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8 Mar 2018

KFTC Task Force Releases Final Report on Antitrust Enforcement Reform Measures

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KFTC Task Force Releases Final Report on
Antitrust Enforcement Reform Measures

On November 10, 2017, the Korea Fair Trade Commission’s (“KFTC”) Task Force for Enhancing Law Enforcement System (“TF”) released an interim report that includes various recommendations for improving antitrust and consumer protection regulations in Korea, including (1) improving civil remedies through the introduction of private right of action for injunctive relief and the introduction/expansion of punitive damages; (2) abolishing the KFTC’s exclusive right to make criminal referrals granted in three distribution-related statutes1) to facilitate eradication of chronic tension between large distributors and their suppliers; (3) raising administrative fines imposed under the Monopoly Regulation and Fair Trade Act (“MRFTA”); and (4) collaborating with municipal governments in order to reinforce and expedite enforcement processes, mainly through authorizing municipal governments to investigate antitrust cases concerning franchise businesses. On February 23, 2018, the TF released the final version of the report by fine-tuning the previously discussed agenda and newly adding seven additional topics.

The KFTC launched the TF on August 29, 2017 to comprehensively review administrative, civil, and criminal means to better enforce antitrust laws. The TF is headed by the KFTC’s Vice Chairman and its members are primarily composed of outside experts and officials dispatched from related ministries and administrative agencies. The TF made recommendations for each of the eleven topics on the agenda for further considerations by the KFTC and the National Assembly.

Classification Agenda/Topics
Sharing investigative authority and other cooperation with municipal governments
Raising administrative fines imposed under the MRFTA
Protecting a respondent’s right to defense and improving the investigation and case management procedures
Expanding structural remedies to non-merger cases
Introducing private right of action for injunctive relief
Introducing/expanding punitive damages
Introducing class actions and parens patriae actions
Reforming alternative dispute resolution program
Facilitating evidence collection by antitrust victims
Revising criminal referral program
Strengthening collaboration with the Prosecutor’s Office

I. Summary of Final Report

1. Sharing Investigative Power and Other Cooperation with Municipal Governments

The KFTC constantly makes decisions as to where to deploy its investigative resources. In light of the limited law enforcement resources, particularly in the areas of regulating franchise, distribution, agency, and sub-contractual relations, the TF reviewed the scope and method of sharing the KFTC’s investigative power with municipal governments.

Specifically, the TF recommended the following:

(1) Authorize municipal governments to investigate alleged violations of the Franchise Act;
(2) Transfer the operation for registration and administration of franchise disclosure documents to municipal governments from the KFTC; and
(3) Have municipal governments establish and operate in each province a Dispute Mediation Council for franchise, distribution, agency, and subcontract disputes.

2. Introduction of “Private Right of Action for Injunctive Relief”

Under the current MRFTA, a complainant of an alleged violation, who objects to the KFTC’s decision to clear the charges without taking any enforcement action, has no other means but to report the alleged violation again to the KFTC. Thus, there have been ongoing discussions on the need to recognize the private right of action for injunctive relief that would empower a private party to directly seek a cease and desist order in court to stop the alleged violation of the antitrust law rather than solely relying on the KFTC’s administrative authority.

The TF made the following observations:

(1) The TF recognized the need to introduce a scheme establishing the private right of action for injunctive relief because granting such a right would expand ways in which a victim can seek direct remedies;
(2) The TF recommended to introduce this scheme for a violation of the MRFTA, the Fair Transactions in Subcontracting Act (“Subcontracting Act”), the Franchise Act, the Distribution Act, and the Agency Act; and
(3) As safeguards to prevent frivolous litigation, the TF recommended to define the scope of injunctive relief not to cover the unlawful conduct as a whole, but only the part of that conduct that directly infringes upon the requesting person’s right. Moreover, the TF recommended to authorize the courts to order that the requesting person to furnish collateral if deemed necessary.

On the types of unlawful conduct subject to private right of action, the TF has presented two different proposals. The first proposal seeks to limit the scope to unfair trade practices whereas the second proposal argues for covering all violations of law.

