The Korea Fair Trade Commission (KFTC) has developed rapidly in the last five or six years and is receiving high recognition from international antitrust practitioners. The KFTC was established in 1980 as a competition law enforcement agency at a relatively early stage of Korean economic growth to enforce the Monopoly Regulation and Fair Trade Act (MRFTA). Until recently, the KFTC has focused most of its resources on the prior regulation of chaebol (large business groups), in addition to disputes between companies involving matters such as unfair trade and subcontracting practices. However, since 2000, the KFTC has been successful in reforming the MRFTA and its practice.
First, the KFTC augmented its investigation capabilities and sanctions concerning anti-cartel regulations, which were thought to have been somewhat ignored in the past. Also, in 2005, it reinvigorated its Corporate Leniency Programme, which was thought to have been an unused policy. It has also concentrated its resources on strengthening merger controls for the past two or three years. Finally, regulation of abuse of market dominance, which had also not been used in practice, has been reinforced and strengthened since 2006. Consequently, with these efforts, the KFTC has successfully promoted market competition by encouraging Korean companies to voluntarily comply with the MRFTA, enabling consumers to enjoy the fruits and advantages of a free market economy.
In addition, the KFTC has actively enforced its competition policy on regulating antitrust violations involving foreign companies. For example, the KFTC investigated and sanctioned the Graphite Electrode Cartel and the International Vitamin Cartel by applying the MRFTA extraterritorially for the first time in Asia. At the moment, the KFTC is very active in investigating and sanctioning international cartels with the help of its Corporate Leniency Programme. Earlier this year, the KFTC established the International Cartel Division within the Cartel Bureau to exclusively investigate international cartels. In 2003, the KFTC implemented a provision imposing a pre-merger notification requirement with regard to mergers between foreign companies. Furthermore, by closely monitoring multinational companies for violations of the MRFTA, the KFTC investigated cases in which Microsoft and Intel abused their market dominance through illegal rebates and the tying of certain products and took corrective measures against them.
The Seoul High Court reviews the decisions of the KFTC if the defendants appeal. The Seoul High Court makes its ruling by applying reasonable legal principles pursuant to relevant laws and regulations and focuses on previous decisions of the KFTC.
Cartel regulatory regime
Revision of corporate leniency programme
The Corporate Leniency Programme, which was substantially revised and enhanced in 2005, provides significant assistance to the KFTC's investigation of cartels. As of July 2008, a total of 30 leniency applications have been filed. Also, most investigations concerning international cartels were initiated through the filing of leniency applications under the Corporate Leniency Programme.
As of November 2007, the Corporate Leniency Programme was revised and now grants an automatic 50% reduction, instead of 30% as previously provided, in administrative fines to the second-ranked leniency applicant while the first-ranked applicant will automatically receive full amnesty from any administrative fines or corrective measures. Also, companies responsible for coercing the formation or continuation of cartels cannot benefit under the Corporate Leniency Programme. The Corporate Leniency Programme provides clearer standards for "sincere cooperation", which is a prerequisite to a leniency application. Additionally, the requirement for a written application has been eliminated: therefore, the leniency application can also be made orally. Further, stronger protection of confidentiality for leniency applicants is provided.
Changes to administrative fines
The ceiling on administrative fines levied for cartel-type violations of the MRFTA was increased from 5% to 10% of the relevant turnover. There was some confusion as to the cases falling under the newly enacted standard because of the simultaneous introduction of Amnesty Plus (a programme applied to companies under investigation for participation in cartels) under the MRFTA. However, clarity was provided by further revision of the relevant regulations to apply the previous standard to cartel cases terminated on and before November 4 2007, with the revised standard applying (10% administrative fine ceiling and Amnesty Plus) to those terminated thereafter. Also, the criterion for statutory maximum administrative fines was changed to a certain percentage of the relevant turnover (10% for cartels and 3% for abuse of market dominance), which was intended to impose heavier fines for long-term illegal conduct proportionately.
Cases
The KFTC has maintained its strong enforcement policy against cartels since 2000. It has detected 46 cartel cases in both 2005 and 2006, 44 cases in 2007 and has imposed appropriate sanctions upon the perpetrators. More than 75% of these cases were those considered to be "hardcore cartels" such as price-fixing.
