The overarching goal of the Korea Fair Trade Commission (KFTC) for 2016 was to achieve the ‘establishment of a fair and active market’. To achieve this goal, the KFTC proposed in its business plan for 2016 (the 2016 Business Plan) to:
- invigorate the economy by promoting competition with regard to innovation and creativity;
- improve the economy as experienced by the general public through economic democratisation;
- create a consumer-centred market; and
- reform and improve the KFTC’s administration and procedure to enhance credibility in law enforcement.
The KFTC’s focus this year has been on achieving the tasks outlined in the 2016 Business Plan, and it further elaborated in its annual report during the National Assembly’s audit of government agencies in October 2016 (the October Report). Below, we summarise the key developments of competition law and policy in South Korea and the KFTC’s enforcement activities during 2016, and conclude with an assessment of the outlook for 2017.
Eradicate collusion and other anticompetitive conduct
As stated by the KFTC in the 2016 Business Plan, the KFTC vigorously monitored for collusive conduct with a significant impact on the market, such as bid rigging, and in ‘sectors that directly impact the everyday lives of ordinary consumers.’ In this vein, the KFTC imposed 37 corrective orders and a fine of 591.5 billion won in the aggregate in connection with cartel cases during the period from January to August 2016. Notable cases include the bid rigging regarding construction of LNG storage tanks (administrative fine: 351.6 billion won) and price fixing among paper manufacturers (five cases involving raw material purchase, processing and sales processes; administrative fine: 214.8 billion won).
Focus on international cartels
The KFTC has been active in reviewing international cartel cases. In 2016, the KFTC continued to investigate the auto parts industry, and is also investigating sectors such as finance, key components, and marine transportation. In the October Report, the KFTC announced that it would continue to vigorously investigate international cartels, especially in areas where Korean companies are highly reliant on imports (eg, key materials and components such as electronic components) or that have a close bearing on imports and exports (eg, marine transportation). These investigations are expected to continue into 2017.
Active cartel investigation by the prosecutors’ office
In February 2015, a Fair Trade Tax Investigation Department was established at the Seoul Central District Prosecutors’ Office, and has been active since that time. For example, the prosecutors conducted a search and seizure and took relevant personnel into custody in connection with an investigation into alleged bid rigging in a high-speed railway construction project. The investigation had been initiated by the prosecutors based on their mandate under the Framework Act on the Construction Industry, which, unlike the Monopoly Regulation and the Fair Trade Law (FTL), does not require a criminal referral by the KFTC as a prerequisite for the prosecutors’ indictment.
Changes to the leniency regime
Amendments to regulations concerning the leniency regime became effective as of 15 April 2016. As stated by the KFTC, the purpose of the amendments is to have the regime be operated more strictly in accordance with the relevant facts, and at the same time to make the rules more reasonable. Key features of the amended leniency regime are:
- the requirement for officers or employees of the leniency applicant to attend the KFTC hearing;
- a non-disclosure obligation on leniency applicants;
- changes to the leniency application form;
- clarification regarding timing of submission of leniency applications (applications will be deemed submitted upon arrival via fax or email);
- improvement of the ‘Amnesty Plus’ programme; and
- establishment of conditions for a later-in-line applicant to succeed to the position of an earlier-in-line applicant that withdraws its leniency application or ceases to qualify for leniency.
In particular, the KFTC will take factors (including the first bullet point) that have a bearing on the extent of the leniency applicant’s cooperation into account when determining whether to grant leniency status. The amended leniency regime is expected to increase the efficiency of cartel enforcement because it encourages leniency applicants to recognise their obligation to fully cooperate with the KFTC and discourages them from further colluding with other cartel participants to interfere with the KFTC’s investigation.
Enhancing cooperation with foreign competition authorities
The KFTC has made efforts to enhance its cooperation with foreign competition authorities, such as by holding formal and informal consultation sessions with them. For example, KFTC officials participated in the 2016 International Competition Network Cartel Workshop in October.
Structural improvements to monopolistic or oligopolistic markets and the blocking of anticompetitive M&As
In the 2016 Business Plan, the KFTC anticipated that numerous large-scale mergers would take place in the petrochemical, construction and distribution industries in Korea, and in the IT, electronics and chemical industries globally, and stated that such mergers could have a significant impact on each respective industry. The KFTC planned to preemptively respond to large-scale mergers by (i) conducting preliminary review of the mergers and (ii) during the actual merger review process, receiving comments from not only parties with a direct interest, but also from others including industry members and experts. The KFTC also stated that it would strengthen coordination with other competition agencies by establishing and maintaining open channels with foreign competition agencies and increasing the degree of coordination in merger reviews to more effectively respond to global mergers.