3. Increases in Administrative Fines Imposed under the MRFTA

The TF observed that, unlike other jurisdictions, administrative fines serve as an exclusive financial means to deter illegal conduct in Korea because civil sanctions such as punitive damages and class action lawsuits are not readily available. And yet, the maximum levels of administrative fines remain extremely low relative to the global trends and expected benefits from a violation. To this end, the TF recommended to increase the amounts of administrative fines by doubling the base fine rates and the fixed-amount fines applicable to each category of illegal conduct.

4. Introduction and Expansion of Punitive Damages

Emphasizing the need to enhance deterrence and provide relief to the victims, the TF called for introduction of punitive damages that make it possible to impose fines exceeding actual injury. After discussing the relevant scope of punitive damages and the level of reasonable compensation, the TF concluded as follows:

(1) Punitive damages should apply to violations of the MRFTA and the Distribution Act; and
(2) For the Subcontracting Act, the Franchise Act, and the Agency Act, to which punitive damages have already been introduced, punitive damages should apply expansively to more types of conduct such as retaliatory measures.

With regard to the specific scope and the amount of damages (three or ten times the actual injury), the TF is still considering multiple proposals.

5. Introduction of Class Action & Parens Patriae Action

Because the current judicial system of Korea does not provide for class actions to the victims of antitrust violations, it has been difficult to extend relevant remedies in case victims are numerous but the harm incurred by each of them is small because the litigation costs generally exceed the amount of the remedy to each victim. To address this issue, the TF concluded that class actions should be made available for consumer protection cases where a small amount of harm occurs to numerous consumers. However, multiple proposals have been submitted and discussed for the structure of the class action including the scope of case types subject to class actions and the method of class composition (opt-in or opt-out).

Additionally, the TF also formed consensus on the need for parens patriae actions for consumer protection, which would allow the government to bring an action to serve the public interest on behalf of victims that cannot file a claim on their own. However, some members of the TF pointed out that the U.S. is the only jurisdiction that has adopted parens patriae actions for antitrust violations and that an introduction of parens patriae actions warrants further scrutiny because its effect should be considered simultaneously with that of a class action whose introduction is also being discussed.

6. Vitalizing Alternative Dispute Resolution Program

The current alternative dispute resolution program under the MRFTA applies to unilateral unfair trade practice cases only and does not have a binding force because either party may refuse to subject itself to the program. In consideration of this limitation, the TF recommended the following:

(1) Expand the type of cases that may be resolved through mediation.
(2) Introduce a two-tier dispute resolution program which requires the parties to carry out mediation, and then resort to arbitration should the mediation fail.
(3) Grant to the Consumer Dispute Resolution Committee under the Korea Consumer Agency to initiate an ex officio mediation process if it acknowledges possible collective consumer harm for a large pool of consumers.

7. Facilitating Evidence Collection by Antitrust Victims

As the positional asymmetry between the parties in antitrust cases makes it difficult for victims to collect sufficient evidence, the need for limiting a respondent’s right to refuse submission of information or allowing the KFTC to provide information to the victims was constantly raised and acknowledged. In consideration of this need, the TF agreed on the following:

(1) The MRFTA should adopt a mandatory information production rule similar to Article 132 of the Patent Act, which prohibits a company from refusing the court’s request for information that is a trade secret if that information is necessary to prove a violation of law or to calculate the amount of harm.
(2) Upon the request by the court, the KFTC should provide an Examiner’s Report (or a Statement of Objections) (including affidavits thereto) from the relevant KFTC matter.
(3) However, the information submitted by leniency applicants to the KFTC should not be subject to this mandatory information production rule to ensure the integrity and effectiveness of the leniency program.

8. Improving the KFTC’s Investigation and Case Management Procedures

In line with the KFTC’s effort to ensure the right of defense for respondents, the TF proposed measures to improve transparency and credibility in the course of the KFTC’s investigation and case management procedures, including:

(1) raising the tier of law regulating case management procedures from a mere KFTC notice to a statute or regulation, and
(2) providing legal grounds for general market surveys or investigations that are separate and distinct from an investigation into an alleged law violation by a specific entity.

9. Expanding Structural Remedies to Non-Merger Cases

Recognizing that the current sanctions of imposing administrative fines and behavioral remedies are not sufficient to address a prolonged monopolistic market structure, the TF considered an expansion of structural remedies (such as divestitures or spin-offs of a company) to non-merger cases. While some agreed that structural remedies are necessary, others opposed to them on the ground that, even if adopted, they are unlikely to be used in non-merger cases and may even interfere with private property rights. However, the TF formed a consensus that, if adopted, structural remedies should be permitted in limited situations that satisfy certain conditions, including the size (measured by the total output or turnover in a relevant market), the type of conduct (such as abuse of market dominance), and the complementary effect of structural remedies (when the purpose of the sanction cannot be achieved with less restrictive behavioral remedies).