The following are recent cartel cases: (i) price-fixing by three sugar manufacturers ($51.1 million aggregate fine); (ii) price-fixing by 10 liability insurers on insurance premiums ($50.8 million aggregate fine); (iii) price-fixing by four petrochemical companies ($50.8 million aggregate fine); (iv) bid-rigging by six construction companies for the Seoul subway construction project ($22.1 million aggregate fine); (v) a cartel concerning price and trade terms by three laundry and dishwashing detergent manufacturers ($41.0 million aggregate fine); (vi) price-fixing by three mobile telecommunications service providers ($1.7 million aggregate fine); and (vii) price-fixing by two telephone companies ($115 million aggregate fine). With respect to international cartel cases, KFTC investigations in connection with air cargo, SRAM, LCD/CRT and marine hose and others are in progress.
In principle, the KFTC should refer all cartel cases to the Prosecutor's Office to initiate criminal proceedings against the perpetrators, apart from first and second-ranked leniency applicants. The Korean courts have imposed criminal fines against individual violators and have passed only suspended prison sentences or probation. Also, the amount of administrative fines rose to $307 million in 2007, which clearly shows that the KFTC is firmly determined to combat cartels.
Merger review regime
Changes to merger notification requirement
In June 2008, the KFTC revised upward the threshold of assets or sales of a company subject to mandatory merger notification from the previous $100 million or more to $200 million or more, which is twice the previous standard. It also substantially increased the threshold of a counterpart company from $3 million to $20 million. Such criteria apply to overseas mergers as well and, if each foreign company's sales in Korea exceed $20 million, the acquiring company is obliged to notify the KFTC of the merger. As the threshold was raised, many companies have been relieved of the notification burdens and the KFTC can focus its resources on in-depth analysis of large-scale mergers instead of wasting its resources on reviewing mergers that are not anticompetitive in nature. Moreover, companies with total assets or sales of $2 billion or more need to file merger notifications with the KFTC before closing, whereas companies with less assets or sales are to file merger notification within 30 days of closing.
Changes to substantive review of mergers
The KFTC changed the CRk-based (or market concentration index) review system to an HHI-based (Herfindahl-Hirschman index) review system for the purpose of better reflecting the structure of the relevant market and adjusted the safe harbour provision accordingly. For example, in cases concerning horizontal mergers, the safe harbour is applied: (i) when the post-merger HHI is less than 1,200; or (ii) when the post-merger HHI is more than 1,200 but less than 2,500 with an increased margin of less than 250. Accordingly, such mergers falling within the safe harbour are not considered to have anticompetitive effects.
Cases
The number of merger notifications has recently been on the rise (744 notifications in 2006 and 857 in 2007, for example). The average size of the top 10 mergers in 2008 is $187 million, twice the average size in 2006. For example, Shinhan Financial Group's acquisition of LG Card was valued at $6.6 billion, Hanjin Group's acquisition of S-Oil was valued at $2.3 billion and Doosan Group's acquisition of the construction equipment business of US-based Ingersoll-Rand was valued at $4.5 billion, which is the largest M&A involving a Korean company and a foreign company.
Furthermore, many second-tier chaebol are actively taking over companies undergoing restructuring, especially in cases of M&A in the financial sector, which have increased significantly. Apart from Shinhan Financial Group's acquisition of LG Card, another example is Woori Financial Group's acquisition of Hanmi Capital. Examples of foreign companies acquiring Korean financial institutions are France-based AXA Group's acquisition of Kyobo Automobile Insurance, Germany-based Munich RE Group's acquisition of Daum Direct Automobile Insurance, and England-based HSBC's acquisition of Hana Life Insurance.
The value of M&A in the Korean market in 2007 amounted to $257 billion, of which 66% were conglomerate mergers, 27.7% were horizontal mergers and 6.4% were vertical mergers. Most of the mergers between foreign companies were very large mergers, the size of each being about $22 billion on average, which is 40 times larger than that of a domestic merger. The number of mergers between foreign companies and domestic companies in 2007 was 73, with a total value of $1.9 billion, which is much smaller than that for 2005, when there were 84 mergers with a total value of $5.5 billion.
In 2007, among the 857 reported mergers reviewed by the KFTC, it recognised the anticompetitive effect of only three and imposed corrective measures. There were 50 cases in which the KFTC imposed administrative fines because of overdue merger notification.
In the case of CJ Cable Net acquiring two cable system operators in the Chungnam region of Korea, the anticompetitive effect of the merger was recognised by the KFTC and, in consideration of the government broadcasting policies and the unique nature of the domestic broadcasting market, the KFTC imposed remedies geared towards limiting certain conduct (a behavioural remedy), such as temporary suspension of increasing cable TV service charges.
In a vertical merger case where POSCO, the largest steel manufacturer in Korea, acquired Korea Core, the KFTC recognised the merger's anticompetitive effect and imposed a behavioural remedy.
