The Korea Fair Trade Commission (the “KFTC”), the Korean antitrust enforcement agency, has adopted the “Notification on Specific Types of Abuse of Superior Bargaining Position Relating to Continued Resale Transaction” (the “Notification”). The Notification, which went into effect on May 12, 2014, is aimed at preventing and regulating specific types of prohibited conduct relating to unfair trading practices between a supplier and a distributor.
Under the Notification, “continued resale transaction” refers to various types of transaction between a supplier and a distributor, including (i) a sales transaction whereby a distributor purchases products from a supplier for purposes of resale, and (ii) a consignment transaction whereby a distributor sells products on a consignment basis.
1. Overview of the Notification
The prohibited conduct set forth in the Notification constitutes abuse of superior bargaining position under the Monopoly Regulation and Fair Trade Act (the “MRFTA”), the primary Korean antitrust statute, and specifically relates to unfair trade practices carried out by suppliers against distributors. The Notification prohibits suppliers from engaging in the following six types of unfair practices:
- Compulsory Purchase:
- unilaterally supplying and billing for products that have not been ordered by a distributor;
- coercing a distributor to purchase a certain number of products with imminent expiration date, new products, unpopular products, or inventories without reasonable grounds; or
- coercing a distributor to purchase products or services that the distributor has no intention of purchasing.
- “Economic” Coercion:
Coercing a distributor
- to bear the costs of promotional events;
- to provide manpower/staff to the supplier at the distributor’s cost;
- to bear the supplier’s labor costs; or
- to provide economic benefits including donations or sponsorships that are irrelevant to any transactions between the distributor and the supplier.
- Compulsory Sales Target:
Conduct that penalizes a distributor for failure to achieve a sales target set by the supplier, including premature termination of a contract, refusal to supply products, or refusal to make any payment owed to the distributor.
- Conduct Disadvantageous to a Distributor:
- imposing unfair terms and conditions during a contract period;
- disallowing indemnification claims in case of a partial or complete termination of a contract;
- imposing unfair indemnification clauses;
- imposing a contractual clause requiring the distributor to perform in accordance with the supplier’s interpretation of the contract in case of inconsistencies within the contract;
- refusal to take back products that were damaged due to conduct attributable to the supplier;
- passing on to the distributor the expenses for product returns (such as the shipping fee) attributable to the supplier;
- unfairly refusing to supply goods or business assistance or to make sales incentive payments, whether in whole or in part, on grounds unrelated to withholding sales incentive payments;
- imposing or modifying a contractual clause in any other way that unfairly disadvantages the distributor; or
- imposing disadvantages on a distributor in retaliation for reporting a violation of the Notification to the KFTC or other relevant agencies.
- Unfair Interference with Business Management:
- unreasonably requiring a distributor to participate in promotional events;
- unilaterally determining (i) the employment terms and conditions and/or location in regard to the distributor’s officers/employees or (ii) the sales conditions and/or territory in regard to the distributor’s agents;
- demanding that a distributor provide its confidential business information including its customer accounts, sales statements, and cash flow statements; or
- unilaterally determining a distributor’s transaction counterparties, business hours, or sales territories.
- Refusal to Confirm a Distributor’s Order:
Denying or evading a distributor’s reasonable request for confirmation of its order, including the name or quantity of the products that the distributor has offered, or has expressed an intention, to purchase from the supplier.
Please note that the Notification does not apply to any franchise business that is subject to the Fair Franchise Business Act.
2. Implications of the Notification
The Notification does not create a new category of prohibited conduct. Instead, it provides detailed guidance as to which specific types of conduct on the part of a supplier constitute abuse of superior bargaining position under the MRFTA. Although the Notification applies only to continued resale transactions carried out by a supplier in a superior bargaining position as against a distributor, the scope of “continued resale transaction” under the Notification is likely to be expansive given the KFTC’s similarly expansive interpretation of the term “bargaining position.” Therefore, companies that distribute their products in Korea through distributors or agents should pay careful attention to the types of conduct prohibited under the Notification.