The overarching goal of the Korea Fair Trade Commission (KFTC) for 2015 was to achieve a creative and innovative economy based on ‘the establishment of a principled market economy’. To achieve this goal, in its business plan for 2015 (the 2015 Business Plan), the KFTC proposed to:
- improve creativity and innovation by promoting competition;
- address unfair practices of large companies against small and medium enterprises (SMEs);
- create a consumer-friendly market environment; and
- actively respond to the globalisation of competition law.
As the KFTC’s focus in 2015 has been to achieve the tasks proposed in the 2015 Business Plan, we have organised our discussion on key developments in competition law and policy in South Korea, and KFTC enforcement efforts in 2015, under the headings of the tasks identified in the 2015 Business Plan. We close this article by discussing the outlook for 2016.
Improving creativity and innovation by promoting competition
The KFTC has traditionally experienced some difficulty in enforcing competition law with regard to unfair practices in the Information and Communications Technology (ICT) sector due to the highly complicated technical issues involved, despite a perception that this is a high-risk area, given the potential for formation of monopolies and oligopolies. In an effort to ramp up expertise in this area, the KFTC formed a task force dedicated to ICT issues, headed by the secretary general, in February 2015. In line with such efforts, in August 2015, the KFTC imposed a corrective order, with regard to a multinational holder of global-standard audio technology, for including unfair terms in agreements with local licencees, such as an obligation not to dispute the effectiveness of the company’s patents. There are also several ongoing investigations regarding alleged unfair and anticompetitive conduct by other holders of standard-essential patents and by corporate software developers.
In this connection, concerns have been raised that the investigations could lead to or be used as a means of de facto discrimination against multinational companies, which continue to hold a competitive edge over most domestic companies in terms of technological innovation. Mr Jae-Chan Jeong, the current chairman of the KFTC, has dismissed such concerns, stating that the KFTC will make its decisions solely based on the market effect of the conduct at issue and the magnitude of the damage to consumers, without regard to whether the company being investigated is domestic or multinational.
Collusion in public sector and industries closely tied with public welfare
As in 2014, the KFTC continued in 2015 to closely scrutinise activity in sectors that have a bearing on public welfare, as well as in the industrial products field and public procurement. As of 1 December 2015, the KFTC had identified and imposed sanctions in 64 domestic and international cartel cases. The KFTC also revamped its internal analytical tool for monitoring bid rigging based on its review of KFTC decisions in this area over the past five years.
Investigations are ongoing with regard to cartels in essential goods and services, and in the markets for core automobile and electronic components and materials, which are highly dependent on imports. Cases involving fixing of benchmark prices in the global financial market are also under review.
Increasing M&A review efficiency
The KFTC processed a total of 313 business combination filings amounting to 127.7 trillion Korean won in value during the first half of 2015. These included 45 combinations (aggregate value 85.5 trillion won) between overseas entities. The KFTC conducted an in-depth review in 16 cases where it deemed that the combination could potentially have anticompetitive effects, and imposed a corrective order (eg, to divest assets) in six cases.
On 30 June 2015, the KFTC revised its Review Guidelines on Business Combinations. A key change is the shortening of the review period (from 30 days to 15 days) for mergers and acquisitions (M&A) that:
- undergo the ‘voluntary pre-review’ process and are deemed to lack anticompetitive effect at this preliminary stage; and
- are later submitted timely for formal review by the KFTC.
Voluntary pre-review is a process by which the applicant consults with the KFTC before the filing period commences to discuss and address any potential anticompetitive concerns. The change is expected to lead to increased utilisation of voluntary pre-review and to increased predictability and expedited completion of M&A.
Improvement of regulations with restrictive effect in public welfare areas
The KFTC launched a task force that is co-headed by the secretary general of the KFTC and the chief of the office for regulation coordination, charged with spearheading amendments to regulations that hinder competition. This task force has thus far identified 18 areas in which regulation can be improved. On 3 December 2015, the task force announced that it will work with various government agencies to amend the relevant regulations to address four key issues:
- unfair entrance barriers;
- excessive restriction on business;
- reduced quality of life; and
- monopolisation over public welfare areas.
Addressing unfair practices of large companies against SMEs
Payment of subcontracting fees
The KFTC actively enforced the Fair Transactions in Subcontracting Act (Subcontracting Act), including by conducting on-site investigations in sectors where it received a large number of complaints regarding non-payment of subcontracting fees.
It also amended the Subcontracting Act so that:
- the statute’s protections against non-payment are extended to certain mid-sized companies as well as to SMEs; and
- those who report violations of the Subcontracting Act are granted a reward.
Abnormal practices in the distribution sector
There have been numerous complaints regarding unfair trade practices in the shopping channel sector, which has rapidly expanded in recent years. In this connection, the KFTC in 2015 investigated six shopping channel companies and imposed administrative fines totalling 14.4 billion won. The KFTC also conducted ex officio investigations regarding unfair trade practices (including unfair cost shifting and improper requests to dispatch sales promotion personnel) by discount retail stores, department stores and outlet malls.
