Is the Korea Fair Trade Commission Abusing the Provision for Abuse of Superior Trading Position?: A Critical Analysis of the Act on Fair Intermediary Trade of Online Platforms

2.1 Delicacy and Complexity in Approaches to Online Platforms

The percentage of online transactions, compared to offline transactions, is steadily increasing in Korea.^[21] Online platforms provide various conveniences and benefits that the consumers have never experienced before: At minimum time and costs, with a simple click at an online shopping mall, consumers can compare diverse products of multiple brands. They are enjoying not only existing products or services with convenience, but also totally new services providing all kinds of information, or social networking services, etc. The areas or services these platforms can provide seem to be infinite, which excites consumers with the expectation of the next service to come.

However, large-scale online platforms in the ever-increasing digitalized economy possess influence exceeding that of large offline businesses. This presents a significant challenge to competition law authorities. What is first observable is that once a few platforms obtain a certain level of power in an online market, consumers who frequently visit these platforms are very easily locked-in. Hence, existing platforms can enjoy advantages such as extreme returns to scale, network externalities, access to data as a crucial input for many services, and again these advantages can be the basis for economies of scope. Very often, such advantages are crucial to function as barriers for new platform businesses to cope with incumbents in a short time.^[22] Furthermore, once a dominant position is established, the existing platform operators are strongly incentivized to commit anticompetitive behavior in order to expand its own businesses into neighboring markets.^[23]

As counter-measures against these challenges, even within the scope of competition law, we can consider diverse stances. At one extreme, ex ante break-ups of large platforms may be suggested. At the opposite extreme, advocates of maximum business freedom might argue that when entrepreneurs try an unknown business model, the government should not intervene until competition authorities can provide concrete proof of anticompetitive effects arising from the novel business activities. Between these two extremes, various opinions may exist. Additionally, there may be voices urging the need for direct government regulation rather than relying solely on competition law.

The starting point for finding solutions to these complex issues with differing opinions is to recognize that each platform may have its own unique characteristics. Hence, empirical studies for each platform’s characteristics should be cumulated first, and then institutional adjustment should reflect the results. Although large online platforms appear to rarely exit from the business, whether this impairs efficiency of the society has not been substantiated.^[24] While emphasizing the diverse nature of online platforms and the consequent need for a fact-specific approach to intervention, Hovenkamp argues that a few platforms consistently dominating a market should not indicate the existence of a natural monopoly, thereby justifying the introduction of regulation instead of competition law. It is because even in those instances there is room for competition.^[25] He views that as long as there is room for competition, competition law which takes actions tailored for a specific market situation after going through a fact intensive examination, is preferable to regulations which impose standardized criteria.^[26]

Since the evaluation of business activities surrounding online platforms involves various possibilities, it is necessary to take each step in institutional approaches to online platforms only when supported by empirical grounds, considering long-term implications. It would be wrong if we introduce strict regulations without empirical basis by catering to a populist view, as it would be easy to fall into such a trap. Furthermore, if the regulation comes into place under the pretext of competition law enforcement, rather than regulation, there will be even more serious harm. The reason is as follows: When we select institutional mechanisms for resource allocation between market and government, we compare the respective costs of market failure and government failure. If a country principally bases its economy on a market system, only in exceptional cases when market failure is greater than government failure, government intervention in the economic activity would be justified. Even in those cases, a precautionary monitoring mechanism would be put into practice in order to constrain the intervention to the least necessary degree and during the shortest period. Hence, for example, when a market situation changes over time, whether the balance between the government failure and market failure changes would be keenly watched. On the contrary, the enforcement of competition law, though it is also a kind of government action intervening in the operation of the market, is less likely to entail vigilance against over-intrusion by government. It is because competition law enforcement is considered to work to restore market function, rather than intervening in the market for the sake of intervention itself. Also, the way competition law cases are handled makes people feel reassured that the government overstepping its power is kept in check, as in every case fact-intensive analysis to examine whether anticompetitiveness exists or not is required.

