The overarching goal of the Korea Fair Trade Commission (KFTC) for 2014 was to achieve a ‘revitalisation of the economy through creativity and innovation’, based on a fair and vibrant market. To achieve this goal, the KFTC’s 2014 business plan proposed to:
- rectify ‘abnormal’ business practices;
- facilitate an innovation-fostering market;
- strengthen law enforcement to protect ordinary people’s livelihoods;
- realise ‘economic democratisation’; and
- actively respond to the globalisation of competition law.
Since the KFTC has focused on successfully fulfilling the tasks proposed in the KFTC’s 2014 business plan, we briefly summarise below the key developments in South Korean competition law and policy, and the Commission’s enforcements during 2014, generally in accordance with the aforementioned tasks, and finally provide a preview of what is likely to lie ahead in 2015.
Rectifying ‘abnormal’ business practices
Enforcement against unfair trade practices by state-owned enterprises
The KFTC has investigated and conducted enforcement activities to rectify unfair trade practices by state-owned enterprises, such as the abuse of superior bargaining position in transacting with their vendors and the provision of unfair assistance to their affiliates.
Enforcement against abuse of superior bargaining position in the areas of subcontracting, distribution business, franchise business and agency arrangements
With respect to law enforcement against violations of the Fair Transactions in Subcontracting Act (the Subcontracting Act), the KFTC focused its monitoring and enforcement efforts on any violation relating to payments to subcontractors as well as the four ‘core unfair practices’ (ie, unfair determination or reduction in supply price; technology usurpation; unfair return of supplied products; and unfair cancellation of orders).
In connection with this, the amendment to the Subcontracting Act, which strengthened its prohibition of unfair contractual restrictions against subcontractors, went into effect on 14 February 2014. The amendment prohibits, among others, the following provisions as unfair contractual restrictions against subcontractors:
- requiring the subcontractor to pay the costs incurred to execute matters that are not stipulated in the agreement; and
- placing the burden of handling complaints and costs related to accidents in the workplace on the subcontractor.
Following this amendment, the KFTC introduced a new set of guidelines for reviewing and determining unreasonable contractual restrictions prohibited under the Subcontracting Act.
To rectify abnormal practices in the distribution business, the KFTC has conducted a wide range of surveys and other investigations to examine relevant unfair practices and has enacted certain review guidelines and prepared a standard form contract to prevent such unfair practices. In connection with this, the KFTC sanctioned large distributors that have unfairly shifted certain costs to suppliers or forced their suppliers to provide confidential business information, and has also conducted investigations against home shopping companies.
The KFTC also strengthened its monitoring and investigating efforts on franchisors, and sanctioned certain franchisors (eg, coffee and cosmetics businesses) for their unfair trade practices against franchisees.
Finally, in an effort to prevent abuse of superior bargaining position by large companies against their distributors, the KFTC issued the Notification on Specific Types of Abuse of Superior Bargaining Position in Continuous Resale Transactions, which provide for specific criteria of unfair trade practices involving distributors that are prohibited under the Monopoly Regulation and Fair Trade Law (FTL). Some of the examples of unlawful practices provided in the notification include:
- unfairly forcing sales of unwanted or unordered goods;
- imposing mandatory purchase requirements for goods with an imminent expiration date, unpopular products or obsolete goods;
- unfairly forcing economic favours by shifting the cost of promotional activities or labour costs without prior agreement with distributors; and
- unfairly forcing sales targets by imposing disadvantages, for example.
Based on the KFTC’s reinforced policy and regulations, it sanctioned, among others, certain food and cosmetics companies for their unfair trade practices against their distributors.
Facilitating an innovation-fostering market
Consent decrees for internet portal companies and an enterprise software company
The KFTC has continued to show a keen interest in enforcing competition law in the emerging service industries (eg, the information and communications technology sector). In this regard, the KFTC has been conducting investigations on the hardware and enterprise software markets, platform services relating to mobile application stores and internet portals. These activities were implicated primarily to improve or correct customary practices that restrict the growth of emerging industries.
