2013 marked the beginning of President Park’s term and many far-reaching amendments to South Korean competition laws that advanced President Park’s policy agenda. President Park’s economic policy priorities rested on two main pillars: ‘economi c democratisation’ and ‘building a foundation for a creative economy’. For competition policy – a central part of Park’s economic policy – the new administration has set the following priorities that mirror Park’s broader policy goals:
- impose stricter regulations against abuses by large business groups;
- strengthen cartel enforcement and other abusive practices;
- enhance protection for the ‘economically inferior’ actors such as subcontractors and franchisees; and
- improve consumers’ rights.
As will be seen below, in 2013 the Korea Fair Trade Commission (KFTC) – headed by President Park’s appointee – focused more of its efforts on proposing and enacting amendments reflecting these priorities. Hence, in comparison to 2011 and 2012, there was generally less enforcement activity by the KFTC in 2013. The KFTC has nevertheless actively investigated particular types of competition law abuses, such as international cartels, cartels in markets that would affect the working classes, subcontracting abuses and unfair assistance by large business groups.
This article provides a brief summary of 2013’s major developments in South Korean competition law under each of the four competition policy priorities, and gives a preview of what is likely to lie ahead in 2014.
Stricter regulations against abuses by large business groups
Expansion of the unfair assistance provision
On 2 July 2013, the National Assembly passed a series of amendments that expanded the scope of the Monopoly Regulation and Fair Trade Law (FTL) provision against unfair assistance – article 23.
First, the amendment to article 23 lowered the threshold for finding ‘unfair assistance’. Even prior to the amendment, the FTL has already prohibited the act of ‘supporting a specially related party or another company by unfairly providing prepayments, loans, manpower, real property, securities, goods, services, intangible property rights, etc, to the specially related party or another company, or transacting on very significantly favourable terms with the specially related party or another company’ as a form of prohibited unfair trade practice. However, the amendment changes ‘very significantly’ favourable trade terms to ‘significantly’ favourable terms, with the intent of lowering the threshold for finding unfair assistance. Furthermore, although prior to the amendment, only the entity giving such unfair assistance could be subject to punishment under the FTL, the entity receiving such unfair assistance can now be subject to punishment as well under the amended FTL.
Second, the amendment to article 23 now prohibits the act of transacting through a specially related party or another company, who does not have a substantive role in the transaction, despite a significant advantage in directly transacting goods or services with another enterprise, as a form of unfair assistance. This prohibition of so-called tollgating or ‘tunnelling’ is meant to prohibit the practice of a company inserting another company (usually an affiliate) in a transaction with a third party for the sole purpose of having the affiliate take commissions or generate other revenues in the transaction as a middleman, without substantively contributing to the overall transaction.
Third, the amendment introduced a new article 23-2 to the FTL to prohibit the act of providing unfair advantages to specially related parties, such as the owner family of a conglomerate. Under article 23-2, paragraph 1, ‘provision of unfair advantages’ is defined as:
- transacting on significantly favourable terms than the terms that are applied or would apply to normal transactions;
- provision of a business opportunity that would have brought a significant advantage to the company, if the company itself or another company controlled by it had engaged in the business opportunity;
- trading cash or another financial product on significantly favourable terms with a specially related party; or
- transacting at a significant volume without a reasonable consideration of the other party’s business capacity, financial condition, credit, technology, quality, price or transaction terms or without comparison with another company.
Under the new article 23-2, a transaction can be found to be unlawful, even if the transaction does not create any anti-competitive effects. Another notable aspect of the new article 23-2 is that, like the amendment to article 23, the entity receiving such unfair advantages (and the ‘same person’ or owner of the relevant conglomerate and his or her certain prescribed scope of relatives who are shareholders of such receiving entity), as well as the entity giving such unfair advantages can be subject to punishment for receiving unfair advantages. The amendment is scheduled to become effective on 14 February 2014.
Prohibition on new cross-shareholding
On 31 December 2013, the National Assembly passed an amendment to the FTL which prohibits large business groups from newly engaging in or reinforcing cross-shareholding among their affiliates that arguably are used by large business groups to support financially troubled affiliates or to expand excessive control of their owners to related companies.