In the case of Owens Corning acquiring the fibreglass-reinforced plastic business of France-based Saint-Gobain Vetrotex, which was a horizontal merger between foreign companies, the KFTC found that the merger was anticompetitive because it restricted competition in the domestic fibreglass-reinforced plastic market by reducing the number of market players from four to three. Consequently, the KFTC imposed a structural corrective measure requiring Saint-Gobain Vetrotex to sell its stakes in the acquiring company to a third party. This was considered to be an extremely large global merger case, where a corrective measure was imposed to protect market competition in Korea.
Regulation of abuse of market dominance
Since 2006, regulation of abuse of market dominance, which was until then an unused law, was granted priority in the KFTC's policy. The rationale behind this use of the regulations regarding abuse of market dominance was that it was necessary to strictly regulate monopolisation and the anticompetitive conduct and unfair trade practices of chaebol in the Korean market.
Organisational and legal reform
In order to strengthen regulations concerning abuse of market dominance, the KFTC first reorganised the secretariat (which was previously divided by function) by dividing it into relevant industries so that continuous in-depth monitoring and observation was possible. Also, strict monitoring systems were established for government-regulated industries such as the financial, pharmaceutical, communication and transportation industries.
In 2007, there were 36 abuses of market dominance cases reviewed by the KFTC, which represented a significant strengthening of enforcement, compared to only seven cases from 2000 to 2006.
Cases
In 2006, the KFTC found that Microsoft bundling its Windows Media Player, Messenger Program and Media Server Player with its server and PC operating systems was anticompetitive. Accordingly, the KFTC ordered corrective measures against Microsoft to untie the programs and imposed an administrative fine of $32.4 million. This was the second time that the tying of a media player was held to be illegal, following the European Commission's first decision. It was also the first time that the tying of a media server and messenger program was held to be illegal. Microsoft subsequently appealed to the Seoul High Court, but it later withdrew its appeal and is now complying with its obligations under the corrective order of the KFTC.
The KFTC boldly found that Hyundai Motors unlawfully interfered with the business activities of its dealerships in violation of the MRFTA and also held that the conduct of Interpark G-Market, which blocked its competitors' entrance into the e-market, was a violation of the MRFTA.
In 2008, the KFTC held that US-based Intel unlawfully abused its market dominance and imposed a corrective measure and an administrative fine of $25 million for providing loyalty rebates to local original equipment manufacturers (OEMs) including Samsung Electronics and Trigem Computer, contingent upon not purchasing CPUs from its competitor, Advanced Micro Devices. In this case, the KFTC found illegality in Intel's conduct while similar cases were still pending in the US and the EU.
Regarding the distributorship contract between a UCC video clip supplier and NHN, a big internet portal operator in Korea, the KFTC found that NHN had abused its market dominance by prohibiting the supplier from broadcasting advertisements before the video clip began and imposed corrective measures upon NHN.
On the other hand, the Supreme Court reached a landmark ruling, considered epochal in the history of Korean antitrust law, on November 22 2007. The Supreme Court reversed and remanded the case back to the Seoul High Court in the POSCO case, where the Seoul High Court held that POSCO unlawfully interfered with the business activities of its competitor in violation of the MRFTA by refusing to deal. Specifically, the Supreme Court held that intent and purpose to abuse market dominance and its effects are legal elements that need to be proven for abuse of market dominance. It was also held that these elements are legal standards specifically applicable to abuse of market dominance cases, distinguishing them from unfair trade practice cases.
The POSCO case was a rare case where the Supreme Court heard the case en banc and made a ruling with two Supreme Court Justices dissenting. It is expected that this ruling will become the legal standard for the Supreme Court itself, as well as the lower courts. Following the POSCO case, the Seoul High Court, upon its review of the Interpark G-Market case, held that G-Market's conduct did not constitute abuse of market dominance following the rule of law under the POSCO case and thereby overruled the KFTC's decision. Therefore, as in the case of Intel, if an appeal is filed with the Seoul High Court against the KFTC's decision, it is likely that the Seoul High Court will apply the POSCO test and will hold that the KFTC's findings in the Intel case do not satisfy the POSCO test.
Future tasks of the KFTC
The KFTC was established 28 years ago. With such a relatively long history, competition policies and regulations have evolved in accordance with the development of the Korean economy. The experience and insight that the KFTC has accumulated through its enforcement of antitrust laws may give guidance to the newly established competition agencies of developing or transitional countries. The KFTC ranked tenth globally in the assessments of competition agencies and first in Asia, outranking Japan. The KFTC is also one of the founders of the International Competition Network (ICN), a member of the Steering Committee of the ICN and a chairman of the Competition Committee of the OECD.