In connection with this, in March 2014, the KFTC approved its first consent decree with Korea’s major internet portal companies, which concluded the KFTC’s investigation of those companies for their alleged abuse of market dominance without any finding of liability. The consent decree system, adopted in December 2011, provides businesses that are under investigation an opportunity to voluntarily propose remedial measures to restore competitive order and remedy and potential consumer harm. This proposal is then reviewed by the KFTC and relevant government agencies, and interested parties are able to submit their comments and opinions. If the proposed remedies are deemed to be reasonable, the KFTC concludes the case without a finding of liability.
The KFTC’s approval of the consent decree in this case was significant in that it established the consent decree as a tool to promptly resolve investigations especially for dynamic and innovative markets, such as the online search market, where technological innovation is an important factor that must be considered. Moreover, the KFTC reasoned that online search services are closely related to the everyday life of Korean consumers and therefore necessitated a prompt restoration of competitive order.
After the first consent decree was approved, a Korean subsidiary of a global enterprise software company also concluded its investigation against its alleged unfair trade practices through a consent decree. In this consent decree, the respondent company not only voluntarily took certain corrective measures, but also established a non-profit foundation to utilise big data, create jobs and train personnel in the software and other related industries.
KFTC rejects movie theatre chains’ consent decree application
The KFTC also investigated certain alleged unfair practices in the movie industry. In the investigation, the relevant respondent companies (the movie theatre chains) applied for initiation of the consent decree process, but in December 2014 – after the first two consent decrees had been approved – the KFTC rejected these applications. According to the KFTC, it considered the nature of the case, clarity of the available evidence, as well as the public interests involved in determining that the case was not appropriate for the consent decree process, and thereby reverted the case back to the formal hearing process. This rejection signifies that the KFTC carefully reviews the elements of the consent decree system (eg, whether it could promptly and effectively remedy the harm to consumers and allow the market to regain normalcy).
Regulations against IPR abuses
As part of its plan to examine and address unfair trade practices that undermine innovation, the KFTC has heightened its investigations of IPR abuses particularly by global multinational companies and the relevant investigations are expected to continue. In particular, the KFTC has also shown an interest in examining the effect of patent abuses by NPEs, and in this regard, the KFTC has revised its Guidelines on IPR Abuses in December 2014. The amended Guidelines include matters concerning standard-essential patents and NPEs.
Proposed exemptions from merger review
The KFTC proposed a draft bill to amend the FTL, which, among others things, exempts certain mergers (business combinations) from the KFTC’s merger control process. Under the current merger filing requirements of the FTL, the KFTC’s review may be required for certain transactions that have no or insignificant anti-competitive concerns. The KFTC proposed certain exemptions by which it expects to further promote M&A activities in the market. The exempt transactions under the proposed amendment includes certain interlocking directorship, certain inter-affiliate mergers and business transfers and incorporation of private equity funds. The draft bill was submitted to the National Assembly for its review on 23 December 2014.
Strengthening law enforcement to protect ordinary people’s livelihoods
Active enforcement against cartels
The KFTC continued to actively enforce its cartel regulations in 2014. It imposed fines of approximately 1 trillion won in cartel cases. In particular, it has severely sanctioned bid riggings in large construction projects including the metropolitan railway, rapid transit railway and the canal business, as well as cartels involving daily goods such as boilers and rental cars. Recent cartel enforcement activities have shown an increase in administrative fines, strengthening of criminal enforcements, and an expansion of damages claims.
Increase in administrative fines
In 2013, the KFTC amended the Detailed Guideline for Calculation of Administrative Fines to clarify how the KFTC calculates fines. By strictly adhering to these guidelines, the KFTC effectively raised the fines that were imposed against violators of the FTL. The KFTC again amended the guidelines to enhance the deterrent effect of the fines and further restrict the discretion of the KFTC in determining and calculating the surcharge amounts by, among other things, broadening the scope of aggravating factors for repetitive violators of the FTL and reducing the scope of several mitigating factors, respectively.