Stronger enforcement of cartels and other abusive practices
Changes to KFTC guidelines on fines
On 11 June 2013, the KFTC published its Guidelines on Detailed Method for Fine Calculation, which was aimed at clarifying how the KFTC calculates fines for each of the FTL offences. Previously, the KFTC’s calculation of fines was based on a three-tiered approach (‘very severe’, ‘severe’ and ‘less severe’) under which each tier had an assigned rate. The new guidelines adopted a point system that would consider factors such as competitive harm, market shares, relevant turnover and amount of unlawful profit; and the final fine amount would be calculated after tallying up all the points. As a result of the change, the KFTC effectively raised the fines imposed against cartel activity participants by a couple percentage points from what they would have faced under the prior system. The new guidelines became effective as of 17 June 2013.
End of KFTC’s exclusive power to make referrals to the prosecutor’s office
Although the KFTC lacks the authority to engage in criminal prosecution itself, the KFTC currently acts as the exclusive gatekeeper for all criminal enforcement actions against offenders of Korean competition laws. Under the current system, criminal sanctions may be imposed on competition law offenders only when the KFTC makes a referral to the Prosecutor’s Office. Without such referral from the KFTC, the Prosecutor’s Office cannot on its own initiate a criminal proceeding for competition law violations; while the attorney general could technically request a referral from the KFTC, this right has rarely been exercised.
On 25 June 2013 and 2 July 2013, the National Assembly passed a series of amendments that will take away the KFTC’s exclusive referral power by empowering three additional government agencies – the Bureau of Audit and Inspection, the Public Procurement Service, and the Small and Medium-sized Business Administration – with the ability to trigger criminal enforcement of competition laws. While these agencies will not be making the referrals to the Prosecutor’s Office themselves, they will be able to make a referral request to the KFTC who then must honour such request, even in cases where the KFTC originally decided not to refer for criminal enforcement.
This amendment changes the criminal enforcement process for the following laws: the FTL; the Fairness in Subcontracting Transactions Law, the Fairness in Large-Scale Distribution Transactions Law; the Fair Labelling and Advertisements Act; and the Fairness in Franchising Transactions Law. The amendments provide that the agencies may exercise their right to request referrals under specific laws and for specific cause.
- The Public Procurement Service will have the authority to request referrals for violations of the FTL and the Fair Labelling and Advertisement Act only, when it has reasonable grounds to believe that the violation had an impact on the national budget.
- The Small and Medium-sized Business Administration will have the authority to request referrals for violations of the FTL, the Fairness in Subcontracting Transactions Law and the Fairness in Large-Scale Distribution Transactions Law, when it has reasonable grounds to believe that such violation would be harmful for the small and medium businesses.
- The Bureau of Audit and Inspection will have the authority to request referrals for violations of the FTL, the Fairness in Subcontracting Transactions Law and the Fairness in Large-Scale Distribution Transactions Law, when it has reasonable grounds to believe that the degree of social impact warrants a referral.
To ensure that the new referral system does not hinder the KFTC’s ability to administer its leniency programme, the amendment carves out an exception for leniency applicants who may be immune from referral requests by the other agencies.
The amendment, which will become effective in early 2014, was in response to the mounting criticism that the KFTC’s exclusive referral power resulted in weak criminal enforcement of the competition laws. It is expected that as a result of the amendment, there would be a greater risk of criminal sanctions under Korean competition law. In fact, the KFTC itself recently emphasised that it would increase criminal referrals for both respondent companies and their relevant officers and employees, even in unfair trade practice cases, when the KFTC has historically shown a tendency not to refer cases involving only unfair trade practices to the prosecutor’s office.
Creation of new ‘bid rigging investigation’ division at the KFTC
In 2013, as a part of its efforts against unlawful collusive behaviour, the KFTC created a new ‘bid-rigging investigation’ division. The new division would focus on investigating unlawful bid-rigging practices, previously a responsibility of the Cartel Policy division. As a result of the new division, more enforcement activities in the ‘public bidding’ sector are expected.
Protection for the economically inferior actors
Passage of amendments to the Fairness in Subcontracting Transactions Law
On 30 April 2013, the National Assembly passed an amendment to the Fairness in Subcontracting Transactions Law (the Subcontracting Law) that expanded the right granted to the Korea Federation of Small and Medium-sized Businesses (KFSMB) to negotiate the supply price on behalf of small to medium-sized suppliers, and also expanded the scope of abusive conduct that may be subject to punitive damages. Such amendment came shortly after the release of the KFTC’s 2013 business plan that identified improvements in subcontracting practices as a key priority for the KFTC.
