Exemptions and Exceptions to Competition Policy
and Law in Korea
Director, Korea Fair Trade Commission
The [Monopoly Regulation and Fair Trade Act](FTA) of Korea prohibits the abuse of market-dominant positions, the excessive concentration of economic power, improper concerted conducts and unfair business practices that are likely to lessen competition. The Korea Fair Trade Commission (KFTC) is the single independent agency in charge of administering and enforcing the Act.
Before the Commission made the 7th amendment of the Act that went into effect on Jan. 6, 1999, the activities in the primary industries, such as agriculture, mining, fishery, and forestry and the activities of the government agencies were excluded from application of the Act. Now the Act shall apply to all business activities and to all sectors of the economy, and the activities of the government agencies are also subject to the Act in so far as they carry on a business to make a profit. However, the Act does not simply target all activities that are deemed unfair under the conventional wisdom of society and the economy. There are a limited number of specific situations in which the Act should not apply or should be limited in application. For example, purely individual activities or government activities of a 'non-business' nature do not fall within the bounds of the Act.
There are four main categories of exemptions(or exceptions) to the Act:
conducts specifically authorized(or permitted) by other laws;
proper exercise of intellectual property rights;
activities of cooperatives;
conducts authorized by the KFTC under the Act.
Here the term 'exemption' is used in a broad sense to encompass both business practices not subject to the Act and those prohibited by the Act but for some particular reasons exempted from application of the Act. Three of the four categories are clearly expressed in the Act, but the fourth is up to the authority of the KFTC. It would rather be exception than exemption, to be exact, since the KFTC grants authorization on a case-by-case basis.
Exemption 1 - conducts specifically authorized(or permitted) by other laws
Conducts that are properly exercised in accordance with an existing law or any decree are exempt from the Fair Trade Act. Section 58 of the FTA provides that conduct specified in and specifically authorized by other laws are exempt from the Act. For instance, the [Property Reevaluation Act] requires that reestimating the property of a company should be carried out only by the Korea Evaluation Corporate. This may restrict entry by private companies into that market and the conduct would not appear to be in conformity with the principles of competition policy. However, the conduct is subject to statutory exemption.
The Commission's position is that even though there is a statutory base for exemption, the exemption cannot be justified unless the conduct is appropriate to the prime objectives of the legislation. Conflicts regarding the nature and the scope of 'appropriateness' need to be resolved by statutory interpretation.
In a particular industry where highly technical expertise is needed, a number of agencies under individual laws are engaged in enforcing special competition policies. For instance, in telecommunication service sector, the Korea Communications Commission(KCC) regulates anti-competitive activities in connection with access to and use of network and misuse of network. Other anti-competitive activities which are not specifically covered by the [Basic Act on the Telecommunications] are subject to regulation by the general competition authority under the FTA.
The Commission is making utmost efforts to remove anti-competitive factors in the existing laws and policies through close cooperation with the administrative agencies concerned. As a part of its efforts, the Commission enacted the [Act on Comprehensive Ban of Cartels] on Feb. 5, 1999 that prohibits ongoing concerted activities that have been permitted by existing laws. During the intial developing stages of the Korean economy when both market and capital were scarce, government intervention in market was inevitable in order to efficiently distribute limited resources while pursuing government-led economic growth policies. However, at the present stage of economic growth and under the sweeping trend of globalization, characterized by mega-competition across the world, direct government intervention impedes free and innovative business activities.
The 20 kinds of concerted conducts granted by 18 individual laws would be illegalized or limited to a minimal level by the new Act. For instance, the remuneration for such professional occupations as lawyers, CPA’s, customs services, tax accountants will neither be jointly determined by the Trade Association nor subject to the endorsement by the related government any more. Instead, each professional determines its service charge individually.
Insurance companies have so far jointly set insurance premium based on the projected rate calculated by the Insurance Development Institute. However, starting 2000, each insurance company shall determine the premium on their own discretion making way to a flexible price setting in accordance with business performance of each company.
Currently, the government and public corporations are forced to have group negotiations with the ‘Cooperatives of Small and Medium Sized Companies’ when purchasing products notified by the Small and Medium Business Administration, apart from general principles of open bidding. The number of items subject to the group negotiation now stands at 258 in total. However, under the revised law, this will be reduced by 20% a year in the following 3 years. The revision is expected to bolster the competitiveness of small- and medium-sized companies while reforming anti-competitive laws and regulations.