In line with this statement, the KFTC collaborated with foreign competition agencies in reviewing large global M&A deals that may significantly impact the Korean market (including deals in the IT sector), and there were instances where the parties walked away from the deal because of the anticompetitive concerns raised. In July 2016, the KFTC blocked the acquisition of CJ HelloVision, the largest cable television company in Korea, by SK Telecom, Korea’s largest telecommunications operator. In announcing its decision, the KFTC cited a concern that the deal could lead to actual restriction of competition in the pay broadcasting market and the retail and wholesale mobile communication markets. More recently, the KFTC imposed a corrective order (including an order to divest assets) in connection with a proposed merger of two global animal drug companies.
Developments and trends in the first half of 2016
In the first half of 2016, the KFTC processed 272 merger filings (involving 266 trillion won in deal value). The number of transactions went down compared to that for the first half of 2015 (313 transactions), but the deal value increased greatly (from 127.7 trillion won in the first half of 2015). The increase in deal value was driven mostly by foreign-to-foreign transactions. Of such foreign-to-foreign transactions, 65.1 per cent involved vertical or horizontal combinations with adjacent industries, suggesting that foreign companies were focused more on increasing their competitiveness in their existing business than in expanding to new sectors. According to the KFTC, it conducted in-depth anticompetitiveness reviews for 10 transactions during the first half of 2016.
Simplification of submission requirements
The KFTC amended its Merger Notification Preparation Guidelines (Merger Notification Guidelines), effective as of 20 June 2016. The amendment (i) exempts parties from submitting market data for transactions that qualify for a simplified filing, which are deemed to have minimal anticompetitive effects; (ii) narrows the scope of submission requirements for conglomerate combinations; and (iii) exempts parties from submitting the list of shareholders and affiliates if the party at issue is listed in a Korean stock exchange, as the relevant data is available. In brief, the amendment seeks to exempt or narrow the scope of information to be included in the merger notification, getting rid of that which is not deemed to be critical to the KFTC’s assessment or is publicly available. The amendment is expected to reduce the burden of preparing the Korean merger notification in cases such as a reorganisation of affiliates within a business group.
Abuse of market dominance
Increase of creative and innovative capacities in the digital sector by fostering a competitive environment
In the 2016 Business Plan, the KFTC stated that it would strengthen its monitoring of abuses of intellectual property rights, such as abuse of standard-essential patents (SEPs) and collusive agreements with the competitor or patent licensee to delay or stop the introduction of competing products. Accordingly, this year the KFTC focused on monitoring for intellectual property rights (IPR) abuse in the ICT sector, such as mobile communications companies using SEPs for core technology to exclude competitors, and mobile component makers violating FRAND commitments to monopolise the relevant market and restrict innovation-based competition. The KFTC also investigated a global developer of database management solutions regarding the tying of system upgrades with support services, but ultimately closed the investigation without a finding of violation.
Amendment to the IPR Guidelines
The KFTC amended its Review Guidelines on Abuse of Intellectual Property Rights (the IPR Guidelines), effective as of 23 March 2016. One of the major drivers for amending the IPR Guidelines was extensive criticism regarding the previous IPR Guidelines, which regulated de facto SEPS as if they were regular SEPs. The amended IPR Guidelines limit the definition of ‘standard technology’ to the technology selected as a standard by the government, standard setting organisations, business associations, groups of companies with similar technologies and other similar bodies, and deletes the reference to the technology that is used widely in the relevant technology field as a de facto standard. The definition of SEPs was also amended accordingly. In this connection, the KFTC stated in a press release that it will now review the legality of the exercise of de facto SEPs based on the standard for non-SEPs, rather than SEPs. The amended IPR Guidelines also clarify that the analysis on whether a refusal to license patents is ‘unfair’ should focus on the conduct’s anticompetitive effects.