Previously, the Subcontracting Law allowed the KFSMB to request the purchasers to renegotiate the supply price with their suppliers if there were unavoidable circumstances warranting such renegotiation. The amendment now allows the KFSMB itself to directly renegotiate the price terms with the purchasers at the request of the suppliers, and also to request the subcontracting dispute mediation committee to mediate the price adjustment process if the renegotiation does not begin within 10 days from the purchaser’s receipt of the request, if the agreement cannot be reached within 30 days from the purchaser’s receipt of the request, or if circumstances provide a clear indication that an agreement cannot be reached through renegotiation.
In addition, while the Subcontracting Law previously allowed suppliers to recover punitive damages (up to three times the amount of actual damages) only with respect to damages resulting from the purchasers’ appropriation of the suppliers’ technology, the Amendment expands the scope of such punitive damages to include the following additional conduct prohibited under the Subcontracting Law:
- unfair determination/reduction of supply price;
- unfair cancellation of order; and
- unfair return of supplied goods.
Generally, tortfeasors are only liable for actual damages under Korean law that does not recognise punitive or treble damages, but the Subcontracting Law has a special provision that allows punitive damage as described above.
On 2 July 2013, the National Assembly passed further amendments to the Subcontracting Law to protect the rights of SMEs. Previously, a subcontractor was not able to receive payments directly from the contractor’s guarantor, in case the contractor was not able to make payments itself for reasons such as bankruptcy. The amendment provides that a contractor’s guarantor must make payments directly to the subcontractor within 30 days of such request, if the following conditions are met:
- the contractor is not able to make payments for reasons such as bankruptcy; and
- the contractor has failed to make payments to the subcontractor two or more times.
KFTC to strengthen sanctions against unlawful subcontracting
On 22 May 2013, the KFTC started implementing the amended Guidelines on Penalty Surcharge for Violations of the Subcontracting Law. The following are the main changes from the previous guidelines:
The amendment will raise the surcharge rate, which currently ranges from 1–8 per cent, to 3–10 per cent, depending on the type and number of violations, and the amount involved.
The amendment will raise the ceiling for the aggravated surcharge rate that may be applied against enterprises that have obstructed the KFTC’s investigation, from 20 per cent to 40 per cent depending on the types of obstruction:
- up to 40 per cent for violent language/assault and intentionally blocking or delaying entry into investigation site;
- up to 30 per cent for concealing/discarding materials, refusing access to materials or forging/falsifying materials; and
- up to 20 per cent for other types of obstruction of investigation).
In case of any disadvantages conferred (ie, retaliation) by the contractor after a subcontractor has either reported the contractor to the relevant authority for violation of the Subcontracting Law or requested that the contractor adjust the subcontract price or filed for mediation to the Subcontract Dispute Mediation Council, the ceiling for aggravated surcharge rate has been increased from 20 per cent to 30 per cent.
Amendments to the Franchise Act to Protect Franchisees
On 2 July 2013, the National Assembly passed multiple amendments to the Fairness in Franchise Transactions Law, which will become effective in February 2014. These amendments enacted the following changes to the Franchise Act and called for an Enforcement Decree that shall outline detailed enforcement criteria:
- Restrictions on remodelling and cost-sharing: According to the amendments, a franchisor cannot compel the relocation, expansion or remodelling of a franchise without a just cause, and if a franchisor requests remodelling of a franchise, the franchisor must bear a part of the cost of remodelling.
- Franchisee associations: According to the amendments, the franchisees will be allowed to organise franchisee associations, and the franchisee association for a single franchise brand can request the franchisor to negotiate amendments to the terms of the franchise agreement. The franchisor must respond to such request for negotiation in good faith, and if multiple franchisee associations make the request, the franchisor must first negotiate with the largest association. To ensure that franchisees can freely organise franchise associations, the amendments prohibit the franchisors from:
- discriminating against the franchisees who organize, become a member of or conduct activities on behalf of franchisee associations; and
- entering into a franchise agreement on the condition that the prospective franchisee does not become a member of a franchisee association.
- Prohibition against business hour restrictions: The proposed amendments would prohibit unfair restrictions on the business hours of a franchise. More specifically, the franchisor will be prohibited from:
- demanding late-night business hours; and
- disallowing a franchisee to shorten business hours for unavoidable reasons, such as for receiving medical treatment.
- Protection of franchise territory: The amendments will require the franchisor to specify the franchise territory in the franchise agreement. The amendments will prohibit the franchisor and its affiliates from opening a store engaged in the same business as the franchisee within the franchise territory.
