South Korea: Flexing its muscles

Author: | Published: 1 Oct 2010
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Korea's competition law is contained in the Monopoly Regulation and Fair Trade Act (MRFTA). The Act is composed of regulations dealing with curbing concentration of economic power and promoting competition. The Korea Fair Trade Commission (KFTC) is in charge of enforcing the MRFTA. Recently, and in accordance with government policies of reinvigorating the economy and easing regulations on businesses, the KFTC has relaxed its regulations concerning large conglomerates (chaebol). Conversely, the trend toward strengthening investigations and sanctions regarding more traditional anti-competitive activities, such as abuse of market dominance and cartels, has grown. In particular, with respect to abuse of intellectual property rights (IPR(s)) by multinational IT companies, the KFTC has strengthened its enforcement of the relevant laws. Also, the KFTC has made amendments to MRFTA that apply to IPRs, and other regulations that define the types of abusive acts and commenced large-scale surveys in the pharmaceutical and IT sectors. Furthermore, in the second half of 2009, in the LPG (liquefied petroleum gas) Cartel case, the KFTC made clear its position: it intends to strengthen investigations and sanctions for domestic cartels. The KFTC showed its aggressive stance toward investigations and sanctions for international cartels in the Air Cargo Cartel case. Meanwhile, with respect to the area of business combinations, the KFTC has strengthened the use of economic analysis to determine whether limitations to competition occur and defining relevant markets and, in the event that a business combination is anticipated to limit competition, the KFTC is taking a strong stance to prohibit such combination.

Cartel regulatory regime

From the second half of 2009, the KFTC has stated its goal of "strengthening its watch on cartels involving products closely associated with the lives of laymen and corporate activity". Specifically, the KFTC is closely monitoring business activities involving daily necessities and services, which heavily influence the cost of living, as well as raw materials and industrial machinery for possible cartels. Also, in order to effectively prevent bid rigging in the public sector, efforts are being made with the Public Procurement Service to take measures, such as stipulating in the supply contract the anticipated damage compensation amount in case of a cartel (10% and 20% of the contract price). Further, computer forensic techniques have been developed and a task force has been formed to strengthen the KFTC's capabilities for investigating cartels,. In practice, during the Air Cargo Cartel case, forensic computer investigations were conducted on computers located in Korea and evidence was secured. Further, the KFTC is taking various measures to augment its capabilities to gather evidence such as establishing a system of mutual assistance with foreign competition authorities and use of economic analysis. Such change in the position of the KFTC is not entirely unrelated to the fact that, in recent years, there has been a drastic increase in imposition of sanctions for cartels against Korean corporations by US and EU competition authorities.

Moreover, in January 2010, for the first time since 1988, the KFTC granted approval of the application for a cartel by domestic ready-mixed concrete companies regarding joint quality and research and development. However, the KFTC declined to approve the request for a cartel with respect to joint purchasing of raw materials and sales, noting concerns about limiting competition. It should be noted that, while in principle the MRFTA prohibits cartels, if a cartel is conducted for purposes such as industrial rationalization and satisfies certain requisites such as reducing the cost of raw materials, overcoming economic difficulties or improving production, the KFTC may grant approval of a cartel (MRFTA, Article 19(2); Enforcement Decree of the MRFTA, Articles 24 to 34).

Leading cartel cases

With respect to leading KFTC decisions after the second half of 2009, the LPG Cartel case, where a record administrative fine was imposed for a single case (about W668.9 billion or $576 million), and the Air Cargo Cartel case, an international cartel case which involved jurisdictional issues, are noteworthy.

First, concerning the case where LPG suppliers engaged in price-fixing of LPG, the KFTC determined that the fundamental cause for such cartel was based on the special characteristics of the Korean LPG supply market and the affiliated/closely associated relationships among the suppliers. Specifically, the Korean LPG supply market is composed of two LPG importers (A and B importers) and four petroleum companies. A and B importers import LPG and sell a portion of the LPG to LPG charging stations and a portion to the four petroleum companies. Although in a competitive relationship regarding the LPG charging station supply market, A and B importers and the petroleum companies were in a special relationship where they sold/purchased LPG among each other. Also, in the case of A importer, from the time it was established until the present, it had an affiliate relationship with certain petroleum companies and, in the case of B importer, it was previously in an affiliate relationship with certain petroleum companies before being separated, but B Importer still maintains a sole transacting relationship with the former affiliate petroleum companies. The basis on which the KFTC determined that a cartel was formed was the fact that A and B importers sold LPG at the same or similar prices with each other based upon prior agreements although A and B importers had separate calculation formulas from January 2003 to December 2008. The KFTC further determined that A and B importers notified petroleum companies of the price they sold LPG to charging stations.