However, the KFTC has many challenges ahead. Most importantly, the significance of competition policy and its enforcement in a market economy is not sufficiently recognised by stakeholders in Korea. Competition is an essential basis for economic development and is a mechanism to facilitate innovation. Therefore, it gives guiding principles to the market economy with policies for lower prices, economic growth, higher employment and technological innovation that are superior to mere state-sponsored industrial policies. In this regard, it is regrettable that the Korean government and enterprises sometimes do not sufficiently understand the importance of a solid competition policy and reasonable and strict law enforcement based upon such policy. As such, it is critical that the KFTC becomes a watchdog and a supporter of the market economy by concentrating its legal expertise on enforcing the MRFTA.
In addition, the Korean judiciary serves as the last resort to correct and firmly support the KFTC's law enforcement. It is true that the expertise of the court has improved considerably so far and that the court has made economically reasonable rulings. Nevertheless, as is the case with the courts of other countries (even those with advanced antitrust expertise), there are still a number of areas that need to be improved, such as improving systems to gain expertise in antitrust laws, constant research into relevant and up-to-date antitrust issues (both domestic and international) and the training of judges.
Finally, by making the examination and deliberation process more transparent and predictable, the KFTC should be able to enhance deterrence and compliance on the part of the business community. In other words, more efforts need to be made in the examination and deliberation process (such as reviewing the statements of an examinee thoroughly), including the clearly stated reasoning of the KFTC's decisions and the clarification of how an examinee's argument is admitted or overruled. We are hopeful that such measures will be taken.
| Author biographies |
Dr Joseph Seon Hur
Yoon Yang Kim Shin & Yu
Dr Joseph Seon Hur is recognised as a leading authority on Korean competition law and its enforcement. In 2006, Joseph joined Yoon Yang Kim Shin & Yu as a senior consultant after being the Secretary General of the Korea Fair Trade Commission, which is the highest career position in the Commission, overseeing a staff of 480. During his 16 years with the Commission, he achieved many notable successes. He investigated the bundling case of Microsoft in 2006 and applied Korean competition law extraterritorially for the first time in the graphite electrode and vitamins international cartel cases. Joseph also enhanced the corporate leniency programme that took effect in 2005, which dramatically increased leniency filings, and investigated large cartel cases such as a domestic mobile phone price-fixing (which resulted in a record fine of $100 million).
At Yoon Yang, Joseph has consulted on international cartel and abuse of dominance cases involving Qualcomm, Intel and Merck. He has served as Vice Chair of the OECD Competition Committee and as Chairman of the Membership Working Group of the ICN. He is consistently recognised as a leading antitrust practitioner by GCR's The International Who's Who of Competition Lawyers and Economists and PLC's Which Lawyer?
As well as writing leading articles on Korean antitrust law and extraterritorial application, Joseph is the author of the English-language title Competition Law/Policy and Korean Economic Development. He received an MS from New York University and a PhD in law from the University of Seoul.
Paul S Rhee
Yoon Yang Kim Shin & Yu
Paul S Rhee is the senior foreign counsel/partner in the 45-attorney antitrust practice group at Yoon Yang Kim Shin & Yu with a practice focusing on M&A and antitrust matters, including counseling, mergers, internal investigations and compliance audits. As well as representing clients in abuse of dominance and unfair trade practice investigations, he represents leading multinational corporations in domestic and international cartel investigations in a variety of industries including elevator, industrial motor, airline, freight forwarding and high technology. Paul has worked on a range of antitrust matters for United Technologies Corporation and its business units, Otis Elevator and Carrier, Qualcomm and Cathay Pacific Airways. He is recognised as a leading antitrust practitioner by Euromoney's Asialaw Leading Lawyers 2008.
Paul received his JD from Syracuse University's College of Law in 1996 and a BA from the University of California at Berkeley in 1991. He is admitted to the Bars of the State of Connecticut and District of Columbia. In addition to writing many articles on Korea's antitrust law and corporate leniency programme in the American and International Bar Associations' publications, he is co-author of "South Korea Q&A" (Practical Law Company Cross-border Competition Handbook 2007/08, Volume 1). Since 2006, Paul has been the Vice-Chairman of the Legal Services Committee of the European Union Chamber of Commerce in Korea, advising the European Commission in Brussels and Seoul on the liberalisation of the Korean legal services market. |