Enactment of Fairness in Agency Transactions Act
On 3 December 2015, the National Assembly passed the Fairness in Agency Transactions Act (FATA), the purpose of which is to prevent unfair trade practices and foster fairness in supplier-distributor relationships. The statute, inter alia:
- requires the execution of a written distribution contract;
- enumerates certain unfair trade practices that are prohibited in supplier-distributor transactions;
- prescribes administrative and criminal sanctions for suppliers that engage in unfair trade practices; and
- permits up to treble damages for certain damages to the distributor.
The FATA will be enforced one year after the date of promulgation, and will apply to the first agreement executed or renewed between the supplier and the distributor after the statute’s enforcement.
Creating a consumer-friendly market environment
Safe overseas purchases
Provision of information to customers
With the aim of enhancing consumer competence, the KFTC has provided comparative information on the price and quality of goods that are closely related to public welfare since 2010. In 2015, the KFTC provided comparative information for 12 products; for four of these products, it additionally provided information on prices at which the goods were sold by domestic and overseas vendors and by each distribution channel.
Actively responding to the globalisation of competition law
Imposition of criminal penalty on foreign corporation for the first time
In 2015, a Korean court rendered a decision imposing criminal sanctions on a foreign corporation due to collusion. In this case, the KFTC had, in November 2014, made a criminal referral regarding collusion by a foreign vendor that supplied products to Korean customers, and the prosecutor’s office issued an indictment in September 2015. The Seoul District Court imposed a criminal fine on the company in October 2015 and the decision was not appealed. Although the KFTC, the prosecutors and the courts have been tightening enforcement with regard to cartels, the Seoul District Court’s decision was noteworthy in that it was the first time a Korean court imposed criminal sanctions against a foreign corporation. Going forward, we expect to see more criminal sanctions being rendered against both individuals and corporations implicated in cartels.
Enhanced review over global business combination
In 2015, the KFTC strengthened its review with regard to global M&As, which may have a significant impact on the Korean market. For example, in February 2015, the KFTC approved for the first time the commencement of the consent decree procedure for a business combination, and in August the KFTC approved a voluntary correction plan submitted by the filing party in this transaction that addressed concerns of potential patent abuse. In March 2015, the KFTC imposed a corrective order in a business transfer between two multinational pharma companies; under this order, the acquirer was required to divest certain assets and rights relating to pharmaceuticals, regarding which there were anticompetitive concerns for the domestic market. The KFTC also imposed a de facto block on a merger between global semiconductor manufacturing equipment companies in April 2015. On 23 November 2015, the KFTC cooperated with competition authorities in the US, EU, Japan and other jurisdictions to require two other global semiconductor companies to liquidate certain business units.
Amendment of criteria for determining anticompetitive effect of unfair trade practice
‘Unfair trade practice’ is a fairly unique concept that is a significant pillar of Korean competition law. The practices that are regulated are similar to those regulated as abuse of market dominance; however, the entity engaging in the allegedly unlawful conduct need not have market dominance, while fairness as well as anticompetitive effect is taken into consideration in assessing illegality.
On 31 December 2015, the amendment to the Review Guidelines on Unfair Trade Practices (the Amendment) came into effect. The Amendment is aimed at making the KFTC’s review criteria align more closely with the global standards, and:
- adds details to the standards for assessing anticompetitive effect; and
- makes anticompetitiveness the key standard for determining that a tying arrangement is illegal in accordance with the practice of competition authorities in major jurisdictions.
Anticompetitive effect is a key component in determining the illegality of practices such as refusal to deal, discrimination against certain transacting partners, unfair exclusion of competitors and imposition of unduly restrictive terms. The Amendment clarifies that the focus of the anticompetitive effect review should be on protecting competition, not protecting competitors; in this regard, main risks to be considered include market price increase and reduction in production volume. The Amendment also stipulates criteria specific to certain market share brackets (10 per cent or more, 20 per cent to 30 per cent and 30 per cent or more) that can be used to determine whether a company has market power, and places the burden of proof regarding anticompetitive effect on the KFTC.
The existing Review Guidelines on Unfair Trade Practices state whether a tying arrangement constitutes an ‘unfair means of competition’ as a factor for assessing the arrangement’s permissibility. The Amendment deletes this factor and states that tying arrangements should be reviewed based on four elements being present:
- two separate products or services;
- the seller has sufficient market power in the market for the tying product; and
- anticompetitive effect.
In effect, the Amendment shifts the focus of review to the anticompetitive effect of a particular tying arrangement.
Plans to improve investigation and enforcement procedures
On 21 October 2015, the KFTC announced a plan for reforming its investigation and enforcement procedures to substantially strengthen the procedural rights of companies being investigated (the Reform Plan). The Reform Plan comes, among others, in the wake of recent high-profile court cases that nullified KFTC decisions, and also addresses concerns that the KFTC’s past enforcement practice has not afforded due process protections in line with global standards. Key components of the Reform Plan include:
- proposals for strengthening the leniency regime;
- the announcement of draft Guidelines on Investigation Procedure; and
- the announcement of a draft amendment to the Guidelines on Committee Hearing and Case Handling Procedure.
