South Korea: Tackling cartels

Author: | Published: 1 Oct 2009
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Following its inception in 1980, the Korea Fair Trade Commission (KFTC) has established itself, during a span of about 30 relatively short years, as a competition agency that vigorously enforces competition laws not only in east-Asia but also globally. Korea's competition law, the Monopoly Regulation and Fair Trade Act (MRFTA), is enforced by the KFTC and covers regulations on cartel activities, abuse of market dominance, and merger control among other areas, which is similar to competition laws in other major jurisdictions. However, unlike competition laws in other jurisdictions, the MRFTA includes provisions that specifically regulate large corporate groups (chaebols), which is unique to Korea, and, in the past, the regulation of chaebols composed a key part of the KFTC's duties. However, the KFTC's regulation of chaebols has steadily decreased with the growth of the domestic economy and globalisation, and the KFTC is now focusing on establishing the MRFTA as a regulation that is geared towards the promotion of competition.

Additionally, following the international graphite electrodes and vitamins cartel cases, where the KFTC conducted investigations by applying extraterritorial jurisdiction of the MRFTA for the first time and imposed sanctions on international cartels, the KFTC has imposed sanctions on international cartels such as the imported copying paper cartel and the marine hose cartel and is currently investigating international cartel cases involving, for instance, the air cargo cartel, cathode ray tubes (CRT) cartel, liquid crystal display (LCD) cartel, and power cable cartel. Moreover, the KFTC has also stepped up its enforcement over multinational high-tech companies for their abuse of market dominance and unilateral conduct and has recently investigated and issued sanctions on multinational high-tech companies such as Intel and Qualcomm. Furthermore, with respect to business combinations, including those involving foreign entities that exceed a certain threshold, the MRFTA imposes mandatory filing obligations and provides remedies if they have any adverse effect on competition.

Since the latter part of 2008, the KFTC has made noticeable amendments to its Corporate Leniency Programme and M&A reporting obligations, and legal precedents are being established in the area of abuse of market dominance through Korean Supreme Court precedents.

Cartel regulatory regime

In 2008, the KFTC imposed approximately W205 billion in administrative fines with respect to 43 cartel cases, which constitutes approximately 80% of the total administrative fines imposed by the KFTC in 2008 (approximately W254 billion).

Corrective orders may also be issued along with administrative fines for cartel activities, and the amount of administrative fines that can be imposed is up to 10% of the relevant sales of the product/service in Korea. Also, with respect to the companies and individuals that participated in a cartel, administrative fines of not more than W200 million and/or a prison sentence of not more than three years may be imposed. While the KFTC does not have the power to criminally prosecute cartel participants, it has the authority to make prosecutorial referrals of such participants. The Prosecutor's Office may only prosecute cartel participants upon referral from the KFTC.

The KFTC introduced its Corporate Leniency Programme in 1997 and made significant amendments in 2005 in order to promote the use of the Programme. From the time of the amendments in 2005 to June 30, 2008, the Programme was applied in 35.4% of the cartel cases and, during the same period, 65.8% of the administrative fines for cartel cases were based on the Programme. Moreover, international cartels are mostly uncovered through the Programme.

Changing corporate leniency

Under the Programme, the first-ranked leniency applicant receives an automatic 100% exemption from administrative fines, and the second-ranked applicant receives an automatic 50% reduction. As long as the leniency status and ranking of an applicant is established, the KFTC does not have discretion over such exemption or reduction. The rationale for such lack of discretion of the KFTC under such circumstances is to promote predictability for applicants and to facilitate the filing of applications under the Programme. Currently, the KFTC's policy is to not refer the first and second-ranked leniency applicants to the Prosecutor's Office for criminal prosecution. Furthermore, under "amnesty in the plus" Programme, if a company is the first to report to the KFTC a cartel that is different from the cartel currently under investigation, that company will receive an exemption from administrative fines for the reported cartel and additional reductions (up to 100%) to administrative fines for the cartel currently under investigation.

The KFTC recently amended the Programme in May 2009 with respect to certain areas that were previously indicated as problematic. Such amendments include: (i) allowing two or more companies to jointly apply for leniency; (ii) changing the period for termination of the cartel activity for leniency applicants from "before the KFTC rendered its final decision" to "immediately after their application"; and (iii) recognition of upward movement in leniency rank not only in the event that a higher ranked applicant fails to meet the requirements under the Programme, but also if the higher ranked applicant voluntarily withdraws its application or there is a cancellation of leniency rank, among other reasons.