At the same time, the Commission is striving to eliminate anti-competitive elements from the existing laws and policies as well as newly adopted ones by voicing the need to correct anti-competitive acts, decrees, and notifications as well as authorization. During the last three years, the relevant ministries have filed 1,264 requests for consultation among which the Commission presented opinion in 403 cases and the opinion was reflected in 310 cases.
The Act explictly provides that when an administrative agency intends to enact or amend any acts or decrees which restrict or restrain competition, such as fixing price or terms of trade, restricting market entry or business activities, authorizing concerted conducts, it shall consult with the Commission in advance. Orders issued or measures taken as well as authorizations granted in accordance with relevant acts or decrees shall also be notified to the Commission.
In addition, when the head of the pertinent administrative agency makes or revises any rules or notification which contain particulars that restrain competition, he/she shall notify the Commission in advance.
Exemption 2 - Proper exercise of intellectual property rights
With respect to the execution of rights under the [Copyrights Act], [Patent Act], [Utility Model Act], [Design Act], and [Trademark Act], the FTA does not apply because it is believed that the protection of the intellectual property rights provides incentives for invention and ultimately contributes to promotion of competition. Competition policy and intellectual property rights protection share the same policy goal; increasing economic efficiency by promoting innovation, although they employ different policy means.
However, the execution of such rights must be justifiable; otherwise, acts that abuse rights or go beyond the scope of the law shall be subject to the Act.
The exempted activities with regard to patents, for example, include the right to exclude others from making, using, or selling the patented product or process, the right to give license to others to practice patent and the right to impose reasonable limitations on patent licensees.
However, the Commission's interpretation of this provision is that it is not broad enough to exempt all the unfair practices by the right-holders. The Commission does not exclude unreasonable licensing practices from application of the FTA. For instance, they include designating or limiting supplier of raw materials and imposing conditions of selling the patented product only through the designated distribution channel. Charging fees to non-licensed products in abuse of the market-dominant position shall not be exempted from application of the FTA.
Exemption 3 - Activities of cooperatives
The Act shall not apply to the acts of cooperatives whose objective is to provide mutual aid among small-sized enterprises or users. To be exempt from the application of the Act, a cooperative is in accordance with the following criteria: 1) it shall be established voluntarily and its members may join and withdraw from it freely; 2) each member shall possess equal voting rights; 3) if profits are distributed to members, the limits on distribution shall be provided for in the articles of incorporation.
However, this exemption does not apply when the cooperatives engage in unfair business practices or other unreasonably anti-competitive activities, thereby resulting in undue price increases of commodities.
Exemption 4 - Conducts authorized by the KFTC under the Act
The fourth and final type of exemptions provided by the Act is known as authorization. The Commission has the power to authorize a conduct or agreement between competitors which would otherwise be prohibited under the Act. The authorization may only be granted when the relevant conduct or arrangement results in a benefit to the public and when the benefit outweighs any anti-competitive effect.
Authorizations are specific to the particular parties engaging in identified conducts and determined on a case-by-case basis. The Commission is under the statutory obligation to make decisions regarding such matters as specific types of concerted activities, resale price maintenance arrangements and business combination.
Mergers subject to Section 7 of the Act are prohibited if their effects may substantially lessen competition or they constitute an unfair method of competition. Nevertheless, mergers have the potential to generate significant efficiencies by enhancing the merged firm's ability and incentive to compete, which may result in lower prices, improved quality, enhanced services or new products.
Previously, the Act had a proviso that provides for the exception of mergers and acquisitions aimed at achieving industrial rationality or strengthening international competitiveness. In such an event, the enterprises in questions shall bear the burden of proving the need to rationalize industry or strengthen international competitiveness. However, the provision in nature was recognized to be so ambiguous and the proof of the need by enterprises in question so burdensome that it fell into disuse.
The 7th amendment of the Act introduced ‘efficiency’ and so-called ‘the failing company’ as more clarified criteria for granting exceptions than ‘industrial rationalization’ or ‘strengthening international competitiveness’. It reflects developments in legal and economic thinking about mergers under the recognition that sound merger enforcement is an essential component of free market economy benefiting corporate competitiveness and facilitating the industrial restructuring.