Sustained monitoring of anticompetitive conduct based on IPR
In the October Report, the KFTC stated that it planned to strengthen monitoring over anticompetitive conduct such as IPR abuse in sectors including communications, internet, software and pharmaceuticals. It noted ‘pay-for-delay’ arrangements in the pharmaceutical industry (under which a brand drug manufacturer pays a generic maker to delay or stop the launch of the generic) as an area of special focus. The KFTC also stated that it would closely monitor arrangements whereby a company sought to leverage its market power in the main product market to obtain market power in the aftermarket.
In connection with the above, the KFTC established a Knowledge Industry Monitoring Division (KI Division) within the Anti-Monopoly Bureau on 6 December 2016. The KI Division is expected to focus on investigating abuse of monopolistic or oligopolistic positions and unfair trade practices in the knowledge industry and for establishing and reforming competition policies relating to IPR.
Monitor new growth areas such as online platform market
In the 2016 Business Plan, the KFTC stated that it would conduct a survey of the online platform markets to check for potential abuses of market dominance. The KFTC is expected to continue to monitor major platform companies for abuse of market dominance and other anticompetitive conduct (eg, unfairly restricting use of a competing platform, such as by refusing to deal with or imposing disadvantageous terms on companies that use a competing platform).
In December 2016, the KFTC announced through a press release that it had found Qualcomm to have engaged in abuse of dominance, among others, by refusing to license mobile communication SEPs in violation of its FRAND commitment, despite requests for a licence from competing chipmakers, and by leveraging the supply of chipsets to coerce counterparties to execute and implement unfair licence agreements. The KFTC ordered Qualcomm to take various corrective actions, including negotiating licence contracts with competing chipmakers and mobile phone company licensees, and to pay an administrative fine of 1.03 trillion won. This decision is an example of the KFTC’s active enforcement regarding abuse of SEPs in the ICT sector, a trend we expect to continue in 2017.
Unfair trade practice
Amendment to the Guidelines for Review of Unfair Trade Practices
An amendment to the Guidelines for Review of Unfair Trade Practices (the UTP Guidelines) came into effect on 31 December 2015. The amendment:
- clarifies the meaning of and adds detailed standards for assessing anticompetitive effects;
- makes anticompetitive effects the key factor in determining whether a tying arrangement is to be deemed unlawful;
- supplements the standards for reviewing whether a ‘superior bargaining position’ exists; and
- relaxes the standards for finding unlawful utilisation or employment of technology and personnel.
Of note, the amended UTP Guidelines clarify that ‘anticompetitive effects’ means ‘increase in market price’ or ‘decrease in production’, thereby highlighting that the purpose of the FTL is to protect competition rather than competitors.
Amendment to the RPM Guidelines
The amended Guidelines for Review of Resale Price Maintenance Practices (the RPM Guidelines) came into effect on 30 June 2016. Under the previous RPM Guidelines, minimum resale price maintenance was deemed per se illegal, as suggested in the relevant provision of the FTL, without requiring any anticompetitiveness or unfairness analysis. However, in 2010 and again in 2012, the Supreme Court of Korea held that despite the statutory language, minimum resale price maintenance should be allowed if the practice promotes interbrand competition and as a result increases consumer welfare. In light of these Supreme Court precedents, the amended RPM Guidelines state that while in principle, minimum resale price maintenance will be deemed illegal, in exceptional cases such an arrangement will be deemed legal if it promotes interbrand competition and as a result increases consumer welfare or is otherwise justifiable. Meanwhile, maximum resale price maintenance, while illegal if it functions or could function as a cartel price among the distributors or otherwise has an anticompetitive effect, will be deemed legal if there is a justifiable reason, such as an increase in consumer welfare, that outweighs the anticompetitive effect of the practice.
Enforcement of fairness in the Distributor Act
The Fairness in Distributor Transactions Act (the Distributor Act) is scheduled to go into effect on 23 December 2016. The Distributor Act was enacted amid calls for the taking of measures to prevent unfair trade practices in transactions with dealers and distributors. Key features include (i) a requirement to execute a distributor agreement in writing and to include certain mandatory terms; (ii) specification of categories of unfair trade practices prohibited in transactions with distributors (coercion to purchase, coercion to provide economic benefits, coercion to reach a sales target, imposition of disadvantages, interference with business management, refusal or non-compliance to a request to confirm purchase history, and retaliatory measures); and (iii) imposition of a fine of up to three times the actual damages incurred by the distributor in the event of a violation of the prohibition on coercion to purchase or to provide economic benefits.
