Ye Sun Han and Hyunah Kim, Shin & Kim
This is an extract from the second edition of the E-Commerce Competition Enforcement Guide - published by Global Competition Review. The whole publication is available here.
The most wired country with the highest internet usage rate, smartphone ownership rate and e-commerce penetration rate – these are some of the descriptions used for Korea. And thanks to its well-connectedness, Korea is one of the most attractive and growing markets for global e-commerce, and information and communication technology (ICT) companies. As a growing number of global e-commerce and ICT companies enter the Korean market, its competition authority, the Korea Fair Trade Commission (KFTC), endeavours to understand the changes in market dynamics and competitive landscape, and modernise the relevant competition and consumer protection laws under its purview, as it continues its active enforcement to protect and promote fair competition and consumer welfare.
To assist those in Korea’s e-commerce and ICT market, this chapter examines the KFTC’s 2019 annual enforcement plans (the 2019 Work Plan) and recent amendments to the KFTC Merger Review Guidelines (the M&A Review Guidelines), focusing on the change of merger review standards related to innovative business and big data, and explains the Monopoly Regulation and Fair Trade Act (MRFTA) and other applicable laws that are relevant to those companies. Thereafter, this chapter explains what to look out for in light of the KFTC’s ongoing investigations and recent decisions against major ICT and e-commerce companies, and discusses the likely enforcement directions of the KFTC in view of the investigation trends and policy stance.
KFTC’s recent enforcement trends and 2019 Work Plan
In March 2019, the KFTC announced its 2019 Work Plan. In it, the KFTC acknowledged that mobile platforms are becoming the mainstay of commerce, changing the market environment and consumption patterns, and stressed the importance of establishing an industrial ecosystem where competition on innovation is promoted and forming a business environment where consumers’ rights are protected.
More specifically, the KFTC stated that it will closely monitor the abuse of monopoly power that prevents technological innovation and announced its plans to focus on monitoring mobile platform operators’ abuse of monopoly power in the mobile operating system (OS) and application markets; ICT companies’ discrimination against or exclusion of content providers on the online platform market; and unfair business practices in the digital audio and pharmaceutical markets. To this end, the KFTC stated it would attend to other major competition authorities’ regulatory trends as well as global policy trends concerning the ICT industry. In the same vein, in connection with large companies’ illegal use, or leakage to third parties, of technical data categorised as business secrets of small and medium-sized venture firms, the KFTC expressed its plan to impose not only administrative sanctions but also civil or criminal penalties, or both, through the amendment of other relevant laws and regulations.
In addition, to protect the rights and interests of consumers, the KFTC announced that it plans to conduct a complete overhaul of the structure and content of the E-commerce Consumer Protection Act (ECPA) regulating online commerce; focus on monitoring violations by firms in relatively new online markets that are closely related to consumers’ daily lives (e.g., social dating services and mobile video on-demand services markets); and focus on monitoring and sanctioning deceptive consumer advertisements that use social influencer marketing and viral marketing. Also, the KFTC announced its plan to heighten firms’ obligations to provide information for customers to make informed decisions if, for example, there is significant information asymmetry between customers and firms (e.g., sampling strategy).
Amendment to the M&A Review Guidelines concerning mergers related to innovative business and information assets
The KFTC amended the M&A Review Guidelines, which became effective on 27 February 2019. The amended M&A Review Guidelines supplement the traditional merger review standards, in light of the Korean economy that is highly dependent on innovation-based industries (e.g., semiconductors and IT devices), so that not only anticompetitive effects on transaction terms (e.g., price increase) but also its effects of restraining competition on innovation would be critically reviewed. While explaining the reasons for amending the M&A Review Guidelines, the KFTC clarified its objectives, which are to proactively respond to anticompetitive mergers with concerns of monopoly or exclusion of information assets, or both, to protect the growth of innovation and secure the unity and predictability of merger review, by specifying the criteria for assessing anticompetitive effects of mergers involving information assets.
