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The overarching goal of the Korea Fair Trade Commission (KFTC) for 2017 was to establish a fair economy full of vitality to help overcome low growth rate and polarisation. To achieve this goal, the KFTC announced its business plan for 2017 (the 2017 Business Plan) to:
- monitor and remedy anticompetitive behaviours to create an innovation-promoting competitive market;
- establish a healthy business ecosystem for large conglomerates and small- and medium-sized enterprises (SMEs); and
- create an environment promoting consumers’ rights.
With the regime change in May 2017 and the appointment of Sang-Jo Kim as the new chairperson at the KFTC in June 2017, while the KFTC’s overarching goal for 2017 was maintained in principle, further importance was put on protecting economic underdogs. During the National Assembly’s audit of government agencies in October 2017 (the October Report), the KFTC announced the following major action items:
- prevent large conglomerates’ abuse of economic power;
- guarantee fair competition opportunities for SMEs;
- promote innovation in competition;
- increase consumers’ rights; and
- restore the KFTC’s trust and improve its antitrust enforcement system.
Overall, the KFTC was active in establishing policies and implementing competition laws in various areas in 2017. The KFTC provided general objectives as well as detailed strategies with specific action plans, some of which were implemented in 2017, while others will be implemented in 2018. Below we summarise key developments in the competition law and policies in South Korea, the KFTC’s enforcement activities in 2017 and conclude with an outlook for 2018.
In 2017, the KFTC actively monitored collusive acts with a significant impact on the market such as bid-rigging in ‘sectors that directly impact the everyday lives of ordinary consumers’. In connection with cartel cases, the KFTC imposed 55 corrective orders and administrative fines in the aggregate amount of 186.1 billion won from January through September 2017. Notable cases include:
- market allocation and price fixing among car shipping companies (43 billion won administrative fine);
- price fixing and market allocation among automobile bearing manufacturers (2 billion won administrative fine);
- bid-rigging among conveyor belt manufacturers (37 billion won administrative fine);
- price fixing for labour cost among dealers of German cars (1.7 billion won administrative fine); and
- bid-rigging among Japanese auto part manufacturers (1.7 billion won administrative fine).
Focus on international cartel cases
The KFTC has been actively reviewing international cartel cases. In 2017, the KFTC focused its investigation in the auto parts and marine transportation industry. In the October Report, the KFTC announced that it would continue to actively investigate international cartels, especially in areas where Korean companies are highly reliant on imports (ie, the electronic components and auto parts industries).
Active criminal referrals by the KFTC
In 2017, the KFTC actively referred cartel cases to the prosecutor’s office. Notably, the KFTC imposed criminal referrals against eight foreign companies in Car Shipping cartel cases.
Furthermore, on 10 November 2017, during a press conference that took place priot to announcing the interim report from the KFTC’s Competition Law Enforcement System Improvement Task Force (Task Force), the KFTC chairperson emphasised the importance of active criminal referrals by the KFTC and discussed the possibility of amending the KFTC’s Guidelines on Criminal Referrals. The key element of the amendment is to impose criminal sanctions on companies as well as individuals. Accordingly, we expect the scope of individuals subject to the KFTC’s criminal referrals to be broadened to include not only company representatives and senior managers, but also working-level employees who directly participated in illegal activities.
Enhancement of monitoring system to prevent cartels
The KFTC has tried to monitor cartels more closely by introducing a system to analyse signs of bid-rigging, and operates a consultative organisation with project owners to further prevent bid-rigging. In it, the KFTC shares any cases related to enforcement, while project owners share any cases related to the monitoring and prevention of potential bid-rigging.
The KFTC also enhanced its cooperation with foreign competition authorities. On 17 November 2017, it hosted its twenty-first International Workshop on Competition Policy in which competition authorities from 13 countries, including Japan, Hong Kong, Taiwan and Singapore, participated. Furthermore, the KFTC held meetings with competition authorities in the United States, Canada, Brazil, Germany and Japan.