Labelling and advertising
Addressing improper labelling and advertisement that interferes with customers making a reasonable choice
On 17 November 2016, the KFTC announced that during the period from 2013 to 2015, it had found 661 cases of false or exaggerated advertising that violated the Act on Fair Labelling and Advertising (AFLA), and had rendered a warning in only approximately one-third of the cases (186 cases), a corrective order without an administrative surcharge in 126 cases (out of 150 cases where a corrective order was rendered), and an administrative fine and administrative surcharge in 179 cases and 28 cases, respectively. During that same period, the KFTC made seven criminal referrals. Following the announcement, the KFTC was criticised from some quarters that the amount of the fine or surcharge was significantly below the amount of benefit obtained by the companies through the false or exaggerated advertisement, and that the KFTC’s failure to take strict measures was contributing to the proliferation of misleading advertisement.
This year, the KFTC imposed a corrective order with regard to advertisements on the beneficial effects of e-cigarettes and on growth-boosting products. The KFTC also finalised (in September) a consent decree with regard to advertisements by three telecoms companies on their call plans, after numerous consultations with the relevant telecoms companies and after soliciting comments from interested parties. Under the finalised consent decree, the companies agree not to use terms such as ‘unlimited’ or ‘limitless’ when there are any restrictions or caps on data, voice, text messaging or other services. This was the first time the consent decree system was utilised since being introduced into the AFLA, and we expect that consent decrees will in the future provide companies with an option for quickly resolving investigations on labelling or advertising practices.
In October 2016, the KFTC announced that it would strengthen monitoring for improper advertisement in certain sectors where such advertisement is especially likely to be harmful (including cosmetic surgery and air purifiers), and with regard to areas including automobile emissions, discounts by large discount stores and real estate investment. In December, the KFTC made a criminal referral regarding five employees and officers of a global automobile maker in connection with false advertising regarding the vehicles’ carbon emissions.
Increasing fairness and transparency of investigations
The KFTC amended its Rules on Case Handling Procedures (the Rules) to increase the transparency and fairness of investigation procedures. Under the amended Rules, the KFTC is required to register cases investigated sua sponte within its internal system prior to commencing the investigation, and must report to the Commissioner the fact that an investigation was commenced within 30 days of commencement. In addition, officials who assist with the deliberation process will be required to recuse themselves in the event of any conflict of interest (previously, the recusal requirement applied only to Commissioners).
The KFTC also newly enacted the Rules on Investigation Process, which purport to increase the transparency of the investigation process and set forth matters such as a requirement for the KFTC to stipulate the suspected violation in an official letter to the investigated company and to prepare and provide to the company of a list of seized or submitted materials. Moreover, the KFTC announced that it would prepare and disclose a written decision even with respect to those cases that were closed without a finding of violation.
We believe that the KFTC’s focus in 2017 will be quite similar to that in 2016. In the short term, the KFTC will likely seek to ramp up its enforcement activity in the online platform sector (the KFTC’s activities in this area have not been as extensive as planned at the beginning of the year), and to wrap up its ongoing internal cartel cases in the finance, electronic components and maritime transportation sectors.
The KFTC is expected to continue to work together with foreign competition agencies in investigating global M&As that may have a large impact on the Korean market (eg, in the IT sector), and to conduct an in-depth review of such transactions. On the other hand, it will likely speed up review of M&A with a restructuring focus in industries such as shipbuilding, marine transportation and steel, by researching market trends and characteristics in advance so as to have the background information needed to quickly process cases that are submitted for the KFTC’s review, and expediting the review for those parties that utilise the voluntary pre-consultation process.
The KFTC will likely continue to actively investigate cartels, abuse of dominance cases and unfair trade practices, especially in connection with IPR abuse. In particular, the newly established KI Division at the KFTC is expected to focus on the following:
- abuse of SEPs in violation of FRAND obligations in the ICT sector, such as unfairly petitioning the court for a stop sale order and patent ambushing;
- pay-for-delay and other practices in the pharmaceutical industry that harm fair competition and decrease consumer welfare; and
- monopolisation of the aftermarket through the abuse of patents, design rights and other IPR, and anticompetitive conduct relating to growth drivers such as next-generation ICT (eg, IoT, big data and biotech).
The KFTC has recently made considerable efforts to increase the fairness and transparency of investigations and we expect these efforts will also enable respondent companies to present a stronger defence and have a clearer view on the progress of an investigation.