By Hoil Yoon, Yoong-Neung Kee, and Myong Hyon Ryu

1. Past Achievements of Competition Policy in Korea

In 1981, South Korea adopted a competition policy by enacting the Monopoly Regulation and Fair Trade Act (the "MRFTA"). The MRFTA, which was adopted to assist Korea’s economy in transforming from a government-led economy to a competitive market economy, has since been amended many times.

During the last 20 years, the competition policy has made a substantial contribution to promoting competition, thereby enhancing economic efficiency and consumer welfare. The Korean Fair Trade Commission (the "FTC") has substantially reduced anticompetitive regulations and strengthened its enforcement efforts against hard core cartels and other anticompetitive conduct. Further, since the recent Asian financial crisis, the FTC has played a significant role in restructuring Korean conglomerates.

As is true for any other areas, however, it has not been easy to drastically reform the structure of the Korean economy, which had been plagued by anticompetitive tradition, regulations, and practices. In addition, because the Korean government believed that problems related to conglomerates (i.e., Chaebol) originated from the concentration of economic power, the MRFTA placed emphasis on prohibiting conglomerates from becoming bigger rather than prohibiting or preventing monopoly or monopolization. Further, the MRFTA prohibited unfair trade acts or practices rather than anticompetitive acts. Moreover, the competition authorities have used much of their energy and resources in dealing with conglomerate-related policies and regulating abuse of superior power or position in individual transactions. As a result, the Korean competition policy did not have musch direct connection with the promotion of competition, and the government’s enforcement efforts turned out to be inadequate.

2. New Environment

The last 10 years have witnessed revolutionary changes in every aspect of our life. On the international level, as the Cold War ended with the collapse of socialism and the triumph of capitalism, the world has become information-oriented and globalized rapidly, while in Korea, democratization progressed dramatically on the basis of economic development.

Due to such changes, both international and domestic, the role of government has conspicuously shrunk and the importance of market has greatly increased in every facet of our life. Accordingly, having an effectively-functioning competition system has become extremely important for national competitiveness.

In the Korean economy, with the increase of the role of market, the relationship between the government and companies is undergoing profound changes. Besides, during the restructuring process after the financial crisis, Korea’s business environment and industrial structure changed, and through the restructuring of the financial and corporate sectors, the financial system and the financial supervisory system have improved significantly. In view of these changes, it appears necessary that the Korean government separate its conglomerate policy from the competition policy and the competition authorities focus on their inherent role of promoting competition, rather than implementing industrial, political or social policies, such as the conglomerate policy or the concept of fairness in transactions. Also, the information-oriented and globalized world calls for the globalization of the competition policy.

3. Competition-oriented Approach

It would be necessary to change the title of the MRFTA to "Competition Act," "Competition Promotion Act," or the like, to exclude the regulation of the concentration of economic power from the purposes of the law, and to focus on the promotion of competition, traditionally the main purpose of competition law.

a. Transfer of Rules on Conglomerate Policy to Securities Regulations

Although the provisions of the MRFTA regulating conglomerates have recently been relaxed to a great extent, conglomerate-regulating rules still remain in many provisions of the MRFTA in regard to, among others, the establishment and conduct of a holding company (Articles 8, 8-2 and 8-3), restrictions on capital contributions (Articles 9, 10 and 11), limitations on payment guarantees for affiliates (Article 10-2), and disclosure of large-scale intercompany transactions (Article 11-2). From the standpoint of the structure of the laws, it would be desirable to transfer such provisions, to the extent they must be maintained, to the Korean Commercial Code (the "KCC") or the Korean Securities and Exchange Act (the "KSEA"), (particularly, to Chapter 9 of the KSEA regarding the supervision of listed corporations and the following chapters of the KSEA). In substance, the above MRFTA provisions are dealing with corporate transparency, management responsibility, and corporate governance, and, thus, are indistinguishable in nature from related provisions of the KCC and the KSEA. Also, it appears doubtful whether all of the above MRFTA provisions need to be maintained; perhaps it may be sufficient to include in the KSEA only essential rules, such as limitations on payment guarantees for affiliates and strengthened disclosure requirements. Like other provisions of the KSEA, those provisions could be enforced by regular enforcement agencies, such as the prosecution and financial supervisory authorities. In order to enhance the effectiveness of enforcement, however, it would be advisable to permit class-action lawsuits for violations.