Next, on May 26 2010, the KFTC determined that 21 international air cargo carriers engaged in a cartel regarding outbound Korea routes to worldwide destinations and outbound routes from foreign locations (Hong Kong, Europe and Japan) inbound Korea from December 1999 to July 2007 by adopting and/or changing the imposition of fuel surcharges. In that case, the KFTC issued a corrective order and imposed total administrative fines of W119.5 billion. This case is noteworthy because: (i) it is the largest international cartel case that the KFTC has dealt with; (ii) the KFTC and competition authorities from the US and EU mutually cooperated in their investigations and simultaneously launched on-site inspections (on February 14 2006) and (iii) since the KFTC performed all phases of the investigation on its own, which lasted for over 4 years from the commencement of the investigation until the final decision was issued, this showed the KFTC's determination to strengthen investigations and sanctions for international cartels. Moreover, in the case of outbound routes from foreign locations inbound Korea, although the air cargo transportation transaction takes place between the carriers and purchasers (usually forwarders) within the relevant foreign country and such transaction concludes within that same country, the KFTC applied exterritorial application of the MRFTA based on the rationale that Korean customers paid for the carriage or such charge was reflected in the price of the imported product and the ultimate cost was borne by Korean customers. Therefore, the transaction structure in this case was significantly different to previous international cartels investigated by the KFTC, which involved direct transactions with Korean customers such as in the Graphite Electrodes Cartel and Vitamin Cartel cases. It bears noting that, while the MRFTA has a provision for extraterritorial application if conduct which occurs outside of Korea has an effect on the Korean market (Article 2(2)), unlike the US Foreign Trade Antitrust Improvement Act, there are no specific requisites for such application. Therefore, there is a controversy over the interpretation of requisites for extraterritorial application in Korea. Further, another focus in this case was the influence of administrative guidance by government authorities upon the airline industry. However, the KFTC still recognised the existence of a cartel, and the specific reasoning for such decision can be subsequently confirmed when the KFTC issues its written decision to carriers later this year.

Increase in antitrust damage claims

In 2009, there were two noteworthy lower court decisions involving compensation of damages for cartels. First, in the appeal of the case involving the lawsuit for compensation of damages by the Ministry of National Defense against five petroleum companies, the Seoul High Court disagreed with the court of first instance's use of the econometrics method to calculate the damage amount and adopted the so-called yardstick method to calculate the damage amount (Seoul High Court, 2007Na25157) (December 30 2009 announcement). Based on the yardstick method, the amount of damages, when compared to the court of first instance, increased by about KRW 50 billion to about W130.9 billion (from about W81 billion originally).

Next, in a case concerning a claim for compensation of damages by a bakery company against flour manufacturers that engaged in price-fixing of flour and in controlling production volume, the Seoul Central District Court held that the flour manufacturers were to compensate the bakery company for damages in the amount of W1.5 billion (Seoul Central District Court, 2007Gahap99567) (May 27 2009 announcement)). This case is noteworthy because the court recognised the damages although the claim was brought by an intermediate purchaser, as opposed to the end-users. The key issues in such case centered on the scope of damage compensation for the intermediate purchaser and whether the defendants' pass-on defense could be recognised. The court noted that Korean law regarding damage compensation focused on the compensation of actual damages and will not limit the ability of indirect purchasers to bring a claim. The court then noted that the damages will be calculated at the time that the parties engaged in transactions and that the defendants' pass-on defense will not be recognised. However, the court determined that limiting the amount of damage compensation to the direct purchaser based on the principle of fair distribution of damages was warranted based on the reasoning that: (i) the increased costs to an intermediary purchaser based on a cartel could be passed on to purchasers in the downstream market and (ii) since one of the goals of the MRFTA is consumer protection, if the indirect purchasers initiate a lawsuit for compensation of damages, the possibility of dual compensation exists. The court then decided to exclude the amount of damages that the direct purchaser bakery company passed on to indirect purchasers from the total damage compensation amount through calculation of such amount by economic analysis.

New antitrust guideline for exercise of IPRs

In 2010, one of the key goals for the KFTC is to strengthen its enforcement against abuse of IPRs. In this connection, on March 31 2010, the KFTC announced its New Antitrust Guideline for Exercise of Intellectual Property Rights (the Guideline), which specifies different types of abusive acts, and the Guideline became effective as of April 7 2010. Under the Guideline, in the event that a foreign enterprise's acts have an effect in the Korean market, the MRFTA may be applied; this served to clarify the issue of extraterritorial application. Also, the Guideline provides specific provisions regarding the determination of the relevant market for violations, effects of obstructing fair trade and effects of increasing efficiency.