The ASTP enforcement under the MRFTA in Korea has the leeway to incur aforementioned harm. Despite that the ASTP is not purely geared toward competition protection as we will see later,^[27] it has been enforced under the pretext of competition law enforcement. We will discuss this more in detail in Section 3.2.^[28]

2.2 Overview of the KFTC’s Reform Plan to Encounter Digitalization

Encountering the challenges of the digitalized economy, on June 25, 2020 the KFTC under Moon administration announced its reform plans aiming to incorporate the characteristics of digital markets in the enforcement of competition laws.^[29]

The first item of reform is implementing the KFTC ‘Guidelines for the Examination of Single Firm Conduct by Platform Operators,’ which will integrate the rules for both the abuse of dominant position (Article 5 of MRFTA) and unfair trade practices (Article 45 of MRFTA), to reflect the characteristics of online platforms. The second item is implementing the KFTC ‘Guidelines for the Examination of UTP by Online Shopping Mall Operators’ under the umbrella of the Act on Fair Transactions with Large Distributors. The Guidelines have already been implemented.^[30] The guidelines aim to regulate online retailers meeting the criteria stipulated by the Act (either total sales exceeding KRW 100 billion or sales space exceeding 3,000 m²).^[31] The third item is driving for the legislation of the AFITOP, applicable to online platform operators providing intermediary services. The fourth item is pursuing a M&A policy reflecting the characteristics of newly emerging industries. The fifth item is pushing for the amendment of the Act on Consumer Protection in E-Commerce Transactions to enlarge consumer protection.

Overall, UTP (including ASTP) occupied a substantially high level of significance in the above reform agenda. Most of all, the KFTC itself put forth the legislation of the AFITOP, the third item above, as the main item of the entire reform agenda,^[32] and the draft AFITOP proposed by the KFTC includes the ASTP provision as a key component.^[33] Also, the Act on Fair Transactions with Large Distributors, under which the second reform item is implemented, is a special law derived from ASTP under the MRFTA.^[34] As for the first reform item, after the change in regime to the Yoon administration, on January 12, 2023 the KFTC under the leadership of the newly appointed Chairperson Han Ki-Jeong issued the ‘Guidelines for the Examination of the Abuse of Market-Dominant Position of Online Platforms,’^[35] retreating from its original plan of combined guidelines.^[36] Still, the new guidelines emphasized in Article I, § 2(3) that regardless of its enactment, single firm conduct by online platforms would be subject to UTP.^[37]

As of late June 2024, regarding the treatment of online platforms, the KFTC policy under the Yoon administration appears to have not yet established a consistent principle in finding a balance between market principles and government intervention. While the Chairperson Han Ki-Jeong has consistently advocated for self-regulation concerning the AFITOP, which aims to address unfair trade practices, he has also indicated the possibility of introducing outright ex ante regulation to prevent abuse of monopolistic or oligopolistic power by online platforms.^[38] Even though the legislation may not easily be achieved due to resistance from businesses and academia, who are concerned about hindrances to innovation in online platforms,^[39] it shows the potential for the KFTC policy fluctuations regarding online platforms in relation to private autonomy and government intervention.^[40]

2.3 Contents of the Act on Fair Intermediary Trade of Online Platforms

Below, we will explore the contents of the law, focusing on the subject entities and their obligations as specified in the KFTC’s draft.^[41] The main contents of the Act are summarized in Table 1.

The AFITOP was suggested for realizing fairness in trade for intermediary services by the online platform operators to the business users of the platform.^[42] ‘Online platform intermediary service’ under this law means online platform operators’ service intermediating the commencement of trade between business users of online platform and consumers. It includes the services of connecting consumers and business users, receiving applications for the purchase of commodities or services, and their entailed services such as advertising, payment, delivery support, or customer management.^[43] Meanwhile, as long as the business users are domestic enterprises, and the trade occurs with domestic consumers, the KFTC draft does not exclude the application to foreign online platform operators.^[44]

The subjects of the Act are online platform operators, designated by the Presidential Decree, who meet specific criteria related to business type and size. These operators must provide intermediary services to business users, and have achieved either at least KRW 10 billion in total service fees from domestic business users, or KRW 100 billion in total sales of goods or services to domestic consumers, through the intermediary services provided to domestic business users, in the previous business year.^[45]