Strengthening leniency regime
The Reform Plan proposes changes to the leniency regime that are intended to ensure a fair leniency procedure that furthers competition. The KFTC also noted that they address issues raised in connection with several recent leniency cases, in which leniency applicants amended or withdrew false or exaggerated statements from their applications after receiving the benefits of their leniency status. Under the proposed changes:
- employees and executives of leniency applicants must be physically present when the leniency applications are reviewed at the hearing, so that the KFTC commissioners can directly ask questions and confirm the content of the leniency applications. Their presence at the hearing will be a factor in determining level of cooperation, which is considered by the KFTC as it determines the final status of the leniency application;
- leniency applicants can lose the benefits of their leniency application if they disclose their leniency status to other conspirators or to third parties without the KFTC’s consent; and
- the leniency application form will be amended so that the leniency applicants are informed regarding the specific requirements for cooperation with the KFTC’s investigation.
Draft Guidelines on Investigation Procedure
The draft Guidelines on Investigation Procedure are intended to ensure the fairness and transparency of KFTC’s on-site investigation procedures. For example, under the draft Guidelines:
- the KFTC must have a reasonable and objective basis for selecting companies that are investigated. It must state the number of respondents and the criteria and grounds for selection in its investigation plan, and also include a list of the respondents;
- the KFTC’s investigation notice must specifically state and describe the alleged misconduct (except in cartel investigations) and state the respondent’s name and location to prevent over-investigation, and the respondent has the right to refuse inquiries that exceed the scope of the investigation notice; and
- the respondent has a right to attorney during the entire investigation procedure (while also noting certain exceptions).
Draft amendment to Guidelines on Committee Operation and Case Handling Procedure
The draft amendment to the Guidelines on Committee Hearing and Case Handling Procedure is intended to strengthen internal and external controls on the KFTC’s investigation process. For example, under the draft amendment:
- all new investigations (whether initiated by the KFTC or through a complaint) must be registered in an internal case-handling system within 10 days;
- for investigations initiated by the KFTC, a case number must be assigned upon registration and a report on the commencement of the investigation must be filed within 30 days; and
- investigations should, in principle, be submitted before the commissioners in a hearing within six months (except for abuse of market dominance and unfair subsidy cases, which can be submitted within nine months, and cartel cases, which can be submitted within 13 months). The case handler can extend this deadline with the approval of the secretary general of the KFTC.
Execution of MOU with US antitrust authorities
The KFTC, the US Department of Justice and the US Fair Trade Commission announced on 8 September 2015 that they had executed a memorandum of understanding (MOU) to increase cooperation and communication on enforcement of competition law in Korea and the United States. Some of the topics covered by the MOU include:
- sharing of information that facilitates effective application of US and Korean antitrust laws;
- the establishment of frameworks for communication, such as through designation of liaison officers, communication of significant developments in competition policy and enforcement in respective jurisdictions and regular meetings; and
- commitment to maintaining confidentiality of information where sharing of information is prohibited by the laws of the respective jurisdiction or is incompatible with the respective agency’s interest.
Cooperation with EC regarding enforcement of competition law in ICT sector
As a result of a bilateral discussion on 4 May 2015, the KFTC and the European Commission affirmed that the jurisdictions are aligned in terms of their positions with regard to the abuse of standard patents in the ICT area, such as in connection with injunctions to prohibit sales, patent ambushing and FRAND.
Commissioner Dong-Kwon Shin elected as Bureau Member of OECD Competition Committee
In October 2015, Commissioner Dong-Kwon Shin of the KFTC was elected as a Bureau Member of the Competition Committee of the OECD. Mr Shin has served in various key posts at the KFTC, including as head of the business combination department and the cartel investigation bureau.
Forecast for 2016
On 17 September 2015, Chairman Jae-Chan Jeong reported to the National Assembly’s state affairs committee regarding the KFTC’s activities in 2015. During this presentation, Mr Jeong stated that the KFTC had focused on the following four core objectives, and discussed both the activities that the KFTC has conducted thus far in connection with these initiatives and outlined next steps:
- improvement of unfair trade practices by large companies in relation to SMEs;
- promotion of market competition;
- prevention of and remediation for damage to consumers in sectors bearing on public welfare; and
- improvement of case-handling procedures and rationalisation of the system.
The goals, actions and plans discussed by Chairman Jeong do not depart significantly from the content of the 2015 Business Plan. Accordingly, we expect that the general direction of the KFTC’s enforcement will remain largely the same in 2016.
In this connection, the KFTC will continue to actively enforce competition law with regard to cartels, business combinations, unfair trade practices (including by large entities in relation to SMEs) and other areas within its jurisdiction. It will likely retain its strong interest in the ICT sector. The KFTC will also continue its efforts to make improvements both to internal procedures and to restrictive regulations, and advocate for enhanced enforcement in various domestic and international fora. With regard to impact on companies, we expect that the KFTC’s efforts concerning procedural reform will enhance the transparency and fairness of KFTC investigations and enable those under investigation to present a stronger defence and have more visibility during the investigation’s progress.