Strengthened criminal enforcements
Since the elimination of its exclusive right to file criminal complaints with the Prosecutor’s Office for Korean competition law cases in July 2013, the KFTC has become more active in utilising criminal referrals to sanction cartel participants. In fact, the KFTC is expected to file criminal complaints in most cartel cases (and possibly other types of FTL violations), and more criminal complaints involve not only the respondent companies themselves but also their individual officers and employees.
With the increase in criminal complaints by the KFTC, the Prosecutor’s Office has also shown an increasing interest in pursuing cartelists or other violators of the FTL. Moreover, recent court cases have also signalled the courts’ willingness to consider heavier sanctions against not only companies, but individuals as well. Accordingly, we have seen many more criminal investigations against cartels and other competition law related violations in Korea, and this trend is expected to become even more pronounced.
In light of this development, in August 2014, the KFTC amended its Guidelines on Criminal Referral to establish new standards for criminal prosecution of individuals involved in cartel activities and other violations of the FTL. Under the amended guidelines, individuals who ordered or approved (either prior to or after the fact) the prohibited conduct, those who carried out the prohibited conduct, those who impeded the KFTC’s investigation by physical violence, verbal abuse, or intentional physical obstruction or delay in the KFTC examiners’ entry to the site shall be subject to criminal referral.
Expansion of damages claims
Under article 56 of the FTL or article 750 of the Korean Civil Code for tort, a private litigant can bring a claim for damages arising from a cartel, and thereby subject the company that has engaged in a cartel to a civil action for damages. In the past, however, the KFTC’s finding of an unlawful cartel rarely led to civil claims, perhaps because tortfeasors in Korea are only liable for actual damages incurred, unlike the US where treble damages are available. However, there is now a trend of more and more plaintiffs launching follow-on civil claims after a KFTC investigation.
Relatedly, the KFTC is considering making private enforcement of competition laws possible to further consumer rights by allowing private parties to initiate class-action suits and to seek injunctive relief against competition law offenders.
Protection of consumer rights
As part of its efforts to ensure the protection of consumer rights, the KFTC has focused its efforts on improving the standard terms and conditions in favour of consumers, and has also revised the standard privacy policies of online business operators (eg, internet shopping malls and portals) based on a survey that it conducted of such companies.
The KFTC also continued its practice of providing detailed price comparisons for select ‘everyday’ products, and has introduced the consent decree system for consumers harmed by unfair advertising to allow for a rapid recovery of consumer harm. Under the amendment, however, the consent decree is not available for grave and clear violations that require criminal sanctions.
Moreover, in light of the rapid increase in foreign direct purchases and purchases through mobile devices or internet blogs, the KFTC established specific guidelines, including the e-commerce law compliance guidelines for mobile e-commerce business operators, which includes ways to display product or business information for mobile transactions, and guidelines for overseas purchasers.
Realising ‘economic democratisation’
In 2014, the FTL was amended to strengthen the regulations against unfair assistance primarily among affiliated persons. The amendment:
- relaxes the requirements for establishing unfair assistance under the FTL;
- imposes administrative fines on entities that have benefited from such unfair assistance as well; and
- prohibits the act of assisting ‘specially-related parties’ irrespective of whether such act impedes fair competition.
By relaxing the requirement for establishing unfair assistance, the new law has expanded the KFTC’s authority to sanction unfair assistance, and has affected transactions that involve families of owners of certain conglomerates as it sanctions the beneficiary of unfair assistance without requiring the KFTC to examine its anti-competitive effects.
