The KFTC in 2016 and 2017

As a politically and historically turbulent 2016 comes to a close, it’s a good time for those interested in the antitrust landscape of Korea to review the activities of the Korea Fair Trade Commission (the “KFTC”) in 2016 and consider what may lie ahead for 2017.

Originally published in the February issue of Value Chain.

As Korea’s ‘antitrust watchdog’, the KFTC enforces Korea’s antitrust laws and sets the policy direction for such law enforcement. The KFTC has two arms: the Secretariat, which investigates alleged violations of the Monopoly Regulation and Fair Trade Act (Korea’s primary antitrust statute, the “MRFTA”) and a committee of 9 commissioners (the “Committee”) that reviews the investigation results submitted by the Secretariat to finally determine whether a violation was committed and the appropriate measures violators must take to rectify the consequences of their impugned acts. In making such final determinations, the Committee holds administrative hearings similar in process to civil and criminal court hearings. Through such process, investigation targets are given the opportunity to object to the KFTC’s investigation results and decisions on sanctions and may subsequently appeal the KFTC’s decisions to the Seoul High Court (an intermediate appellate court). The KFTC’s purview of enforcement activities encompass not only merger reviews and investigations of abuse of market dominance and collusion/cartels, but also the control and regulation of commercial transactions to prevent unfair trade practices that may arise in transactions between parties with a large differential in negotiating power, and in outsourcing (subcontracting) transactions, e-commerce transactions, doorto- door sales and the setting of standard-form contracts or terms and conditions, as well as false or misleading advertising practices. In 2016, the KFTC was one of the most hotly-reported on government entities due to the major business impact of its enforcement activities. The discussion that follows highlights some of the KFTC’s major merger review and enforcement decisions in 2016 and then provides a tentative forecast of its activities for 2017.

2016 in Review

The KFTC is as dynamic as Korea, itself, and 2016 was no exception.
First, looking at systems changes, we saw a strengthening of due process in the KFTC’s investigation procedures. Amendments to the KFTC’s regulations on investigation procedures took effect from February 4, 2016, which largely aim to strengthen investigation targets’ defense rights - e.g. at on-site investigations (dawn-raids), investigating KFTC officers are now required to present investigation targets with the charges made against them in writing, and investigation targets now have the express right to request that their lawyers be present during the on-site investigation. Previously, although investigation targets were often permitted to have lawyers present if they requested it, this was not a right but a privilege bestowed by discretion of the investigating officers; it is now an express right stated in investigation procedure regulations, to strengthen investigation targets’ defense rights and prevent investigators from arbitrary exercises of discretion. Having regard to media reports of the KFTC’s investigations of alleged unfair trade practices by Apple Korea in its dealings with mobile telecom companies which reported that the Apple Korea on-site investigation did not go smoothly due to the recent amendments to KFTC investigation procedures, it is clear that KFTC officials are feeling the effects of these amendments. The KFTC was recently bestowed a 5-star “Elite” rating (also bestowed on competition authorities of the US, Germany and France) by the Global Competition Review, a professional antitrust law magazine, and the strengthening of investigation targets’ defense rights certainly contributed to this global recognition and achievement.

It is also notable that the KFTC is amending its administrative fine calculation regulations to reduce the discretionary aspects of the fine calculation. If these amendments are put into effect, the factors that go into administrative fine calculation will be more detailed and clear. However, while increases and decreases in the administrative fine (i.e. that resulted from exercise of the KFTC’s discretion) will go down, the overall impact that is anticipated from the reduced discretion in determining administrative fine amounts is that the basic administrative fine amounts should generally go up.

The establishment of the KFTC’s new knowledge industry team is no less worthy of mention. According to current media reports, there will be aggressive regulation of unfair trade practice issues arising in nextgeneration growth industries such as the ICT sector, such as violations of FRAND agreements and abuse of standard essential patent (SEP) rights, ‘pay-for-delay’ settlement agreements in the pharmaceuticals industry, after-market monopolization of patents or designs and internet of things.

Finally, another notable trend in KFTC sanctions is that the public prosecutor is showing a more aggressive stance, meaning that there will be more criminal prosecution of antitrust law violations. In the past, the KFTC usually only issued orders for remedial measures and payment of administrative fines, reserving referrals for criminal prosecution to cartels or other egregious antitrust law violations. However, recently, the public prosecutor’s office has established a separate team for antitrust cases, which is aggressively pushing forth with prosecution of individuals (not just companies) and showing more of a propensity toward imprisonment rather than the previously more common criminal fines. Even with cases that the KFTC has not referred for criminal prosecution, there is a growing number of cases where the public prosecutor will request the KFTC to refer senior management individuals for criminal prosecution.