In its 2017 Business Plan, the KFTC planned to aggressively review M&A deals that are expected to have substantial effects on the Korean market in order to prevent the formation of monopolistic or oligopolistic markets. The KFTC announced that it would pro-actively review global M&A deals through closer coordination with other competition authorities. The KFTC also announced that it would strengthen the monitoring of unreported mergers and failures to comply with the behavioural remedies in order to increase the effectiveness of the merger control regime.
In line with these statements, the KFTC worked with foreign competition authorities in reviewing global M&A deals that have a significant impact on the Korean market, notably deals in the chemical and shipping industry. The KFTC also imposed structural and behavioural remedies in cases with anticompetitive concerns. For example, in May 2017, the KFTC imposed a structural remedy, specifically divestiture or assets, on a proposed merger of two major global chemical companies. And in November 2017, the KFTC imposed structural and behavioural remedy on a proposed merger of deep-sea container shipping companies.
Developments and trends in the first half of 2017
In the first half of 2017, the KFTC processed 295 merger filings involving 247 trillion won in deal value. The number of transactions went up compared with the first half of 2016 (272 transactions), but the deal value slightly decreased from 266 trillion won. The number of transactions increased in domestic-to-domestic transactions, foreign-to-foreign transactions and transactions in which a foreign company acquired a domestic company. However, the number of transactions in which a domestic company acquired a foreign company decreased from 12 cases in the first half of 2016 to six cases in the first half of 2017.
From an industry point of view, the number of transactions increased significantly in the electric and electronic sector from 14 cases in the first half of 2016 to 21 cases in the first half of 2017. The KFTC analysed that this is due to an increase in mergers in the semiconductor industry related to recent technological innovations such as the Internet of Things and AI.
Amendments of the Merger Filing Thresholds
On 19 October 2017, the statutory thresholds for merger notification in Korea were amended. The changes include increases in the thresholds pertaining to the relevant parties’ worldwide and Korean assets and revenues. Under the new threshold, mandatory filing can be triggered if one party (including all of its affiliates that remain as affiliates after the closing) has worldwide assets or sales revenues of at least 300 billion won and the other party (including all of its affiliates that remain as affiliates after the closing) has worldwide assets or sales revenues of at least 30 billion won. In foreign-to-foreign mergers, a filing is required if each party (including all of its affiliates that remain as affiliates after the closing) has Korean sales revenues of at least 30 billion won. According to the related press release issued by the KFTC, the Commission expected to see a noticeable drop in the number of merger filings it reviewed each year as a direct result of this change (by approximately 8 per cent according to the KFTC’s projection, which translates to about 50 cases annually).
Amendments of the Merger Review Guidelines
On 20 December 2017, the KFTC amended its Merger Review Guidelines to simplify its review process for reportable offshore joint ventures that are not expected to have much effect on the Korean market. Under the amended Merger Review Guidelines, the establishment of such joint ventures are subject to the KFTC’s simplified review procedure in which the KFTC is required to complete its review within 15 days from the date of filing (instead of the regular 30-day timeline) and limit the scope of its review to verifying the accuracy of the information provided in the filing without engaging in an in-depth competitive assessment. While the amendment does not completely exempt offshore joint ventures from the filing requirement, companies contemplating establishing offshore joint ventures will be able to benefit from a significantly streamlined and expedited post-filing review process.
Abuse of market dominance
In its 2017 Business Plan, the KFTC stated that it would more actively monitor infringements of intellectual property rights (IPR) in the semiconductor, telecommunication and media industries. In particular, the KFTC would investigate exclusionary conduct and behaviour that restrains competition on R&D and innovation in these industries. The KFTC also stated that it would enhance its enforcement against anticompetitive behaviours in the pharmaceutical and medical devices industries.