According to the amended M&A Review Guidelines, a definition of an ‘information asset’ is stipulated as ‘a collection of information gathered, aggregated, analysed, and utilised for various purposes’. Also, in reviewing mergers involving information assets – ‘big data’ – the amended M&A Review Guidelines provide additional factors to assess anticompetitive effects to prevent the combined parties from forming and strengthening their dominant market positions using information assets. The additional review criteria being considered are as follows: whether mergers may restrain non-price competition by restricting or foreclosing competitors’ access to information assets that are not easily substitutable and lowering the quality of services related to the collection, management, analysis or utilisation of information assets. These criteria take into consideration changes in the industrial ecosystem that are difficult to detect through the traditional framework of merger review.
Also, in connection with the relevant product market definition – an essential step in market analysis in merger review – the amended M&A Review Guidelines allow an ‘innovation market’ in which research and development (R&D) activities are closely interchangeable or substitutable with the manufacturing or sales activities or other R&D activities to be defined as (1) a separate ‘R&D market’ or (2) an ‘R&D, manufacturing and sales market’, and to be subject to the horizontal integration review criteria. For example, if company A, which manufactures and sells a certain drug, acquires company B, which researched and developed a drug with the same or similar efficacy and is close to launching the product, under the amended M&A Review Guidelines, company A’s manufacturing and sales activities and company B’s R&D activities are considered practically in competition, and those markets will be defined as a single relevant product market, allowing the review of the proposed merger’s anticompetitiveness by applying horizontal integration review standards. Also, in the innovation market, it is challenging to calculate a firm’s market share or market concentration based on revenue because there is no actual manufacturing or sale of goods in such market and, thus, market concentration in the innovation market will be assessed based on other factors, including the amount of R&D expenditures, size of R&D assets and capabilities for innovation activities, the number of patents registered and citation thereof, and the number of actual market participants. Criteria for assessment of ‘effects of hindering innovation’ were adopted as part of the criteria for reviewing anticompetitive effects so that the KFTC can assess anticompetitive effects in light of the following:
- whether integrated parties are important innovators;
- the proximity or similarity of the integrated parties’ innovative activities;
- whether there is a sufficient number of innovative competitors post-merger;
- the gap between integrated parties and competitors’ innovative capacity; and
- whether one party to the merger is a potential competitor that may enter into the other product market through innovative activities.
Considering that mergers between global ICT companies are happening more frequently these days to secure, analyse and use big data, and to secure technologies related to artificial intelligence, cloud computing and data security, the amendment of the M&A Review Guidelines is meaningful, and it will be worth paying attention to the changes to be made to the KFTC merger review practices.
Applicable antitrust laws for e-commerce and ICT companies
The primary law that regulates anticompetitive practices in Korea is the MRFTA and, in particular, for e-commerce and ICT companies, the KFTC has mostly focused on regulating the abuse of a dominant market position and unfair business practices. In addition to the MRFTA, the following laws are also relevant to e-commerce and ICT companies: the Act on Regulation on Standardised Contract Act (RSCA), the Fair Labelling and Advertising Act (FLAA), and the ECPA.
Abuse of dominant market position and unfair business practices under the MRFTA
Article 3-2 of the MRFTA prohibits abuse of a dominant market position, and Article 23 prohibits unfair business practices. These prohibitions of the abuse of a dominant market position and unfair business practices are regulations on conduct by a single firm, and these regulations frequently become an issue for global ICT and e-commerce companies as they often exercise market power with their advanced technology, intellectual property rights and exclusive control over data.