In addition, several legislative or regulatory changes in Korean antitrust law aimed at promoting ‘economic democratisation’ have come into effect throughout 2013 and 2014, including:
- the Subcontracting Act, which expanded the right granted to the Korea Federation of Small and Medium-sized Business to negotiate the supply price on behalf of small to medium-sized suppliers, and also expanded that the scope of abusive conduct that may be subject to punitive damages; and
- amendments to the Fair Transactions in Franchise Business Act, which restricted requests for remodelling and cost-sharing, permitted the formation of franchisee associations, prohibited unfair restrictions on business hours, and provided protection of franchise territory, and so on.
The KFTC has been scrutinising whether its new policies are functioning as intended, and is expected to continue to strengthen the promotion of new policies and conduct onsite inspections.
Actively responding to the globalisation of competition law
Monitoring international cartels and scrutinising global M&As
Given the global nature of business and competition, the KFTC has over the past few years focused on establishing cooperative relationships with foreign competition authorities, in order to better coordinate for purposes of competition law enforcement as well as related policies. In 2014, this increasing trend towards international cooperation was especially evident in the areas of international cartels and global M&As.
In accordance with this goal, the KFTC has intensified enforcement against unlawful collusions in global intermediate products or raw materials markets that may adversely affect Korea’s major industries. In particular, the KFTC imposed a penalty of 114.6 million won against auto parts manufacturers in a big-rigging case, followed by 77.8 billion won against bearing suppliers for jointly deciding the price, quantity and prospective clients of bearings for commercial sales and steel facilities.
In addition, the KFTC has been reviewing merger notifications filed in connection with global M&A transactions in various industries with heightened legal and economic scrutiny, and for certain cases, the KFTC issued certain remedies or even blocked the contemplated transaction. In these cases, the KFTC has shown a tendency toward greater and closer coordination with relevant foreign competition authorities and more use of sophisticated economic analysis methodologies in its evaluation of M&As.
Draft bill to amend Korean competition law
The KFTC announced a draft bill to amend the FTL to be more compatible with the global market and its current trends. On 23 December 2014, the draft bill was submitted to the National Assembly for its review.
Minimum resale price maintenance
Traditionally, minimum resale price maintenance requirements were deemed to be a per se violation. However, in 2011, the Korean Supreme Court held that the rule-of-reason test should apply by balancing the anti-competitive effects of the restraint on intra-brand competition with the pro-competitive effects arising from the promotion of inter-brand competition. To reflect this decision into the FTL, the KFTC plans to amend the FTL and clarify that the rule of reason test will apply whereby the benefits to customers shall be balanced against the anti-competitive effects of a minimum resale price maintenance requirement.
Respondent’s rights and investigation procedure
In order to codify a respondent’s rights that have been generally available through notifications and guidelines or through general practice, the KFTC plans to amend the FTL to explicitly specify the various rights of respondents as well as provide more transparency in the KFTC’s investigation procedure.
On 8 December 2014, Jae-Chan Jeong took office as the 18th chairman of the KFTC, and the KFTC has yet to finalise and report its 2015 business plan to the president. As such, it may be premature to predict with certainty what will lay ahead in the year to come.
However, since the competition policies of the KFTC have been determined within the framework of the current administration’s economic policies, it is likely that the KFTC’s enforcement priorities and trend will be, by and large, consistent with what has transpired in 2014. Moreover, Chairman Jeong’s statements at his confirmation hearing and during his appointment ceremony did not include any indication that there will be significant changes to the policy priorities of 2014. Given the foregoing, the issues and areas which the KFTC is expected to focus on may include:
- abuse of IP rights or market dominance;
- domestic and international cartels (especially in sectors with a direct impact on consumers);
- global M&A deals likely to have a significant impact on the domestic market;
- unfair trade practices (eg, coerced transfer of technology and arbitrary supply price reductions) by those with superior bargaining position (with a focus on subcontracting, franchising, distribution and agency arrangements);
- consumer protection through strengthened supervision over consumer policy formation and implementation; and
- ‘economic democratisation’ matters, including unfair assistance regulations.