10. Reform of the KFTC’s Exclusive Criminal Referral Rights

To address a criticism that unfair trade practices are prevalent partly due to the KFTC’s reluctance to refer matters to the Prosecutor’s Office, the TF discussed abolishing the KFTC’s exclusive rights to make criminal referrals under each of the statutes it enforces.2) The TF reviewed various positions, including (1) for complete abolition, (2) against complete abolition, (3) that amending criminal statutes should take place before the complete abolition of the KFTC’s exclusive criminal referral rights, and (4) that this is purely a legislative policy concern.

After the discussion, the TF recommended the following:

(1) On the Franchise Act, the Agency Act, and the Distribution Act (except Article 13 on the Prohibition of Compelling Exclusive Dealing), the TF recommended to abolish the KFTC’s exclusive right to make criminal referrals;
(2) On the Subcontracting Act, the TF presented multiple proposals (partial abolition or maintenance of the status quo);
(3) On the Fair Labeling Act, the TF also presented multiple proposals (complete abolition or maintenance of the status quo); and
(4) On the MRFTA, the TF also presented multiple proposals (complete abolition or maintenance of the status quo with supplementation or selective abolition based on the extent of need for economic analysis, the impact on small-to-medium-sized enterprises, and a social need for criminal punishment).

The TF also acknowledged the need for cooperating with the Prosecutor’s Office to eliminate unilateral unfair trade practices, and recommended that the KFTC prepare specific plans for cooperation after due consultation with the Prosecutor’s Office.

II. Implications and Prospects

The KFTC will deliberate on the TF’s recommendations on the eleven topics and present both the TF’s recommendations and the KFTC’s final opinions to the National Assembly for deliberations on possible amendment to the MRFTA and other relevant laws under the KFTC’s enforcement. However, because the TF’s final recommendations simply reflect the KFTC’s own internal viewpoints as an administrative agency, actual implementation of the recommendations under this final report depends on various legislative and policy concerns. The implementation of most of them requires amendment to the relevant laws or the enforcement decrees.

Based on the TF’s final report, we anticipate the following:

(1) The number of investigations into alleged violations of the Franchise Act and the number of resulting administrative sanctions will increase because the TF seeks to grant municipal governments the power to investigate and impose sanctions on the Franchise Act-related violations.
(2) The KFTC will enhance the administrative regulation of anticompetitive conduct because the TF recommends doubling of administrative fines.
(3) In the long run, civil regulation of anticompetitive conduct will also be enhanced because if the TF’s proposal comes to life, a private party can either file for injunctive relief or sue for punitive damages even in cases where the KFTC does not conduct an investigation or it declines to bring an enforcement action against an alleged violation.
(4) In particular, on the issue of the KFTC’s exclusive criminal referral rights, scholars are heavily divided into pro-abolition and anti-abolition. Those in the pro-abolition camp points to the public demand to reinforce criminal sanctions and no danger of excessive prosecution thanks to procedural safeguards such as the warrant requirement. Conversely, the opposing side expresses concerns over a possible contraction in business activities (particularly those of small and medium-sized businesses), as well as the (different) global standards, and the particular nature of antitrust law.

The final report’s ambiguous recommendations reflect a continued struggle between the two opposing views, and the final outcome will be heavily influenced by public opinion and debates at the National Assembly.

Regardless of the direction of the ultimate decision, given the public demand for stronger criminal sanctions, it is likely that the KFTC will begin to actively refer cases against not only law-breaking corporations but also individuals to the Prosecutor’s Office. As such, corporations should minimize the risk of criminal punishment by preemptively and proactively dealing with the KFTC from the investigation stage.

  • 1)The Fair Transactions in Franchise Business Act (“Franchise Act”), the Act on Fair Transactions in Large Franchise and Retail Business (“Distribution Act”), and the Fair Agency Transactions Act (“Agency Act”)
  • 2)The MRFTA, the Franchise Act, the Agency Act, the Distribution Act, the Subcontracting Act, and the Fair Labeling Act.
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