First, Article 4 of the MRFTA provides that, if, in the relevant market, a single firm’s market share is 50 per cent or greater or a total market share of three or fewer firms is 75 per cent or greater (provided, that any firm with less than a 10 per cent market share will be excluded), these firms will be presumed to have market dominance. Further, the types of conduct that would constitute an abuse of a dominant market position can be classified largely into five types:
- unfairly setting, maintaining or changing price;
- unfairly adjusting the sale of products or provision of services;
- unfairly interfering with other firms’ business activities:
- interfering with the purchase of raw materials essential for production;
- unfairly hiring other firms’ essential workforce;
- refusing, ceasing or restricting the use of elements essential for production, supply or sale of the other firm without just cause; or
- engaging in any activities that would make other firms’ business activities difficult by using unfair means other than those listed above, as set out in the KFTC guidelines;
- unfairly interfering with the market entry of new competitors;
- executing an exclusive agreement with distributors without just cause;
- purchasing rights and other items essential for the ongoing business of others without just cause;
- refusing or stopping the use of, or access to, elements essential for production, supply or sale of new competitors or market entrants without just cause; or
- engaging in any activities that would make a new competitor’s market entry difficult by using unfair means other than those listed above, as set out in the KFTC guidelines; and
- engaging in transactions to exclude other competitors through predatory pricing or exclusive dealing, or any other conduct that gives rise to a concern of markedly hindering consumer interests.
Second, unfair business practices under Article 23(1) of the MRFTA can be considered illegal based on two different criteria: anticompetitive effects, and unfairness of means of competition or terms of the transaction. There are types of unfair business practices that are evaluated based on their anticompetitive effects, which are as follows:
- unfair refusal to deal;
- unfair discrimination;
- unfair exclusion of competitors;
- transacting under terms that unfairly restrain the other party’s business activities; and
- provision of an unfair advantage to related persons or other firms.
There are four types of unfair business practices whose illegality is evaluated based on unfairness of means of competition or terms of transaction, which are as follows:
- unfair solicitation of customers;
- coercion to employees to purchase or sell a firm’s products or services;
- unfair interference with other firms’ business activities; and
- abuse of superior bargaining position in transactions.
While the types of violations based on an abuse of a dominant market position and unfair business practices overlap and are sometimes similar, the former requires a dominant market position, whereas the latter can be established without such market power. Also, as noted above, unfair business practices depending on the type may only require proving unfairness and do not require proof of anticompetitiveness. As such, when the KFTC regulates single-firm conduct, it tends to apply both provisions and if the firm concerned does not have market dominance, the KFTC regulates the illegal conduct through the legal framework applicable to unfair business practices.
Regulations on unfair T&Cs under the RSCA
For the past several years, the KFTC has been intensively monitoring whether global ICT companies’ terms and conditions (T&Cs) for Korean consumers are unfair and thus hinder consumer welfare. According to the RSCA, a firm has the obligation to prepare the T&Cs in a way that allows customers to easily understand them. Also, a firm is required to clearly explain the T&Cs to customers. If an agreement is executed in violation of this obligation, the firm is not allowed to claim that the T&Cs are valid terms of the contract. Further, the following T&C clauses are some of the examples that often become issues in practice as being unfair (and thus, null and void) clauses. Any clauses that:
- are unfairly unfavourable to customers;
- would be unlikely to be expected by customers in light of the totality of circumstances;
- would restrict the basic rights under a contract to the level that the objective of the contract cannot be achieved;
- unfairly set the scope of indemnification of a firm (e.g., a clause that transfers the risks a firm should bear to customers or excludes legal liabilities that may arise from an intentional act or gross negligence of a firm);
- unfairly impose onerous obligations for damages on customers;
- unfairly restrict customers’ exercise of rights to terminate; or
- unfairly prohibit customers from bringing a legal action or unfairly designate the court of jurisdiction in the case of any dispute.
Interested parties or consumer right organisations, among others, may request that the KFTC review T&Cs, and if the KFTC determines that the T&Cs are unfair under the RSCA, it may either recommend or order that the T&Cs be deleted, revised or otherwise amended, as appropriate.
Violation of the ECPA
The ECPA is a law that is enacted to protect consumers’ rights, interests and trust in the market in the context of e-commerce, and transactions through mail or telecommunication order. In particular, the ECPA requires online shopping mall operators to indicate certain prescribed information, comply with restrictions imposed by the relevant law concerning collection and use of consumer information, and strictly ensure the rights of consumers to withdraw their offers within a certain period (i.e., seven days from the date of receipt of a written confirmation of the contract). Also, the ECPA prohibits e-commerce business operators from, inter alia:
- informing false or exaggerated information;
- soliciting or transacting with consumers in a deceitful manner;
- interfering with consumers’ withdrawal of offers;
- arbitrarily supplying products and charging for these products when there was no such request from consumers; or
- coercing consumers to purchase goods via email or phone calls despite the fact that consumers expressly refused to purchase.