Accordingly, the KFTC actively monitored IPR abuse in the telecommunication sector. Notably, in January 2017, the KFTC imposed sanctions against Qualcomm for having engaged in abuse of dominance by, among others, refusing to license mobile communication SEPs in violation of its FRAND commitment despite requests for a licence from competing chipmakers, and leveraging the supply of chipsets to coerce counterparties into executing and implementing 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 just over 1 trillion won. Qualcomm appealed against the KFTC’s decision and applied for a stay order. However, the court denied the stay order and the appeal is still pending. The KFTC also continued its investigation against a global medical device company in relation to the allegation that the company has abused its market dominance in the after-service market for medical devices.
IPR survey in the pharmaceutical industry
In December 2016, the KFTC established a Knowledge Industry Monitoring Division (KI Division) within its Anti-Monopoly Bureau. Additionally, in its 2017 Business Plan, the KFTC stated its plan to monitor the drugs subject to patent lawsuits in Korea and other countries and a sales prohibition under the Pharmaceutical Affairs Act in order to investigate 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 a generic).
Following up its plan, in May 2017, the KFTC conducted a survey on 69 companies in the pharmaceutical sector, requesting information on the status of patent ownership, patent licensing agreements and relevant lawsuits. The KFTC has reportedly been analysing the result of the survey throughout 2017. In December 2017, on-site investigations of several pharmaceutical companies were also conducted in relation to pay-for-delay and are likely to continue in 2018.
Establishment of monitoring network in collaboration with institutions specialised in IP
In its October Report, the KFTC stated that it would establish a monitoring network with the Korea Intellectual Property Association and the Korea Electronics Association in order to share information on the IP usage of technology leaders in the market. The KFTC also stated that it would continue to monitor and actively enforce against IPR abuse in the markets for mobile platforms, next generation semiconductors and pharmaceuticals/medical devices.
Unfair trade practices and sub-contracting
One of the main policies of the Moon administration is to address problems arising from an abuse of superior bargaining position. The chairperson of the KFTC has emphasised that eradication of the abuse of superior bargaining position will be instrumental in achieving economic democratisation and vowed to take necessary steps as quickly as possible. Accordingly, the KFTC’s enforcement efforts in distribution, franchise and sub-contracting areas have led to several investigations and amendments of the relevant laws and regulations.
Elimination of suppliers’ unfair trade practices against distributors
The Fairness in Distributor Transactions Act (the Distributor Act) became effective on 23 December 2016. It was enacted amid calls for measures to be taken to prevent unfair trade practices in transactions with dealers and distributors. In the course of enforcing the Distributor Act, the KFTC has been conducting a survey on distribution transactions across all industries targeting 4,800 suppliers and approximately 700,000 distributors since 10 August 2017. According to the relevant KFTC’s press release, the survey results will be used for future enforcement, policy-making and regulatory reform to eliminate suppliers’ unfair trade practices against distributors.
In September 2017, the Distributor Act was amended to expand applicable scope to include agreements in effect as of 23 December 2016. Furthermore, in December 2017, the National Assembly passed an amendment of the Distributor Act to establish a monetary reward programme for whistle-blowers and to provide a statutory basis for the KFTC’s market surveys. The amendment will become effective in 2018.
Protection of franchisees
In April 2017, the Fair Franchise Transaction Act (the Franchise Act) was amended to allow for the imposition of treble the damages on franchisors that harm franchisees by providing false or exaggerated information or unfairly denying transaction opportunities to franchisees (ie, by refusing to renew or terminating a franchise agreement). Furthermore, in December 2017, the National Assembly amended the Franchise Act to include:
- empowerment of local governments to handle registration and cancellation of disclosure statements;
- prohibition of unilateral change to sales territories by a franchisor;
- prohibition of retaliation by a franchisor;
- imposition of punitive damages for retaliation; and
- establishment of monetary reward programme for whistle-blowers.
The amendment will become effective in January 2018.
On 18 July 2017, the KFTC announced the following measures to combat unfair trade practices in the franchise businesses:
- strengthen a franchisor’s obligation to disclose information to potential franchisees;
- enhance the bargaining power of franchisees; and
- further develop measures to prevent damages to franchisees.
