surveys, and make criminal referrals of those who commit material violations of the law.

In particular, the amendments aimed to protect the illegal appropriation of SMEs’ technology by large corporations by introducing the concept of ‘technology demand’ or ‘technology misappropriation’, and addressing ways to impose strong sanctions against such illegal appropriations. Under the amendments, contractors (usually large corporations) would be prohibited from demanding that smaller subcontractors provide the technology owned by the subcontractors without justifiable reasons, and if contractors make a demand for the subcontractor’s technology, the contractors are required to communicate the purpose of such demand to the subcontractors and negotiate various terms such as confidentiality, ownership of the technology and compensation for use of the technology. These agreed terms must be provided in writing to subcontractors.

Furthermore, under the amendments, in case a contractor demands that its subcontractor provide technical data for itself or on behalf of a third party without complying with the foregoing conditions and, as a result, it causes damages to the subcontractor, the contractor will be held liable for such damages. Also, the

original contractor may be held liable for treble damages arising from misappropriation by the contractor for itself or for third parties of the technology provided by its subcontractor. Another major change under the amendments was, in the event of an alleged violation by a contractor, to place the burden of proof on the contractor to show that there was no negligence or wilful misconduct on its part.

Issuance of KFTC’s Guidelines on Review of Misappropriation/Seizure and Interception of Technical Data

On 7 July 2011, the KFTC issued the Guidelines on Review of Misappropriation/Seizure and Interception of Technical Data (Misappropriation Guidelines) in connection with the above amendments that were made to the FSA.

The Misappropriation Guidelines aim to prevent various forms of technology misappropriation by setting forth detailed enforcement guidelines for amendments that were made to the FSA to prevent large companies from demanding or misappropriating technology-related materials from their SME subcontractors. Notably, the Misappropriation Guidelines define technology-related materials very broadly to include a wide range of technology and management-related information and materials held by SME subcontractors, such as construction process manuals, blueprints and data on manufacturing costs.

Since the issuance of the Misappropriation Guidelines, the KFTC has actively enforced the FSA in this regard through investigating whether companies are in compliance with the requirement to provide a written request form for technology-related materials as required under the Misappropriation Guidelines. In a number of cases the KFTC also imposed sanctions on companies that unlawfully requested or misappropriated technology-related materials from their subcontractors. As further discussed in the future enforcement plans by the KFTC below, it is expected that the KFTC will continue to focus its enforcement activities on this area going forward.

Introduction of ‘Consent Decree’ system to the MRFTL

On 22 November 2011, the Korean National Assembly passed an amendment to the MRFTL introducing a ‘Consent Decree’ system to the MRFTL.

Under the Consent Decree system, which applies to cases involving violations that are relatively minor or where the existence of a violation is relatively unclear, the companies subject to an investigation by the KFTC may propose appropriate remedial measures for recovery of consumer harm and the competitive order, and may bring a rapid conclusion to the case without making a finding of illegality after consultations with the prosecutor general and providing interested parties and government agencies with the opportunity to submit their opinions.

The main characteristics of the Consent Decree system introduced by the amendment are as follows:

  • an enterpriser or enterprisers’ organisation being investigated by the KFTC may submit a written application for a consent decree, which may be withdrawn before the consent decree is actually issued;
  • the written application shall include remedial measures necessary to recover the competitive order or improve the transactional order, and remedial measures necessary to recover or prevent harm to consumers or other enterprisers;
  • a consent decree does not signify that the conduct in question has been recognised as a violation of the MRFTL, and no one may assert that certain conduct is in violation of the MRFTL by reason of a consent decree;
  • the KFTC must provide interested parties the opportunity to submit their opinions at least 30 days prior to the date of issuance of the consent decree, by either individual or public notice to such parties. The KFTC must also give notice to interested government agencies and consider their opinions, and must consult with the prosecutor general prior to issuing the consent decree; and
  • the KFTC may impose an enforcement fine of 2 million won per day on persons who do not comply with a consent decree within a reasonable period of time and without reasonable justification for such non-compliance, until the consent decree is complied with or cancelled.