KFTC’s investigation into e-commerce and ICT companies, and the recent decisions
Investigation concerning the abuse of a dominant market position and unfair business practices
In a press conference in March 2019, the KFTC chair explained global competition authorities’ investigations into Google’s alleged antitrust law violations, and mentioned that there are largely two anticompetitive issues – one is the issue of whether Google has transferred its market power to a different service market using its significant market power in the search engine service market and the other is whether Google has engaged in the unfair bundling of its Play Store with Android OS. From around April 2018, the KFTC has been investigating whether Google Korea was involved in abuse of a dominant market position by forcing Korean online game companies to launch their game applications only on Google Play Store and preventing them from launching the game applications on other mobile platforms. Also, the KFTC appears to have been investigating whether Google’s bundling of Google Play Store with Android OS as a basic app on the OS would be illegal.
In addition, the KFTC has investigated whether Apple Korea has engaged in various types of unfair business practices, such as unfairly transferring various costs and expenses (e.g., TV advertising costs and free repair costs) to Korean mobile carriers, unfairly interfering with mobile carrier’s advertisement productions, and forcibly assigning iPhone sales volume. As such, in its KFTC hearing session, the KFTC deliberated the agenda concerning Apple Korea three times over the period from the end of 2018 to early 2019. However, on 4 July 2019, before the KFTC could render its final decision, Apple Korea applied for a consent decree process with the KFTC and, as such, the KFTC stopped the ongoing deliberation and will determine whether to commence the consent decree process for Apple Korea. Given that there had already been several rounds of heated legal debates between Apple Korea and the KFTC, whether the KFTC will accept Apple Korea’s consent decree application and if so what remedies will be agreed are being watched with keen interest.
Cases concerning global ICT companies’ violations of the RSCA
The KFTC recently determined that the T&Cs commonly used by many global ICT companies and online travel agencies (OTAs) are unfair T&Cs in violation of the RSCA, and recommended voluntary remedies or issued remedial orders.
If the KFTC determines that T&Cs are unfair in violation of the RSCA, it recommends firms to voluntarily amend the provisions, and if the firms fail to comply with the recommendation, the KFTC imposes binding remedial orders, pursuant to Article 17-2(2)(6) of the RSCA. If the firms fail to comply with the remedial orders, the KFTC has made and is able to make criminal referrals of the firms and their representatives for noncompliance with remedial orders. In light of these KFTC enforcement trends, it is necessary for ICT business operators in Korea to pay attention to the types and details of T&Cs that the KFTC found unfair on several occasions when creating their T&Cs. Below is a summary of recent cases where the KFTC has regulated global ICT companies’ unfair T&Cs.
The KFTC examined the T&Cs of Google, Facebook, Naver and Kakao – major online service providers with a high proportion of Korean users – and either recommended remedies or allowed them to voluntarily remedy 10 types of clauses as follows:
- where a broad, blanket licence is presumed without limitations on the purpose or scope of use of users’ copyrighted content;
- where a firm is allowed to limit or arbitrarily stop the service, such as by unilaterally deleting users’ content or account;
- where a firm is allowed to change the T&Cs without advance notice to users or upon notice but without consideration of impact on users;
- where a comprehensive consent is presumed for a firm’s personal data processing policies if users gave consent to the T&Cs;
- that allow a firm’s collection of excessive personal data, such as collection and analysis of user content for reasons that are abstract and arbitrary;
- that allow a firm to keep and use user content on its platform even if the user deletes the content;
- that permit comprehensive indemnification of a service provider from its legal liability arising from personal data leakage, copyright infringement and inaccuracy of content, among other things, regardless of whether the firm has violated its duty of care;
- that designate a foreign court as the court with jurisdiction in the event of any dispute with users for the convenience of a service provider;
- that allow payments made by users to be non-refundable if users violate the T&Cs and as a result, are restricted or terminated from using the service; and
- that allow presumption of consent to subsequent T&Cs if consent is given to the basic service T&Cs.