- False, exaggerated or misleading information: The amendments called for the Enforcement Decree to specify the types of behaviours that constitute false, exaggerated or misleading information, such as exaggeration of expected sales revenue, unconfirmed business environment analysis, or omission of major costs to be borne by the franchisee in the franchise disclosure statement. The amendments will also increase the fines for this offence from 150 million won to 300 million won.
- Expanded scope of unfair trade practice: The amendments expanded the scope of unfair trade practice covered under the Fairness in Franchise Transactions Law. Under the amendment, the practice of imposing excessive penalty to franchisees would be considered an unfair trade practice. Specific standards as to what constitutes an excessive penalty will be determined in the Enforcement Decree, depending on the purpose and terms of the franchise agreement and the damages that may result from the penalty.
It is expected that there will be greater enforcement of abusive franchising practices by the KFTC, as a result of the amendments and the Enforcement Decree that the KFTC has published for public comments on 10 October 2013.
Improve rights of consumers
In the domain of consumer protection, the KFTC has focused its efforts on providing access to information necessary for consumers to make smart purchasing decisions. For example, the KFTC has provided detailed price comparisons for select ‘everyday’ products such as digital TVs, vacuum cleaners, nappies, etc. On a broader level, the KFTC is considering making private enforcement of competition laws possible to further consumer rights, more specifically by allowing private parties to initiate class-action suits and to seek injunctive relief against competition law offenders. The KFTC will continue to work on these efforts during 2014. As a related matter, while in the past, KFTC’s finding of an unlawful cartel has rarely led to civil claims, there is now a trend that more and more plaintiffs are open to launching follow-on civil claims after a KFTC investigation.
In a 2011 amendment, the FTL introduced the consent decree system in which companies subject to an investigation by the KFTC may propose appropriate remedial measures for recovery of consumer harm and the competitive order. One of the advantages of the system is that it allows for a rapid recovery of consumer harm. For the first time, in November 2013, the KFTC approved respondent companies’ request to initiate the consent decree process. The outcomes of this case will likely impact a respondent company’s potential defensive strategies when responding to a KFTC investigation and more respondent companies may consider a consent decree as an option to achieve rapid conclusion of their case without a finding of liability by the KFTC.
2014: What lies ahead
First, one of the KFTC’s key priorities for 2014 appears to be to foster innovation-based competition. To that end, the KFTC is likely to heighten its policing of patent holders using their patent rights to unfairly foreclose competitors, particularly in the ICT, biotech, pharmaceuticals and renewable energy industries. Also, there may be increased enforcement against unlawful leveraging of one’s dominant position in new-growth industries to monopolise neighboring markets. Additionally, the KFTC is likely to focus on the protection of small and medium-sized enterprises from trade secret thefts, employee-poaching and unfair technology transactions in the context of subcontracting or supply relationships. The KFTC will likely further revise the Guidelines on IPR Abuses, specifically to address abuses of standard-essential patents and abuses by non-practising entities and strengthen enforcement in these areas.
Second, continuing the enforcement trend of the last few years, the KFTC will likely continue its aggressive enforcement actions against domestic and foreign companies in cartel cases. Given that cartel activities in the public bidding, finance and automobile sectors would have a significant impact on the Korean economy, the KFTC is likely to pay particular attention to these sectors. Even for cartel activities among foreign companies on foreign soil, the KFTC is expected to investigate cases aggressively and quickly if the cartel activities affect the Korean economy. In this connection, the KFTC has stated that it would more frequently file criminal complaints with the Prosecutor’s Office against the responsible individuals as well as against corporations in cartel cases, and is planning to amend the administrative fine imposition standards in the first quarter of 2014 to increase the amount of fines imposed in cartel cases.
Third, the KFTC has made clear that it will continue to investigate abuse of market dominant position and unfair trade practices in the distribution and public sectors, particularly by large conglomerates. The KFTC will likely focus on abusive subcontracting and franchising practices, such as channel stuffing and minimum sales requirements, interference with parallel imports by exclusive importers, forced shifting of costs to suppliers by large distributors, and various unfair subcontracting practices.
Finally, the KFTC is likely to pursue policies to protect consumers in online marketplaces by, for instance, providing consumers access to more product information, scrutinising unfair advertising, fraudulent e-commerce and other abusive practices, and correcting unfair standard terms and conditions that create a burden on consumers.