Sound merger enforcement must prevent anti-competitive mergers, but avoid hindering pro-competitive mergers of large scale or competitively neutral mergers.
In the efficiency context, a merger shall be authorized when the efficiency that is likely to be generated with the proposed merger and unlikely to be accomplished in the absence of either the proposed merger or any other means outweighs the comparable anti-competitive effects.
Efficiency is difficult to verify and quantify in part because much of the information relating to efficiency is uniquely in the possession of the merging firms and efficiency projected may not be realized due to the rapidly changing environment. Therefore, the merging firms must substantiate efficiency claims so that the Commission can verify the likelihood and magnitude of asserted efficiency by reasonable means.
A merger is not likely to create or aggravate market dorminance or facilitate its exercise if the merged firm is non-viable and its assets is bound to exit from the relevant market. In such circumstances, post-merger performance in the relevant market may be no worse than market performance should the merger be blocked.
The revised proviso permits a merger if it is deemed competitively neutral and meets the following requirements: 1) the allegedly merged firm is under financial difficulties for a considerable period of time with its net worth far less than paid-in capital and would not be able to reorganize successfully; 2) the assets of the firm exit from the relevant market in the absence the merger; 3) it is unsuccessful to elicit reasonable alternative offers of aquisition of the assets that pose a less severe danger to competition than does the proposed merger.
The Commission released the revised M&A Review Guidelines on Apr. 15, 1999, to ensure objectivity and transparency in the review of mergers and acquisitions. The Commission tries to state its policy as simply and clearly as possible to reduce the uncertainty associated with enforcement of the Act.
Section 19 of the Act prohibits enterprises from engaging in concerted activities. Such acts as fixing price and terms of trade, controlling production and shipment volume, restricting facility investment, or establishing a joint corporation to manage major parts of businesses are regarded as the most damaging on the economy among all the different types of unfair practices. Thus, they are subject to the most severe punishment and even in the absence of clear agreements among corporations, when corporations are engaging in acts that substantially restrain competition, they are deemed to be engaging in undue concerted acts.
However, concerted acts which are carried out for the purpose of rationalizing industry, overcoming economic depression, achieving research and technology development, and strengthening the competitiveness of small- and medium-sized enterprises are exempt from regulations provided by the Act. The criteria for granting each conduct are set forth in the Presidential Decree. But, no conduct has been granted yet in actuality.
Resale Price Maintenance
The Commission prohibits producers and marketers of product from determining, in advance, the prices for every level of sales and forcing distributors to sell the products at such prices. The rationale is that such practices prevent free price competition among distributors and interfere in the formation of a fair market price.
However, the Commission authorizes resale price maintenance for products that meet the requirements in law or of copyrights and which are designated by the Commission. With the enactment of the 7th amendment Act, among all the publications specified in the [Copyrights Act], only printed commodities shall be authorized after consultation with the relevant government agencies.
Whenever the Commission designates a commodity as being qualified for resale price maintenance under the Act, a public announcement shall be made.
The FTA is a basic economic code aimed at establishing free and fair competition among enterprises and is administered by the Korea Fair Trade Commission, an independent ministerial-level central administrative agency. The Act applies to all business activities and all sectors of economy. Nevertheless, there are four broad categories of exemptions; three of which are statutory or anti-competitive in nature (conducts specifically authorized by legislation, execution of intellectual property rights and activities of cooperatives). The fourth category is a mechanism set force in the Act, which gives the Commission power to authorize specific anti-competitive conducts but only after an objective and transparent assessment that the public interest of the conduct outweighs the detriments.
The Commission is making utmost efforts to reduce the uncertainty and improve the predictability in enforcing exemption policy. The 7th amendment of the Act reflects the developments in legal and economic thinking about the competition policy. The application of the Act extends to all business activities and all sectors of economy while the scope and areas of exemptions (conducts authorized by legislation and resale price maintenance) are reduced in conformity with the international standards and norms. The Commission is also devoted to the deregulation of review process in order to further slash exemption cases. The M&A Review Guidelines are also revised to enhance transparency in reviewing mergers and to improve the predictability of investors both at home and abroad.
The Commission is doing and will do its best to reduce anti-competitive business practices, and to make sure its exeption policy be employed in effective and transparent manners and be consistent with international standards and norms.