However, the Consent Decree system does not apply to the following cases:

  • alleged violation concerning illegal collusive conduct under article 19(1) of the MRFTL (Prohibition of Unfair Collusive Conduct); and
  • conduct that must be reported by the KFTC to the prosecutor general for criminal investigation as it is objectively in clear and material violation of the MRFTL, and causes severe harm to the competitive order.

The introduction of the Consent Decree system is expected to make possible a rapid and effective recovery from harm to competition and consumers. In this regard, the KFTC, in its recent announcement of the business plan for 2012, stated that it would actively use the Consent Decree system to ensure appropriate compensation for damages suffered by the consumers. Businesses can also benefit from reductions in cost and time while also avoiding undue damage to their reputations as consent decrees do not involve a finding of violation of the MRFTL.

Cartel regulation

Revised notification on cartel leniency benefits

On 20 July 2011, the KFTC revised the Notification on Exempting or Mitigating Corrective Measures under the Leniency Programme (Leniency Notice).

The Leniency Notice stipulates the possible reasons for which the KFTC may cancel the status of a leniency applicant for reasons such as failure to provide full cooperation, submission of falsified documents, ongoing participation in the reported cartel, the coercion of other members to participate in the cartel and providing insufficient evidence so that the cartel cannot be proven. In relation to the scope of evidence for this purpose, the Leniency Notice broadened the scope of evidentiary materials that can be provided to the KFTC by including the phrase ‘other materials which help prove cartel behaviour when assessed with other evidence in a comprehensive manner.’ In the original provision, evidence was limited to documents, objects, computerised data or communications data. The Leniency Notice also allows extending the period for supplementing submitted materials from the maximum of 75 days to a longer period as determined by the KFTC.

In addition, the Leniency Notice amended the Amnesty Plus system, under which a company that has applied for leniency in a cartel case may receive additional mitigation of or exemption from the corrective measure or surcharge of such a cartel case by reporting its involvement in another cartel. In order to avoid a situation where companies receive a disproportionate reduction of sanction in the first cartel by reporting a small cartel in the second instance, the KFTC has amended this system so that 20 per cent reduction of the surcharge in the first cartel case may be lowered by the KFTC.

Amendment to the Enforcement Decree of MRFTL on restriction on repeat offenders

The recently amended Enforcement Decree to the MRFTL, which took effect as of 1 January 2012, establishes, among others, the grounds for restricting benefits, granted under the leniency programme, to repeat offenders of collusive behaviour. In more detail, under the amended Enforcement Decree, the KFTC is able to restrict benefits under the leniency programme to companies that have previously received benefits under the leniency programme. The specific standards for such restrictions are expected to be set through further amendments to the Leniency Notice in the future.

Merger notifications

Expansion of scope of pre-closing filing obligation

Under the amended Enforcement Decree of the MRFTL, effective as of 1 January 2012, the scope of business combination transactions that would trigger a pre-closing filing obligation has been expanded to include most types of share acquisitions. In more detail, the preview standards for merger notification filings prescribe that, in the case of business combinations through share acquisitions, a purchasing company would be subject to a post-closing filing obligation regardless of the size of assets or annual turnover of the transacting parties, unless the purchasing company acquires ‘existing shares’ and such shares are acquired through private transactions. Under the amended Enforcement Decree, however, all business combinations through share acquisitions shall be, in principle, subject to the KFTC’s pre-closing review in cases where the assets or the annual turnover of either the purchasing company or the target company (including assets or annual turnover of all affiliated companies) exceeds 2 trillion won.

Therefore, business combinations with a large company through public tender offers, acquisition of new shares, etc, which were subject to post-closing reviews by the KFTC will be required to be notified prior to closing. One noteworthy point is that under the amended Enforcement Decree, despite the pre-closing file obligation, public tender offers are expressly exempted from a standstill obligation and it is yet to be seen how these filing rules would be implemented by the KFTC in practice. In only a few specific cases where timing, deal amount, etc, of the acquisition is uncertain due to the nature or characteristics of the transaction (for example, competitive tenders in the securities market); or where a party obligated to file a merger notification cannot be expected to know changes in the ownership interest of the company (for example, increased shareholding due to forfeited shares during the course of issuing new shares for capital increases, retirement of shares, or stock redemptions) shall remain subject to post-closing business combination review.

