On April 24, 2013, the newly-appointed Chairman of the Korea Fair Trade Commission (the "KFTC"), Dae Rae Noh, reported on the KFTC’s Work Plan for 2013 to President Park Keun-hye. We briefly examine the key provisions of the work plan.

  1. Amendments of law for eradication of cartel practices

The KFTC announced plans to sharply raise the actual imposition rate of surcharges, to secure the effectiveness of administrative sanctions by adjusting the grounds for and the rate of reduction of surcharges. The KFTC has been criticized in the past on the grounds that its actual punitive authority is weak since it has been unreasonably lenient by reducing the amount of surcharges actually imposed with respect to cartel activities.

Further, the KFTC has also been criticized that the possibility of criminal punishment is fundamentally restricted under the existing exclusive criminal referral system when the KFTC does not make a criminal referral in a given case. Accordingly, through an amendment of the Monopoly Regulation and Fair Trade Act (the "MRFTA"), the authority to request criminal referral will be granted to the Administrator of the Public Procurement Service, the Administrator of the Small-Medium Business Administration and the Chairman of the Board of Inspection and Audit, in addition to the Prosecutor General currently, and if any of them requests criminal referral, the KFTC will be obligated to refer the case to the Prosecutor’s Office for criminal prosecution as long as the relevant company does not file a leniency application.

Lastly, the KFTC plans to adopt a class action litigation system under the MRFTA to vitalize civil compensation of damages. Thus far, civil compensation of damages has not occurred effectively for violations of the MRFTA due to a culture of litigation avoidance, the difficulty of evidence collection and the inadequacies of the current class action litigation system, among other reasons. Accordingly, a class action litigation system is planned to be adopted for cartel and resale price maintenance activities, which usually involve relatively small amounts of damages on an individual basis, through an "opt-out" method whereby all injured parties are subject to the consequences of the class action litigation (i.e., judgment or settlement) unless an individual opts out and decides to proceed on his or her own through a separate litigation proceeding.

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  1. Strengthened punishment of unfair subcontracting practices

The KFTC has adopted a system of punitive damages (up to 3 times actual damages) for (i) unreasonable determination of subcontracting prices, (ii) unreasonable cancellation of entrustment, (iii) unreasonable return of goods, and (iv) reduction of subcontracting prices, for fairness in subcontracting (an amendment to the Fair Transactions in Subcontracting Act (the "Amendment") was passed by the National Assembly on April 30, 2013). Punitive damages liability, which previously applied only for misappropriation of technical data, has been adopted for the above other leading types of unfair subcontracting practices, and the risk of civil liability is expected to increase for companies in Korea engaged in subcontracting.

Further, under the Amendment, the authority of the Korea Federation of Small and Medium Businesses (the "Federation") has been strengthened by granting to it the power to negotiate on behalf of member subcontractors with their principal contractors for adjustment of supply prices in cases where it is unavoidable to adjust subcontracting prices due to a sharp change in raw material prices, and if negotiations fail, the Federation may also apply for mediation through the Subcontract Dispute Mediation Council.

In addition, to prevent covert circumventions of the law by principal contractors, the KFTC plans to push for legislative activities to prohibit outright the so-called "unfair special subcontracting terms and conditions" where the principal contractor unilaterally establishes unfair subcontracting terms in the form of special terms and conditions, and to establish new grounds for punitive measures, including corrective measures (e.g., deletion of unfair terms and conditions) and imposition of surcharges.

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  1. Systemic reform of the distribution and franchising sectors for correction of unreasonable trading practices

In order to secure a fair trading order in the distribution sector, the KFTC plans to (1) establish "standards on the apportionment of additional expenses" in order to eradicate the practice among suppliers of unreasonably requesting payment of additional expenses (e.g., sales promotional expenses, advertisement expenses and shipping expenses), and (2) establish guidelines on the secondment of sales promotional staff, and furthermore, the KFTC plans to (3) correct unreasonable trading practices through the establishment of "guidelines on permissible sales incentives" and ongoing monitoring of sales commissions in order to improve the culture of sales incentives where corruption of sales incentives to unlawful rebates is a concern.

In relation to the franchising sector, through an amendment of the Fair Transactions in Franchise Business Act, the KFTC plans to (1) prohibit imposition of unreasonable mandatory business hours on franchisees (particularly in relation to convenience store franchises) and excessive penalties, (2) prohibit franchisors’ coercion of franchise renewal and establish "guidelines on apportionment of renewal expenses," and (3) grant collective bargaining powers to franchisee organizations, reflecting the practical difficulties of individual franchisees in raising objections with their franchisors. For reference, a proposed amendment to the Fair Transactions in Franchise Business Act with such contents above was approved by the State Affairs Committee of the National Assembly on May 6.

  1. Adoption of consent decree system for violations of the Fair Advertisement and Labeling Act

The KFTC plans to adopt a consent decree system under the Fair Advertisement and Labeling Act for systemic reform so that injured consumers may be remedied promptly (amendment of the Fair Advertisement and Labeling Act is planned in December 2013). A consent decree system refers to a system whereby a company presents its own appropriate plan for corrective measures, such as compensation or other remedies, and the KFTC, without determining the illegality of the company’s conduct, terminates the deliberation process. The consent decree system to be adopted under the Fair Advertisement and Labeling Act will apply to all unfair advertisement and labeling activities, and the consent decree procedures under the MRFTA will apply mutatis mutandis, however, the procedure for prior consultation with the Prosecutor’s Office will be excluded, for prompt relief from injury.