The KFTC investigated and examined the T&Cs of seven Korean and foreign online travel booking sites as there was a significant increase in complaints by Korean consumers about travel booking sites. The KFTC found that a provision that prohibits a full refund after reservation regardless of how much time is left until the date of stay is unfair as it imposes excessive obligations for damages on consumers. As such, the KFTC recommended those seven Korean and overseas online travel booking site operators to remedy these violations. For two companies that refused to revise the T&Cs despite the KFTC’s recommendation, the KFTC issued remedial orders.
Cases concerning violations of the FLAA and the ECPA
As internet commerce becomes more active and online marketing (e.g., social networking sites and blogs) becomes more influential on consumers’ choices than traditional advertising media, the number of consumer complaints on harm caused by misinformation or deceptive online advertising is increasing. To prevent such harm on consumers, the KFTC regulates false, exaggerated, deceptive or misleading advertising or the provision of false information on the internet as a violation of the FLAA or the ECPA. For example, the KFTC considers the following as deceptive advertising, and in many cases has imposed remedial orders and administrative fines: where business owners engage in deceptive practices by posting a paid advertising post online using professional advertising agencies or famous bloggers or social influencers (without disclosing that it is paid); or cause their employees to post promotional materials (without disclosing it) and thereby mislead the consumers to believe as if their fellow consumers have expressed independent and voluntary opinions on products or services.
Further, the KFTC continues its monitoring so that online shopping mall operators faithfully fulfil their obligations to provide information about the business and products as prescribed under the ECPA; guarantee consumers’ right to withdraw their offers; and not provide false or exaggerated information, or induce consumers in a deceitful manner. For example, the KFTC has imposed a remedial order and administrative fines on hotel booking application operators and food delivery application operators for engaging in the provision of deceitful information in violation of the ECPA when they made consumers’ negative feedback of their services private so that other consumers could not see them, or when they misled consumers about the popularity of certain services or products by making the names of those services or products appear at the top of the screen in exchange for payments. In addition, the KFTC had imposed sanctions on price comparison websites for engaging in the deceitful solicitation of consumers by not clearly stating that they were paid to advertise some products. There is also a severely sanctioned case where the KFTC found firms’ business practices to be gravely unlawful and ordered a three-month suspension of business in addition to a remedial order and administrative fines, when a firm advertised to consumers as if consumers would randomly receive luxurious products at a lower price when those products, in fact, will not be provided, and when a firm posted fraudulent ‘satisfactory’ feedback and thereby engaged in deceitful practices.
KFTC’s future enforcement directions and takeaway
As clearly described in the KFTC’s 2019 Action Plan, it is expected that the KFTC will review and respond more strictly to e-commerce and ICT companies’ anticompetitive practices, and practices that hinder consumer welfare. The KFTC will keep an eye on foreign competition authorities’ trends of investigations into global ICT companies, and if the KFTC determines that the practices under investigation have an impact on the Korean market, the KFTC will likely proceed with a fairly aggressive investigation as well. This likewise would apply to cross-border transactions where the merger review would be conducted in multiple jurisdictions. As such, it is expected that the KFTC will use the review criteria applicable to innovation industries under the amended M&A Review Guidelines in reviewing large-sized deals between global ICT companies, and attempt to take stereoscopic and active approaches in their review. Further, as identified in the cases where the KFTC proactively ordered revision of unfair T&Cs to multiple global IT companies, it is expected that if global ICT companies’ T&Cs or internal policies that are used uniformly around the globe violate Korean laws or regulations, the KFTC will require amendments and try to continue to protect Korean consumers’ rights and interests. Considering that the KFTC continues to take a proactive approach in enforcing laws to promote the competition of innovation and form a business environment where consumers’ interests are protected, it is necessary to closely observe the KFTC’s enforcement trends concerning the ICT and e-commerce industries.
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