Merger Reviews

According to the KFTC press releases for the first-half of 2016, there were 63 merger reports filed with respect to mergers involving foreign entities, which is similar to 2015. Approximately 65% of the reports involved mergers between adjacent market participants (i.e. companies engaged in business sectors adjacent to each other’s core business), showing more concentration toward vertical mergers, which strengthens competition within an industry sector. There were 20 reports of mergers between foreign companies with Korean companies, and among the acquisitions of Korean companies by foreigners, 8 were purchasers from the EU, 4 were purchasers from the US and 3 were purchasers from China.

The KFTC conducted a 10-month review of the proposed merger between the second and fifth largest semi-conductor manufacturing equipment-makers, LAM Research Corporation and KLA-Tencor Corporation. Determining that the merger would give rise to substantial anti-competitive effects in the semi-conductor manufacturing equipment industry, the KFTC decided to impose remedies involving divestitures of certain of KLA-Tencor’s inspection and metrology tool businesses; ultimately, the parties abandoned their merger plans. Throughout its review process, the KFTC conferred and exchanged information with the Antitrust Division of the US Department of Justice (US DOJ) and China’s Ministry of Commerce (MOFCOM) and surveyed and heard opinions from both domestic and foreign interested third-parties.

After a 5-month review of the proposed business swap between global pharmaceutical giants, Boehringer Ingelheim International GmbH and Sanofi SA, of Boehringer Ingelheim’s consumer healthcare business for Sanofi’s animal healthcare business, the KFTC issued remedial orders for divestitures within 6 months of all of Boehringer’s and Sanofi’s animal healthcare businesses having Korean sales of porcine circovirus vaccine and non-steroidal anti-inflammatory oral medication, citing the likelihood of strengthened monopolistic control and related anti-competitive effects on the Korean market.

In addition, although not a merger involving a foreign company, the KFTC refused clearance of a proposed acquisition by SK Telecom of CJ HelloVision for merger with its subsidiary, SK Broadband, citing the anti-competitive effects on the pay broadcasting and retail and wholesale telecom markets of such proposed merger.

Abuse of Market Dominance

Amendments to the KFTC’s review guidelines on abuse of market dominance took effect on March 23, 2016. The key amendments relax the regulation/control of de facto SEPs and set forth the many criteria to consider in evaluating whether an SEP-holder’s refusal to license is unfair and unreasonable. In this regard, the KFTC conducted numerous hearings in 2016 on the alleged abuse of market dominance by Qualcomm in its SEP-licensing practices and modem chip sales practices vis-a-vis mobile handset makers. The hearing results are expected to come out next year.

Cartel Regulation

There are two remarkable developments to highlight in the area of cartel regulation for 2016: first, the Supreme Court of Korea decision in the ramen-maker cartel case, which held that evidence of pricing information exchange is not sufficient to prove cartel-like collusion in the absence of evidence of an actual agreement to fix prices, has resulted in several over-turnings on appeal of past KFTC findings of cartels, citing insufficient evidence of collusion where such KFTC decisions were based only on evidence of mere pricing information exchange; second, as mentioned previously, there has been a clear and distinct increase in referrals for criminal prosecution of violators in cartel cases.

According to statistics for January to August of 2016, the KFTC imposed a total of KRW 590 billion in administrative fines in 37 cartel cases. In February of 2016, the KFTC issued remedial orders and imposed an administrative fine of KRW 1.1 billion against Japanese auto-parts manufacturers, Denso Corporation and Mitsubishi Electric Corporation. Denso and Mitsubishi Electric were participants in a global bidding for supply of engine starters conducted by General Motors in 2008. Prior to bidding for the supply contracts, Denso and Mitsubishi Electric agreed with each other on which of the two would win which supply contract (by model); whichever of the two was not supposed to win the bid would offer an inflated price so that the winner would win its bid at a higher price.

Also, in March of 2016, the KFTC issued remedial orders and imposed an administrative fine of KRW 59 million against Deutsche Bank and Hong Kong Shanghai Banking Corporation. Deutsche Bank and HSBC were participants in a series of bids for F/X swap contracts conducted by A-company in 2011; for each bid, Deutsche Bank and HSBC would agree on which of the two would win the bid, and whoever was not the winner would submit an inflated price so that the winner would be able to win the bid at a higher price.