First, while joint application for leniency under the Programme was not available prior to the amendments to the MRFTA, two or more companies can now jointly apply for leniency, provided certain requirements are met. The KFTC's previous prohibition of joint applicants became problematic in cases where companies seeking joint applications were affiliates belonging to the same business group, sometimes operating in different countries, because such affiliates were separately ranked and only some of them would be entitled to benefits under the Programme. Specifically, since affiliates often have an overlap in employees and officers and jointly possess evidence regarding a cartel, the submission of evidence by only one (or some) of the affiliates could be insufficient. In other words, if affiliated companies applied for leniency separately, in the event that such companies became the first and second-ranked leniency applicants, it would be difficult to obtain additional evidence from other affiliates that participated in the cartel since the leniency status of the first and second-ranked applicants would be exhausted.

In addition, in case a company that engaged in a cartel before spinning off or transferring its cartelised business transferred its documents and employees in the cartelised business to a new company, and if the new company were to continue to participate in the cartel, the KFTC did not previously allow the new and predecessor companies to file a joint leniency application. However, problems arose because the predecessor company or the new company had difficulties in applying for leniency regarding cartel activity due to the lack of evidence in its possession. Also, even if the new company had the necessary evidence in its possession, it had little incentive to file a leniency application since the cartel activities occurred before it took over the cartelised business. Following the amendments, joint applications are now permitted for the predecessor company and the new company, in which case both companies may share the same leniency ranking. However, in order to qualify for such joint application, both companies must not have engaged in the same cartel at the same time.

Second, in order to receive the benefits of the Programme, the leniency applicants must terminate the cartel activity. Following the amendments, the period for termination of cartel activity was changed from "before the KFTC rendered its final decision" to "immediately after their application". The rationale behind this change is to prevent applicants from taking advantage of the Programme by continuing to benefit from the cartel even after applying for leniency.

Third, prior to the amendments, a lower-ranked leniency applicant could move up to a higher rank only when a higher-ranked leniency applicant failed to quality and leniency status under the Programme. However, following the amendments, a lower-ranked leniency applicant may now move up to a higher rank under other circumstances such as the voluntary withdrawal of a leniency application or the cancellation of leniency status, among other reasons. At the outset of the Programme, even if the level of cooperation by an applicant was not entirely satisfactory, the KFTC almost always granted a leniency status to that applicant. However, more recently, the KFTC has been applying stricter standards in determining the leniency status of an applicant, and if a first or second-ranked applicant does not actively cooperate with the KFTC by providing evidence to prove the existence of a cartel, the leniency status of those applicants may be denied. Consequently, it has now become a real possibility for a third-ranked (or lower) leniency applicant to move up to the second (50% reduction of fines) or first-rank (exemption of fines) if the higher-ranked leniency applicant's leniency status is not recognised due to its failure to provide satisfactory cooperation with the KFTC's investigation.

Abuse of market dominance regulation

Since 2006, the KFTC has strengthened its regulations on abuse of market dominance. As a result, compared to only seven abuse of market dominance cases from 2000 to 2006, the KFTC investigated 36 cases in 2007 and 28 cases in 2008. Notably, the KFTC issued a corrective order and imposed administrative fines of approximately W26 billion on Intel in 2008 for its alleged provision of conditional rebates, and imposed administrative fines of approximately W260 billion on Qualcomm in 2009 for its allegedly discriminatory royalties and conditional rebates, among other reasons. The fine imposed on Qualcomm was the highest fine imposed on a single company in the history of the KFTC and was more than twice the amount of the previously highest administrative fine imposed by the KFTC (a fine of approximately W113 billion was imposed on KT for its involvement in a local telephone cartel).