Under the Guideline, the types of abusive acts regarding patent rights are as follows. First, the Guideline prohibits unfair licensing practices. As examples of specific acts in violation of licensing royalties, the KFTC has specified excessive royalties, discriminatory royalties, imposition of royalties after license expiration and imposition of royalties for unlicensed parts. Also, the Guideline specifies that unfairly declining permission to operate, discriminatory licensing, unfairly limiting the operational scope, imposition of unfair conditions (eg limiting the price of the contracting product, grant-backs, tying, limiting competing products or technology, limiting transacting counterparties and unfair imposition of conditions) are also violations of the MRFTA.

Second, regulations regarding abusive acts concerning patent pools are specified in the Guideline. The KFTC has specified the following acts as violations: (i) the act of unfairly agreeing on conditions regarding the operation of the patent pool such as the transacting price, volume or area, (ii) the act of excluding competitors that did not participate in the patent pool by acts such as declining permission to operate or discriminatory licensing, (iii) unfairly forcing another enterprise to share knowledge or technology which it independently gained while operating the patent pool, (iv) the act of unfairly including invalid patents or patents which are not essential for the collaborative operation in the patent pool and (v) unfairly imposing a considerably higher total royalty for the patent pool when compared to the royalty for each separate patent, which brings about severe disadvantages to the company that uses the patent pool.

Third, the Guideline regulates cross-licensing and prohibits the acts noted under points (i), (ii) and (iii) for patent pools above.

Fourth, the Guideline specifies the following as abusive acts concerning standards-setting patent rights: (i) abusing patent rights regarding FRAND (Fair, Reasonable and Non-Discriminatory) conditions following standardization and (ii) purposefully withholding information regarding the patent while setting the standard and imposing a considerably higher royalty after the patent has been chosen as the standard (ie patent ambush).

KFTC launches surveys on pharmaceutical and IT sectors

From June 16 2010, the KFTC commenced surveys of 30 multinational pharmaceutical companies and 18 domestic pharmaceutical companies that were the top sellers of prescription drugs in Korea and/or those pharmaceutical companies that are subsidiaries of large conglomerates that were active in patent-related transactions. The survey focuses on obtaining information regarding execution of contracts and disputes involving IPRs. Further, the KFTC is also obtaining information regarding patent applications by pharmaceutical companies regarding generic drugs and the changes in market shares and price following the launch of generic drugs. It appears that the survey was influenced by the EU competition authority's August 2009 report on the pharmaceutical sector inquiry, which noted that the competiveness of generic drugs were being limited in the market and technological development was being hindered by patent abuses.

Furthermore, from August 6 2010, the KFTC commenced surveys of 19 multinational IT companies and 40 domestic IT companies, which are composed of semiconductor companies, telecommunication companies and manufacturers of computers and related parts. The KFTC has requested materials regarding the status of patent disputes, instances where license agreements were declined and the terms of license agreements if executed. The companies that are subject to the survey have until September 30 2010 to submit requested materials to the KFTC.

Merger review regime

From the latter half of 2009, the KFTC's examination of business combinations are being strengthened through the use of economic analysis for issues such as defining the relevant market, determining the possibility of limiting competition and anticipating changes in price as well as for the use of a competitive price index. Further, the KFTC is using corrective measures to prohibit business combinations or requiring the sale of certain assets.

The number of business combinations that the KFTC handled in 2009 was 413, compared to 550 in 2008, which is a reduction of 25%, probably attributable to the global financial crisis. The most notable trends have been the reduction of acquisitions by corporations of non-affiliated companies in order to expand business and the increase in mergers between affiliates in order to promote operational efficiency. According to the statistics of the KFTC, the number of acquisitions concerning non-affiliates in 2009 was 284, which is a reduction from 2008; but mergers between affiliates grew to 129 which is an increase from 24% of total business combinations in 2008 to 31% in 2009. Conversely, as the economy recovered in the first half of 2010, the number of business combinations has increased to 241 (when compared to 188 cases in the first half of 2009), the number of acquisitions by corporations of non-affiliated companies in order to expand business has increased (179 cases which represents 74% of all business combination reports) and the number of business combinations between foreign companies has significantly increased.