Amendment to the Guidelines on Merger Notification Review

The Guidelines on Merger Notification Review (the Merger Review Guidelines) published by the KFTC was recently amended, effective as of 28 December 2011. The main purposes of the amendment were to expand the types of mergers that are eligible for the simplified review process, to supplement the current standards for determining anti-competitiveness of a merger and to have a separate chapter on the factors that can mitigate the anti-competitiveness concerns. In more detail:

  • mergers eligible for the simplified review process: the amendment will allow the mergers between two companies whose businesses are non-complementary and non-substitutable to be subjected to the simplified review process, which, in principle, are reviewed within 14 days of the submission of the merger notification;
  • supplementation of competitive analysis standards: the amendment expands the definition of control resulting from a merger. Under the current Merger Review Guidelines, control is recognised only when a shareholder has sole control over the target company. However, the amendment expands the definition so that even in the absence of sole control, if a shareholder can affect the controlling shareholder’s decisions through such rights as the right to appoint board members or veto rights over major decisions, control will be recognised. The amendment also supplements the criteria for evaluating the coordination effect from a merger. While the current Merger Review Guidelines look at only whether the merger may give rise to an explicit or implicit coordination effect, the amended Merger Review Guidelines will also look at whether the merger can structurally lessen the incentive for the competitors to compete, and cause price increase, even in the absence of a clear coordination effect. For example, if the merger creates a firm with a significant size difference from its competitors, and the combined firm increases its price, there is a possibility that the smaller competitors, instead of engaging a price-based competition, may decide to raise their prices as well. Such effect, although there is no explicit or implicit price-fixing agreement, will now be viewed as a coordination effect. Finally, the amendment adds the increase in the buying power in the raw materials market to the list of factors to be considered in the competitive analysis, in addition to the price increase and output reduction previously prescribed under the Merger Review Guideline; and
  • factors mitigating the anti-competitive effects of a merger: the amendment reshuffles the list of the factors that can mitigate the anti-competitive effects of a merger by making it clear that the current factors listed under the horizontal merger review section can also apply to the vertical mergers and conglomerate mergers.

Adoption of the Guidelines on Merger Remedy

On 15 June 2011, the KFTC published the Guidelines on Merger Remedy (Merger Remedy Guidelines), which sets forth the criteria and considerations for imposing remedies against anti-competitive mergers.

As the general principles to be considered in determining merger remedies, the Merger Remedy Guidelines list the principle of effectiveness, the principle of proportionality and the principle of clarity and enforceability. The Merger Remedy Guidelines also classify the merger remedies into structural and behavioural ones and specify the type of remedy and the criteria for imposing them.

Notably, the Merger Remedy Guidelines declared that structural remedies that bring changes in the ownership structure of the merged entity would take precedence over behavioural remedies that limit the merged entity’s method or scope of business in imposing remedies against anticompetitive mergers. The KFTC’s reasoning behind such a stance is that structural remedies would be less intrusive to the market as it does not directly regulate the price, quantities, etc, and also that it would help keep the market structure competitive, which in consequence would prevent the merged entity from engaging in anti-competitive behaviour.

Particularly concerning IP rights, the Merger Remedy Guidelines provide for IP right-related actions and specify the reasons for imposing such actions. For example, in certain cases involving IP rights where competitive concerns primarily arise from the overlap or concentration of such rights, the Merger Remedy Guidelines require a merged entity to dispose of or license IP rights.

Revision of the Guidelines on the Referral for Prosecution of MRFTL infringement cases

On 1 August 2011, the KFTC revised its Guidelines on the Referral for Prosecution of Cases of Infringement of the Monopoly Regulation and Fair Trade Act (Referral Guidelines). Under the MRFTL, the KFTC has the exclusive right to refer cases of MRFTL infringement to the prosecutor’s office, which can then initiate criminal proceedings only on the basis of such referral by the KFTC.