Article 23(1), Subparagraph 7 of the MRFTA prohibits so called "unfairly assisting acts," as one type of unfair trade practice. In effect, however, that provision has been perceived and used as one related to conglomerate policy, and once an act was viewed as an "assisting act," it was almost invariably deemed to be an unfair trade practice, irrespective of whether such act has any anticompetitive effect. Although it is true that prohibiting unfair intercompany transactions helped restructure companies after the financial crisis in Korea, such prohibition should be made part of the provisions of the KCC and the KSEA that provide for corporate transparency and management responsibility; there would be no reason to treat it differently from other conglomerate-related provisions of the KCC and the KSEA. Unfair intercompany transactions are already prohibited under tax laws (e.g., Article 52 of the Corporate Tax Act). Once the provisions regarding unfair intercompany transactions are included in the KSEA, they should be enforced by regular law enforcement authorities, such as financial, tax and prosecutorial authorities, and, if adopted, through class action lawsuits brought by shareholders or the like.

b. Shifting of Focus from Fairness of Trade to Promotion of Competition

Article 23 of the MRFTA prohibits an "act which might restrain fair trade" as an unfair trade practice. This provision was modeled after Section 5 of the U.S. Fair Trade Commission Act prohibiting unfair methods of competition and unfair or deceptive acts or practices.

Since, however, the MRFTA uses the concept of fairness of trade, which could be broadly interpreted and is too ambiguous to be applied to specific cases, even acts that have little competition-restraining effect were often prohibited as violating the MRFTA provision, with the result of protecting inefficient businesses at the expense of economic efficiency and consumer welfare. In fact, 52% of all the cases addressed by the FTC in 2000, which comprised the largest portion of FTC cases in that year, were related to unfair trade practices. This indicates that the FTC used a major portion of its resources in 2000 in handling those unfair trade cases, together with 41 other cases related to conglomerate policy, such as unfair intercompany transactions. Consequently, it appears that enforcement in cartel, monopoly/oligopoly, and merger cases, which have greater impact on the competition system in the market, has turned out to be inadequate. Accordingly, the language of Article 23 of the MRFTA, "act which might restrain fair trade," should be changed to "act which might restrain competition" and, in enforcing the law, the FTC should focus on enhancing economic efficiency and consumer welfare through promoting competition rather than promoting fairness of trade.

c. Stricter Merger Review and Prohibition of Monopolization

Bankruptcies and business combinations during the restructuring process after the recent financial crisis have significantly strengthened monopoly and weakened competition in many areas. While Article 3-2 of the MRFTA prohibits abuse of a market-dominating position, the MRFTA does not prohibit monopolization itself. It appears advisable, however, that Korea also consider prohibiting monopolization and attempted monopolization, as in Section 2 of the U.S. Sherman Act.

Article 7 of the MRFTA prohibits a business combination which might restrain competition, but authorizes the FTC to approve even an anticompetitive merger if the benefits of increase in efficiency, which would not be otherwise attainable, outweigh the anticompetitive harms or if a merger of an insolvent corporation meets certain requirements under the MRFTA. Since, however, economic harms resulting from monopolization are difficult to subsequently rectify, the FTC should closely and strictly scrutinize any application for an exception.

d. Enhancement of Role to Advocate Competition

Article 58 of the MRFTA stipulates that MRFTA provisions shall not apply to "justifiable acts that are conducted in accordance with other laws or regulations." Since, however, despite significant reduction in government regulation, numerous anticompetitive acts or practices still remain in the form of governmental regulations or administrative guidance, the FTC should apply the Article 58 exception narrowly.

Article 63 of the MRFTA provides that if a government authority intends to enact or amend a law or regulation so as to restrain competition or to take anticompetitive action, it must consult with the FTC in advance. Pursuant to Article 63, the FTC has taken the lead in eliminating and correcting anticompetitive laws and practices. For example, by enacting the Comprehensive Cartels Rearrangement Act, the FTC abolished 20 cartels permitted under 18 different laws. However, in the transition from a government-led economy to a market-oriented economy, a number of competition-restraining laws and regulations (e.g., the "education standardization system" and restrictions on medical fees) still remain not only in the public sector but also in the private sector. The elimination of such competition-restraining laws and regulations is as important as the prohibition of private anticompetitive acts, and is one of the most important responsibilities of the FTC.

4. Strengthening of Antitrust Enforcement

a. Concentration of Resources on Promotion of Competition

As noted above, the FTC should devote most of its available resources to cartels, monopoly/oligopoly, mergers/acquisitions, and anticompetitive acts, which have serious impact on competition, instead of conglomerate policy or unfair trade practices. Even among those relatively important issues, priority should be given to more important cases in terms of implications on consumer welfare and economic efficiency.

Further, because cartels are still prevalent despite its sincere enforcement efforts, the FTC should intensify its enforcement on cartels by, for example, actively utilizing the recently adopted leniency policy for a person or corporation that reports, or cooperates in investigation of, a violation (Article 22-2 of the MRFTA). In order to ensure fairness and transparency in the FTC’s investigation and decision making, however, it would be necessary to institutionalize details of the procedures in using the leniency policy.

b. Increase of Economic Analysis and Legal Expertise

Due to its heavy workload, the FTC has not been able to conduct sufficient economic analysis for cases. However, in its investigation and decision, the FTC should put in adequate efforts to examine and demonstrate effect on competition that an act has in the relevant market. For that purpose, as soon as practicable, the FTC should improve its capability to carry out economic analysis.