The most notable business combination case in 2009 was for the proposed acquisition of Paradise Duty Free stores by Lotte Hotel. In that case, Lotte Hotel requested a preliminary examination by the KFTC of the acquisition and, since there were concerns that competition would actually be limited in the duty free markets in the Korean city of Busan and the surrounding region, the KFTC rejected the proposed acquisition. This case is noteworthy because it is only the fifth time that the KFTC has prohibited a business combination. In prohibiting such combination, the KFTC conducted economic analysis of the loss of benefits to consumers based on the increase in price (ie reduction in discounts) of duty free products and found that such loss would be estimated to be a minimum of W14 billion and a maximum of W40 billion a year. The KFTC further reasoned that, since the requisites for obtaining a license for a duty free shop were extremely stringent, in actuality, the duty free market was a static market where it was very difficult for new entrants to enter the market. Conversely, in the May 4 2010 KFTC examination of Lotte Hotel's proposed acquisition of another duty-free shop, AK Global, through the acquisition of shares, the KFTC defined the relevant market as duty free stores in Seoul and Incheon International Airport and granted approval based on the rationale that the business combination would not limit competition in the relevant market.

In the first half of 2010, the KFTC has made a notable decision regarding business combinations in the broadcasting market. C&M, which is a major system operator in Korea, desired to acquire another system operator in a different region within Korea. Upon review, the KFTC noted concerns that competition in the multi-channel pay cable market in the region where the system operator was being acquired could become limited, but approved the business combination based on the condition that certain behavioral corrective measures such as limiting the price, which can be increased for package products, be taken. The limitation to the price that can be increased in the above case differs from previous price ceilings which were applied to business combinations in that it applied an advanced competitive price index system to transfer the effects of competition which remained in other competitive regions to the relevant market, and minimized the possibility for price increases based on an oligopoly. This case is meaningful since the decision regarding the business combination came out at a time when the Korea Communications Commission was enforcing its One Region One System operator policy; IP TV operators were entering the broadcasting market; the Broadcasting Act was being amended; and the competitive structure of the multi-channel pay cable market was being transformed.

A pending business combination decision that is highly anticipated is the joint venture between the Australian iron ore producers, BHP Billiton and Rio Tinto. These companies are the second and third leading companies in the marine transportation iron ore market (Vale 35.2%, Rio Tinto 22.5% and BHP Billiton 14.8%) and the Korean steel industry received about 65% of its supplies (in 2008) of iron ore from these two companies. While the two companies made a business combination report to the KFTC on December 28 2009, the KFTC noted its anticipation that such combination would have a considerable effect, not only on direct purchasers in the Korean steel industry, but also in the downstream market such as Korean automobile and ship construction industry. Accordingly, the KFTC announced that it would carefully examine such combination and is also closely cooperating with the Japan Fair Trade Commission in this regard.

About the author

Paul S Rhee is a senior foreign attorney and partner in the 45-attorney Antitrust Practice Group at Yoon & Yang LLC in Seoul, Korea. He focuses on M&A and antitrust matters such as corporate leniency, merger clearance, and administrative, civil and criminal proceedings. He has represented or is currently representing leading multinational corporations in high-stakes, high-profile, and/or highly contentious 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, freight forwarding, marine hose, power cable, air-conditioner, pharmaceutical, telecommunications and high technology.

Paul has been continuously recognised as a leading antitrust practitioner in Korea by international legal publications such as Practical Law Company’s Which Lawyer? and Euromoney Legal Media Group’s Asialaw Leading Lawyers. He was also commended in The Asia Pacific Legal 500 2009/2010 for his antitrust expertise in Korea and was singled out for "his knowledge of Korea’s corporate leniency programme and its impact on private litigation."

Recently, he co-authored the South Korea chapters for Practical Law Company’s Cross-border Competition and Leniency Handbooks, PLC Cross-border Mergers and Acquisition Handbook and Global Legal Group’s The International Comparative Legal Guide to: Cartels & Leniency.

Contact information

Paul S Rhee
Yoon & Yang LLC

22nd Fl., ASEM Tower
159-1 Samsung-Dong Gangnam-Gu, Seoul 135-798, Korea

Tel:  82 2 6003 7000
Fax: 82 2 6003 7800
Web:www.yoonyang.com


About the author

Song Ryu is a senior associate in the 45-attorney Antitrust Practice Group at Yoon & Yang LLC in Seoul, Korea. He focuses on antitrust matters such as corporate leniency, merger clearance, and administrative, civil and criminal proceedings. He has represented leading Korean and multinational corporations in high-stakes, high-profile, and/or highly contentious 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, freight forwarding, marine hose, power cable, telecommunications, building materials, petrochemical, energy, and high technology. 

His practice areas also include telecommunications and information technology and the interface between antitrust law and intellectual property rights.

Song received his LLB degree at Hanyang University in 2001 and is currently studying for his LLM degree at Boston University School of Law. He is admitted to the Korean Bar.

Contact information

Song Ryu
Yoon & Yang LLC

22nd Fl., ASEM Tower
159-1 Samsung-Dong Gangnam-Gu, Seoul 135-798, Korea

Tel:  82 2 6003 7000
Fax: 82 2 6003 7800
Web:www.yoonyang.com