Active enforcement against large-scale retailers
Additionally, in 2017, the KFTC actively enforced the Large-Scale Distribution Transactions Act. The KFTC investigated transactions made by large-scale retailers and imposed corrective orders on six department stores for their unfair practices such as delay in delivery of contracts or transfer in interior fees to suppliers.
Promotion of fairness to sub-contracting transactions
On 28 December 2017, the KFTC announced a comprehensive plan to achieve fairness in sub-contracting transactions. Notably, the KFTC set the following three major policy goals:
- enhance enforcement and improve effectiveness of remedies to recover damage;
- relieve unbalanced power between large conglomerates and SMEs; and
- expand the self-regulatory cooperation model for large conglomerates and SMEs to coexist.
The KFTC announced 23 detailed plans to achieve these goals. These include monitoring unfair agreement, increasing level of administrative fines, enforcing active criminal referral and prohibiting coercive exclusive dealing without justifiable reason.
Also, in September 2017, the KFTC announced a plan to eliminate misappropriation of technology in sub-contracting transactions. Major action items are to:
- conduct pre-emptive ex officio investigations (automotive and machinery industry in 2018, electronics and chemical industry in 2019, and software industry in 2020);
- establish a dedicated team to handle technology misappropriation cases (Technology Examination Advisory Committee); and
- expand the scope of technical data (from the standard of protecting only those materials that have been kept confidential through substantial efforts to those materials that have been kept confidential through reasonable efforts).
Accordingly, in December 2017, the KFTC established Technology Examination Advisory Committee covering five special areas (electric/electronic, machinery, auto, chemical and software). The KFTC also established Task Force Team to deal with technology misappropriation.
Promotion of investigation’s fairness and transparency
In the October Report, the KFTC reported that one of its five core tasks was to restore KFTC’s trust and improve its antitrust enforcement system. On 14 December 2017, the KFTC issued an administrative notice regarding the proposed amendment to its ‘Rules on KFTC’s Committee Operation and Case Handling Procedure’ (the Proposed Amendment). According to the administrative notice, the Proposed Amendment purports to:
- reorganise the Examination Committee for reconsidering previously investigated cases based on refiling of complaints in order to increase participation by civilian committee members;
- expressly stipulate complainants’ right to state their opinions during investigations and deliberations;
- clarify the concept of reference witnesses, as well as the application process for examination of evidence and related procedures concerning the questioning of reference witnesses; and
- modify other procedural rules relating to case management.
Overall, the Proposed Amendment is expected to add more transparency and fairness in the KFTC’s investigation and deliberation process.
Outlook for 2018
We believe that the KFTC’s focus in 2018 will be similar to that in 2017, putting special emphasis on preventing large conglomerates’ abuse of economic power and guaranteeing fair competition opportunities for SMEs. Last year, the KFTC announced several plans and measures in relation to distribution, franchise and sub-contracting including short-term and long-term goals. Many of its short-term goals such as amendment of competition laws were achieved in 2017. In 2018, the KFTC will actively carry out long-term plans by proposing amendments to competition laws. In particular, the KFTC noted that it would develop a comprehensive plan to eliminate unfair trade practices in distribution transactions in early 2018 based on its extensive survey conducted throughout 2017. Also, with the Task Force Team, the KFTC will try to eradicate technology misappropriation issues, especially in electric/electronic, machinery, auto, chemical and software sectors.
Furthermore, the KFTC will continue to actively investigate cartels, abuse of dominance cases and unfair trade practices. In the short term, the KFTC will likely ramp up its enforcement activity in the pharmaceutical and medical device sector based on the results of IPR survey and on-site investigations, and wrap up its ongoing internal cartel cases in the finance and electronic components sectors. The KFTC is expected to continue to work together with foreign competition agencies to investigate global M&A deals that may have a significant impact on the Korean market and conduct an in-depth review of such transactions.
The KFTC has recently made considerable efforts to increase the fairness and transparency of investigations. 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.