In the 2007 POSCO case, the Korean Supreme Court reversed a Seoul High Court decision, which held that POSCO's refusal to supply hot rolled coil (the raw material required to produce cold rolled carbon steel sheets) produced exclusively by POSCO to Hyundai Hysco, a competitor in the cold rolled carbon steel sheet market, constituted an abuse of market dominance. The Supreme Court held that in order to prove an abuse of market dominance, showing only that a competitor suffered disadvantages is insufficient, and the requirement is to show that a market dominant company intended to artificially influence the market through restricting competition and an objective determination that such an act could restrict competition. Subsequent to the POSCO decision, as of July 2009, the Supreme Court issued decisions in two more market dominance cases. While the cause of a competitor's disadvantage in one of these two cases involved exclusive dealings, both cases essentially relied on the illegality standard set out in the POSCO case.

First, under the Tbroad GSD Channel case (Supreme Court decision rendered on December 11 2008, Case No. 2007Du25183), the issue concerned whether the act of a cable service company with a market dominant status constituted abuse of market dominance where it changed the channel of a TV home shopping company (Woori Home Shopping) to a more disadvantageous channel due to Woori Home Shopping's refusal to pay higher transmission fees. The Supreme Court held that the KFTC's determination of the relevant market was erroneous, explaining that the acts of Tbroad GSD did not constitute abuse of market dominance because Tbroad GSC was not a market dominant company in the properly defined market (i.e. the market for programme transmission services between a cable television company and a TV home shopping company as opposed to the market for the transmission of programmes by a cable television company to its cable channel subscribers). Furthermore, the Supreme Court noted that, even if it were to assume that the KFTC's definition of the relevant market was proper (and thus Tbroad GSD was a market dominant company), the KFTC merely showed that Woori Home Shopping sustained disadvantages due to the acts of Tbroad GSD and failed to prove that such acts could objectively restrict competition.

Additionally, in a case involving the Nonghyup Agricultural Cooperative Federation (Supreme Court decision rendered on July 9 2009, Case No. 2007Du22078), Nonghyup, which held nearly 100% of the market shares of food crop chemical fertiliser distribution, entered into exclusionary purchase and supply contracts for food-crop chemical fertiliser with fertiliser manufacturing companies. The Supreme Court essentially followed the precedent under the POSCO case in determining the existence of abuse of market dominance. However, in analysing abuse of market dominance, the Supreme Court noted that engaging in transactions under exclusionary conditions can often be seen as having the intention of restricting competition. This case is noteworthy since it is the first abuse of market dominance case that the KFTC successfully won at the Supreme Court level.

As reviewed above, both the Intel case and Qualcomm case involved the issue of whether conditional rebates constituted abuse of market dominance. Currently, the Intel case is on appeal at the Seoul High Court and Qualcomm is also expected to appeal the KFTC decision. In the event either of these cases reaches the Supreme Court, it will be the first time for the Supreme Court to address the issues of whether conditional rebates and discriminatory pricing constitute abuse of market dominance and whether the rule set out in the POSCO case for abuse of market dominance would apply to such conduct.

Merger review regime

Under the 2008 amendments to the MRFTA, with respect to the obligation to file business combination reports, the threshold amounts have been increased to W200 billion or more regarding the total worldwide assets or sales of one of the transacting companies, and W20 billion or more regarding the total worldwide assets or sales of the other transacting company. However, in the case of a merger between foreign companies or, if a Korean company is acquiring a foreign company, the filing obligation arises only if each foreign company has sales in Korea for W20 billion or more in addition to the foregoing requirement.

Merger filings are divided into pre-merger and post-merger filing obligations. In cases of share acquisitions, mergers, business transfers, and the establishment of joint-ventures, if one of the transacting parties has total worldwide assets or sales of W2 trillion or more, it must file a business combination report with the KFTC before consummating the transaction. In other situations, the business combination report must be filed within 30 days after the consummation of the transaction. Regardless of whether a business combination transaction is subject to a pre-merger filing or a filing obligation at all, a company may voluntarily request, before consummating the business combination transaction, a determination by the KFTC as to whether a contemplated business combination would adversely affect competition in the relevant market. Every year, there are about 40 cases where a party voluntarily requests the KFTC to determine whether the contemplated business combination would restrain competition in the relevant market.