Once designated as a regulated entity under the Act, the online platform operator will be subject to several obligations as outlined in Table 1. The first category of obligations aims to ensure transparency in intermediary service contracts. These include issuing written contracts with mandatory items to business users,^{[46] [47]} providing advance notice of contract termination or modification,^[48] and retaining documents related to intermediary transactions for five years.^[49] While these obligations increase trade transparency, there may be debates about whether they impose excessive burdens on platform operators. Similar legislation exists in the EU and Japan for the same purpose of transparency, although the specifics may vary.^[50] The second category involves the obligation not to commit ASTP.^[51] This is unique to Korea, having a separate provision for directly banning ASTP for online platform operators. In the case of Japan, although the Antimonopoly Law has ASTP provision, the Act on Improving Transparency and Fairness of Specified Digital Platforms does not include ASTP. Additionally, to ensure the law’s effectiveness, the platform operators are prohibited from retaliating against business users for behaviors such as applying for mediation, reporting violations to the KFTC, or cooperating with KFTC investigations.^[52] Also, for violations of the platform operators’ obligations relating to the issuance of written contracts, the ban on ASTP, and the prohibition of retaliation, administrative sanctions such as corrective measures (e.g., corrective orders, orders to publicize the fact of being sanctioned by the KFTC, etc.), and/or administrative fines may be imposed.^[53]

This paper aims to critically analyze the second category of obligations mentioned above. The types of ASTP outlined in Article 9(1) of the draft AFITOP include coercion to purchase, coercion to provide economic benefits, passing on damages arising from transactions, setting or changing trade terms to the disadvantage of business users, or inflicting disadvantage during implementation, and interfering with business activities. Although slightly modified, these largely repeat the types outlined in the Presidential Decree for the enforcement of the ASTP under the MRFTA.^[54]

As pointed out in Section 2.1, tackling conduct related to online platforms through competition law or other regulations should be done cautiously and only with empirical grounds. However, without clearly providing such grounds, the reform plan announced by the KFTC in 2020 is centered around UTP, an ambiguous provision under the MRFTA. Furthermore, the legislation of the AFITOP, the most conspicuous item in the agenda, is to expand the KFTC’s interference with the business activities through the vehicle of ASTP.^[55]

Even prior to the AFITOP, four special laws derived from the ASTP provision of the MRFTA Article 45(1)(vi) have been implemented by the KFTC. Those are, the Fair Subcontract Transactions Act (enacted in 1984), the Fair Franchise Transactions Act (enacted in 2002), the Act on Fair Transactions with Large Distributors (enacted in 2011), and the Fair Agency Transactions Act (enacted in 2015). While the KFTC’s law enforcement covers the MRFTA, the four laws above as special laws of the MRFTA, and consumer protection related laws, the portion for the ASTP related enforcement (either under the MRFTA itself, or regarding the special laws) occupies around half of the all cases processed by the KFTC.^[56] If the AFITOP is added to the special laws for ASTP, the KFTC’s lean on ASTP related enforcement will become even more significant.

Therefore, it is necessary to examine whether the KFTC’s inclination to use the ASTP is appropriate, as the government authority charged with enforcing the MRFTA, which is primarily recognized as competition law, and whether the expansion of the ASTP to laws for the digital economy is justified. In order to answer these questions, Section 3 of this paper will analyze the goals of the MRFTA and core aspects of the ASTP.

3.1 The Goal of the MRFTA in Its Entirety

The primary and dominantly accepted goal of competition law is achieving efficiency through the protection of competition.^[57] However, other values such as protection of small-sized firms, or protection of liberty through the equal distribution of economic power, etc. can be considered possible goals of competition law.^[58] Here, depending on the jurisdiction, whether competition law acknowledges goals other than efficiency, and if so, the significance these goals occupy in relation to efficiency will vary. For example, in the U.S. with respect to the legislative goal of the Sherman Act, the representative competition law in the U.S., there is a diversion of opinions: Some find the goal purely in allocative efficiency, whereas others try to find the goal in justice or fairness, or punishing wealth transfer from consumers, or the protection of interest groups such as small firms.^[59] Taking another example from the EU, integration into a single market should be added as an important goal that the competition law should pursue.^[60]

Then, what is the goal of the MRFTA, Korea’s competition law? Article 1 of the MRFTA states, “The goal of this Act is to promote fair and free competition by prohibiting the abuse of a market-dominant position and excessive concentrations of economic power, and regulating cartel and unfair trade practices, thereby facilitating creative business activities, protecting consumers, and aiming to secure the balanced development of the national economy.” According to this provision, it is hard to say that the goal of the MRFTA is limited to the protection of competition or to increase efficiency. The provision implies achieving other goals as well, such as prevention of economic power concentration or protection of small enterprises.^[61]