Conducting investigations and rendering decisions are part of law enforcement process, and lawful and reasonable enforcement requires legal specialty. As the FTC’s enforcement has become stricter, the number of corporations which receive legal advice from experienced law firms and actively pursue appeals in court has surged in recent years. In response, the Seoul High Court established 2 chambers that specialize in antitrust cases. This should boost predictability and reliability of judicial review. Similarly, the FTC should recruit much more legal experts to strengthen its capability to handle cases.

c. Facilitation of Civil Antitrust Suits

Article 56 of the MRFTA provides for awarding damages to a person who suffered from a violation of the MRFTA, even if the violation was not intentional or negligent, while Article 57 of the MRFTA permits seeking damages in court only after a corrective decision of the FTC has become final. Of course, even without an FTC decision, an injured person may seek damages by bringing a lawsuit in tort under Article 750 of the Korean Civil Code. However, under that article, the injured person would need to prove the violator’s intention or negligence. In order to enhance the effectiveness of enforcement, it would be necessary to facilitate civil antitrust lawsuits by repealing Article 57 of the MRFTA. Also, if class-action lawsuits (which are being considered by the National Assembly for introduction only for securities-related cases) become available to antitrust cases, it would significantly improve private enforcement.

d. Elimination of Exclusive Authority to File Criminal Complaint

Although the MRFTA provides for a criminal penalty for a violation of the MRFTA, Article 71 of the MRFTA provides for criminal prosecution only in case the FTC files a criminal complaint with the prosecution. Under the MRFTA, the FTC shall file a criminal complaint with the prosecution if it determines that a violation of the MRFTA is objectively so obvious and serious as to greatly restrain competition. If the exclusive authority of the FTC is eliminated, it would provide the prosecution with enforcement power exercisable without regard to any FTC action, thereby substantially raising deterrence against anticompetitive acts.

e. Cautious Enforcement in New Economy

In the new economy, as Judge Posner recently noted, fact finding is unusually difficult due to the technical complexity of the products and services involved. The ascertainment and measurement of monopoly or market power is also difficult due to the combination of intellectual property, network externalities, and rapid growth in consumer demand. On the other hand, the enforcement authorities are not adequately equipped to deal with cases in this area. In light of this mismatch between the conditions of the new economy and the institutional structure of antitrust enforcement, and in view of the uncertainty concerning the effect of governmental intervention, for the time being while Korea obtains more experience, caution would be advisable for antitrust enforcement in the new economy.

5. Enhancement of Independence of the FTC

Article 35 of the MRFTA provides that the FTC should perform its duties "independently," and in order to secure independence and fairness of the FTC, Article 37 of the MRFTA provides that the FTC shall consist of 9 commissioners (1 chairman, 1 vice chairman, 3 standing commissioners and 4 non-standing commissioners) who may act only by a majority vote. However, in order to further enhance the independence and fairness of the FTC, it would be necessary to change the method of appointing the commissioners. Currently, President of Korea is authorized to appoint commissioners. But a more desirable method would be, as in the U.S and Japan, requiring President’s nomination to be confirmed by the National Assembly. In addition, it would be desirable to elevate the status of standing and non-standing commissioners to the level of vice minister. Currently, standing and non-standing commissioners are recognized as first-degree civil servants, while the chairman is on the same level as a minister and the vice chairman a vice minister. Further, if a dissenting commissioner were to write his/her dissenting opinion, it may encourage commissioners to freely exchange their views and may also improve the quality of their decisions.

6. Globalization of Competition Policy

As the world is becoming increasingly globalized and information-oriented, competition within each country increases. At the same time, the need for the establishment of international rules and for the strengthening of capability for international enforcement, as well as the need for international cooperation, also increases. In light of the increasing trend of extraterritorial application of competition laws, Korea also would be well-advised to apply its competition laws extraterritorially and strengthen the capability of the FTC to handle international cases. Additionally, the government should make more efforts to enter into cooperation agreements with major trading partners so as to bolster mutual cooperation and coordination in enforcement. Finally, the government should actively participate in international discussion of competition policy at, for example, the WTO and the Global Competition Initiative.

7. Conclusion

Now is the time for the FTC to focus its available resources on dealing with such matters as cartels, monopoly and mergers/acquisitions, which have greater impact on the competition system, rather than conglomerate policy or fairness in trade. Also, the FTC should exert substantially more efforts to advocate competition in reforming anticompetitive laws and regulations as well as administrative guidance. In antitrust enforcement, in order to promote competition, the FTC should strengthen its capability for economic analysis, recruit more legal experts, and facilitate civil lawsuits and cooperation with the prosecution.

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