The revised Referral Guidelines broadly retain the existing system in the sense that the KFTC continues to have the authority to determine whether to refer an infringement case to the prosecutor’s office based on a points system. The so-called ‘infringement points’ incurred by an infringing enterprise are calculated based on the extent and the type of the infringement. When the infringement points incurred by an enterprise exceed certain levels as set out in the Referral Guidelines, the KFTC may refer to the prosecutor’s office for prosecution any enterprise or individual found to have infringed the MRFTL.

Under the revised Referral Guidelines, the basis on which infringement points are calculated has been modified so as to broaden the scope of cases that can be referred. In particular, under the revised Guidelines the KFTC can in certain specified circumstances, including where it finds interference with the KFTC’s investigation, refer a case to the prosecutor’s office regardless of the infringement points incurred by the infringing enterprise.

Report on the future plans of the KFTC: 2012 business plan

On 15 December 2011, the KFTC announced the key elements of its 2012 business plan, according to which, the KFTC’s main goal for 2012 is to establish a ‘fair market economy’ that benefits the SMEs, large conglomerates and consumers together. In particular, in furtherance to its efforts throughout 2011, the KFTC plans to foster mutual growth of SMEs together with large conglomerates. The 2012 business plan also calls for an increased enforcement in technology and daily consumer goods sectors including IT, pharmaceuticals, machinery, chemicals and finance.

The key points of the KFTC’s 2012 business plan are outlined below.

Enforcement against unfair subcontracting practices between large conglomerates and SMEs

To remedy three major types of unfair subcontracting practices (placing oral orders without documentation, unfair cuts in supply price and technology usurpation), the KFTC plans to initiate investigations into the manufacturing industry and service industry where the KFTC’s business practice survey previously conducted revealed potential violations. Also, with the upcoming Large-Scale Distribution Act, the KFTC will heighten its monitoring of unfair business practices conducted by large-scale distributors against suppliers and initiate investigations into such unfair business practices through an extensive survey of suppliers.

Heightened monitoring of the IT, pharmaceutical and other technology sector

The KFTC plans to heighten its monitoring of the IT industry, including platform businesses, commercial server providers and software developers, as well as the pharmaceutical, machinery and chemical industries. The KFTC will, in particular, closely monitor for any monopolistic behaviour of multinational corporations and market dominant enterprises in an effort to prevent exclusionary practices and abuse of patent rights. Furthermore, the KFTC plans to focus on reviewing written industry surveys from the machinery and chemical industries to ascertain whether improper agreements were executed as a way to resolve patent disputes.

Heightened monitoring of cartels and unfair trade practices

The KFTC plans to heighten its monitoring of cartel behaviour in those sectors closely connected to the daily life of consumers, such as finance and general services. The KFTC also plans to closely monitor potential cartel behaviour and unfair business practices related to the products whose domestic and overseas price differences are significant, products that have generated a substantial profit margin and intermediate products. The KFTC has also said that it plans to focus on monitoring whether the elimination of tariffs under various free-trade agreements results in actual decreases in consumer prices. In order to resolve the issue of information asymmetry between businesses and consumers in the finance sector, the KFTC will examine the terms and conditions in the finance and insurance sectors and take active enforcement actions against improper advertising, such as misrepresentation of rate of return.

Upgrading of merger notification filings review

For prompt and efficient review of business combinations, the KFTC plans to review business combinations with no anti-competitive risk within 20 days. However, to prevent the creation of monopolies, the KFTC plans to concentrate its manpower on transactions raising competitive concerns and would utilise structural remedies, as necessary. Further, through international cooperation, the KFTC plans to actively scrutinise overseas transactions that may cause harm to domestic consumers.

Adoption of consumer compensation system

In 2012, the KFTC will concentrate its efforts on ensuring that consumers who are damaged by anti-competitive behaviour are duly compensated. First, upon the request of consumer groups, the KFTC plans to assist with the costs of filing private damage claims following the finding of liability by the KFTC. Second, for prompt and direct relief for consumer harm that is unresolved by the KFTC’s corrective orders, the KFTC plans to actively utilise the consent-decree system in areas where consumer harm is greatest. Finally, the KFTC plans to consider expanding the scope of consumer group actions, which are currently limited to requesting for prohibition of specific conduct, to include compensation for damages.

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