In October of 2016, the KFTC issued remedial orders and imposed an administrative fine of KRW 11.1 billion against Mitsubishi Heavy Industries and Denso Corporation for conspiring to fix prices on scroll compressors (used for vehicle air conditioners) during a global bid for supply contracts conducted by General Motors in June of 2009; Mitsubishi and Denso agreed ahead of the bid that supply prices for their scroll compressors would be an amount above market value for the first year of supply and also agreed to limited discounts for the following 2 years of supply. The collusion occurred in Japan; the two companies’ employees met multiple times at each other’s offices for a year before the bidding to agree on the supply prices, as well as discussing with each other on three separate occasions regarding cost estimates both before and after their submission.

Unfair Trade Practices and Other Regulation

The KFTC drafted an Enforcement Decree to the new Fair Retail Agency Transactions Act (“FRATA”) that came into effect on December 23, 2016, to further define the types and scope of unfair trade practices that may arise in retail agency transactions in violation of the FRATA. The KFTC also issued rules setting forth the detailed standards for calculation of administrative fines. Basically, unilateral acts to control or restrict retail agents’ businesses against their will or without reasonable justification will fall afoul of the FRATA and its Enforcement Decree; there are also provisions that are now expressly required to be covered in retail agency agreements, and administrative fines imposed for violation may amount to up to 80% of the value of relevant products. Moreover, if violations are egregious, orders to pay damages to the injured party (i.e. retail agent) may be as high as 3 times its losses. Accordingly, the FRATA and its Enforcement Decree contain some of the toughest antitrust sanctions currently available to the KFTC.

In April of 2016, the KFTC issued remedial orders against Merial Korea for restricting its exclusive Korean agent, Estien Corporation, from selling Merial’s heartworm disease prophylactic, Heartgard, to customers other than veterinary hospitals. Merial Korea’s Korean market share was 18.5% as at 2004, but together with the 2 other largest market participants, its combined market share amounts to 80%, which makes it market dominant (and, therefore, its actions against Estien Corporation an abuse of such market dominance).

Also in April of 2016, the KFTC issued remedial orders and imposed an administrative fine of KRW 1.2 billion against whiskey supplier, Diageo Korea, for unfair inducement of customers; Diageo Korea paid a total of KRW 14.8 billion in cash as sales incentives to bars that would sell a certain quota of Diageo Korea’s whiskey products instead of those of its competitors.

In December of 2016, the KFTC issued remedial orders and imposed an administrative fine of KRW 37.3 billion against Audi Volkswagen Korea, Ltd. (“AVK”) for engaging in false and misleading advertisements in violation of the Act on Fair Labelling and Advertisement (the “AFLA”). AVK and its foreign shareholders, Audi AG and Volkswagen AG, were alleged to have manufactured and sold dieselengine cars fitted with defeat devices that activated only under emissions certification test conditions to reduce emissions of NOx to enable the cars to pass emissions certification requirements; the cars did not meet these emissions standards under real driving conditions, but were touted in AVK’s advertising campaigns as being environmentally-friendly, powerful and fuel-efficient engines.

The KFTC also referred 5 individuals who were formerly or currently in senior management positions within AVK, Audi and Volkswagen for criminal prosecution, which was unprecedented in past sanctioning under the AFLA.

Finally, the KFTC reviewed and ordered amendments of delivery and assembly terms and conditions of IKEA Korea that refused refunds of its products and various terms and conditions in outsourcing agreements of Apple Korea with its authorized after-service and care providers.

2017 Forecast

Many forecast difficulties for Korea’s economy in 2017. There is an upcoming presidential election and many believe that the opposition party will seize power in the latter half of 2017. In such case, we can expect aggressive enforcement policies being implemented against the Korean “chaebol” conglomerates, and since the KFTC also has charge of regulating the chaebol, the KFTC can be expected to devote much of its resources toward such regulation.

Also, in presidential election years, the KFTC has a tendency to be more passive toward investigations. Accordingly, overall, enforcement of the MRFTA may be more passive in 2017 than 2016. In other words, rather than investigations, we may expect more resources being devoted toward regulation of the chaebol, policy-making and system re-organization.

However, aggressive enforcement of the FRATA may nonetheless be anticipated due to the public support for such new law; also, since the KFTC has established a new IP team, aggressive enforcement against abuse of patent rights in the IT, pharmaceutical and other new growth industry sectors can be anticipated.

Finally, no real change in direction is anticipated in 2017 for cartel investigations, which are more complaint-driven, and merger reviews, which are generally more immune to public opinion and political environment.

 

Jung Won Park


Jung Won Park is a partner at Lee & Ko. He served in various posts at the Korea Fair Trade Commission for over 12 years. During his service, he had hands-on experience in investigations of major cases and in each stage of application and amendment of laws including the affairs relating to cartel, unfair assistance and unfair trade acts, and has represented numerous global companies before the Korea Fair Trade Commission.

 

Have questions about the KBLA? Email us at admin@kbla.info Ready to join?