The key changes to the merger review regime in 2009 involved pre-merger filing requirements. Specifically, while the filing obligations previously arose within 30 days from the signing of the definitive agreement, or the date of the shareholder or board of directors' resolution in case of an establishment of a joint venture, the business community noted that the period was too short in certain situations (for example, if shares are being purchased, there would be at least several months between the signing date of the contract and the actual date of the business combination). Accordingly, in March 2009, the KFTC amended the MRFTA to allow pre-merger filings to be made only by the date of the execution of the business combination.

Meanwhile, the notable business combination cases since the second half of 2008 include the acquisition of Gmarket by eBay, the business combination of Home Plus and Home Ever, and the merger of KT and its mobile telecommunications affiliate, KTF. First, with regards to the acquisition of Gmarket by eBay, it was determined that eBay's acquisition of Gmarket would cause the two companies to collectively hold approximately 90% of the relevant market share of the domestic Internet shopping market. Although it would have been unlikely for such an acquisition to be permitted under the KFTC precedents, the KFTC decided to allow the acquisition (with certain restrictions such as limitations on raising sales commissions) based on the rationale that, although there may be restraints on competition in the short term, it is unlikely to continue in the mid to long term due to the entrance of new competitors and the dynamic changes in the market.

Next, with respect to the business combination of Home Plus and Home Ever, which had 67 stores and 35 stores across the country, respectively, there were concerns over the creation of restraint on competition in the discount megastore market as to the five regions where the two companies held substantial combined market shares. However, the KFTC ultimately approved the business combination under the condition that the prices for certain products, which were based on local pricing in the five stores located in the above five regions, be kept below the applicants' average domestic price for all regions, instead of ordering the applicants to sell those five stores.

Finally, the KT-KTF merger drew a lot of attention since KT was the only company that held essential facilities in various regions for landline telecommunications and KTF was Korea's second leading mobile telecommunications company. The key issue in this case was whether KT could extend its dominance in the landline sector to the mobile sector and exclude competitors through methods other than those based on price and quality. While the merger of KT and KTF would generally not have been a target of examination by the KFTC for restraint on competition because these companies were already affiliates, due to the importance of the merger, the KFTC granted it unconditional approval after listening to the opinions of the concerned parties and experts.

About the author

Paul S Rhee is a partner and senior foreign attorney in the antitrust practice group at Yoon Yang Kim Shin & Yu in Seoul, Korea, focusing on M&A and antitrust matters. These include the corporate leniency programme, merger clearance, criminal prosecution, administrative proceedings, private litigation, internal audits and investigations, and compliance and training. He represents leading multinational corporations in abuse of dominance, unfair trade practice, and domestic and international cartel investigations in a variety of industries such as elevator/escalator, industrial motor, air cargo, marine hose, power cable, air-conditioner and high technology. He has worked on a range of antitrust matters for United Technologies Corporation and its business units (Otis Elevator, Carrier, UTC Power and Pratt & Whitney) as well as for Qualcomm, Chunghwa Picture Tubes, Deutsche Bahn, and Cathay Pacific Airways.
Contact information

Paul S Rhee
Yoon Yang Kim Shin & Yu

22nd Fl., ASEM Tower
159-1 Samsung-Dong Gangnam-Gu, Seoul 135-798, Korea
Seoul KWTC P.O.Box 24
Tel: 82 2 6003 7000 (Rep)
Fax: 82 2  6003 7800 (Rep)
Web: www.yoonyang.com

About the author

Sin Sung Yun is a senior associate in the Antitrust Practice Group at Yoon Yang Kim Shin & Yu in Seoul, Korea. He has practiced diverse areas of law while focusing on antitrust laws and economic regulation of industries, and represented leading Korean and foreign companies, including US Fortune 500 companies. He has extensive experience in the media, telecommunications, financial services, high technology, manufacturing, energy and pharmaceutical sectors. He has been substantially involved in many notable antitrust cases in front of the Korea Fair Trade Commission including the representation of Otis Elevator, Intel and Qualcomm. He has also advised the Commission on the matter of Microsoft’s bundling case.
Contact information

Sin Sung Yun
Yoon Yang Kim Shin & Yu

22nd Fl., ASEM Tower
159-1 Samsung-Dong Gangnam-Gu, Seoul 135-798, Korea
Seoul KWTC P.O.Box 24
Tel: 82 2 6003 7000 (Rep)
Fax: 82 2  6003 7800 (Rep)
Web: www.yoonyang.com