However, since Article 1 features such diverse values, such as the promotion of fair and free competition, the facilitation of creative business activities, protection of consumers, and the balanced development of national economy, upon facing conflicts between different values at the enforcement stage, it does not give any guidance as to which value should take priority. This leaves many unanswered questions: Can the concern over protection of competitors override protection of competition? In the goal of consumer protection, does ‘consumers’ here mean ‘consumers in a specific relevant market,’ or ‘consumers in general (i.e., general public)’? Is ‘fair competition’ distinguished from free competition, or competition for efficiency, and if so, can the latter sometimes be sacrificed for the sake of fair competition? Is ‘fair trade’ different from fair competition?

Therefore, for the formation of consistent economic order, it is necessary to clarify the economic implication of each of the values illustrated in Article 1, and further to systematize the various goals with differentiated priorities. Without accomplishing these tasks first, competition law enforcement may lose its direction, reflecting minor goals with exaggerated significance moved by political needs of the times. If that happens, the whole economic system will totter.

Below, this paper will try to find out the goal of highest priority of the MRFTA. This task will be conducted by examining legislative background and history, and the standards of illegality for main types of conduct prohibited by the MRFTA.

3.2 The Analysis of the ASTP

4.1 Effect on Online Platform Operators’ Incentive to Innovate

As indicated previously, it is hard to precisely predict whether a certain conduct will be deemed ASTP or not ex ante since the concept of impeding fair trade is vague, and the legal outcome is dependent on the consideration of various circumstantial factors. In such a situation, enterprises who are trying to avoid legal risks tend to take a conservative approach for each relevant factor in determining illegality.^[94] A conservative approach here means following common business practices or adopting the methods used by the majority of firms in the same market. Among the factors to be considered for each firm, some factors, such as the market situation, market status, business capacity, and characteristics of the goods or services traded, are fixed. In contrast, the intent, effect, and specific form of conduct by the business are within the firm’s control. For these latter factors, taking a conservative approach would minimize the legal risks involving ASTP.

This is because the Supreme Court used the standard of whether deviation from normal business practices occurred as a conduit in reaching the conclusion that there was a danger of impeding fair trade.^[95] For the normal business practices standard, the meaning of ‘normal,’ translated from ‘jeongsangjeokin’ in Korean, has a normative nuance of the way it should be in Korean and therefore does not necessarily correspond to following the method used by the majority. Nonetheless, without special circumstances it tends to coincide with what is prevalent among participants in the same business. Also in a specific case, which way of business will be deemed normal business practices becomes clear only ex post after the KFTC’s or the courts’ comprehensive consideration of circumstantial factors.^[96] Therefore, enterprises trying to minimize legal risks would consider it to be strategically wise to follow the practice that majority of the participants in the same line of business adopts. Especially, those enterprises whose typical counterparty in trade is smaller than themselves in terms of business capacity would have a stronger incentive than they otherwise would have to follow the methods employed by the majority so that the intent, mode, or effect of their business activities are considered normal, leaving little possibility of triggering the ASTP provision.^[97]

It is easy to find out the KFTC decisions or court rulings where deviation from normal business practices is acknowledged on the ground of adopting trade terms different from what the majority of similar businesses use. For example, in the Qualcomm case,^[98] where Qualcomm operated its businesses in the markets of licensing SEPs (Standard Essential Patents) as well as of manufacturing modem chipsets, various forms of trade implemented by Qualcomm in relation to handset manufacturers and modem chipset manufacturers, based on its unique business model, were challenged as potential violations of certain provisions of the MRFTA including the ASTP provision. The ASTP charge was against the practice that Qualcomm, upon selling modem chipsets to handset manufacturers, required handset manufacturers to conclude a licensing agreement for Qualcomm’s SEPs as a prerequisite, or inserted the clause in a chipset supply contract to the handset manufacturer that enables Qualcomm to suspend the supply of chipsets in the event of a breach of the licensing agreement for SEPs. The KFTC concluded this practice was ASTP, based on the grounds that this conflicts with normal business practices. The critical reasoning supporting that judgment was that no competitors in the same modem chipset manufacturing business took the same trade terms or form.^[99]

Online platform operators subject to the AFITOP are those with large business capacity, either in terms of their service fees or the sales generated by business users on their platforms.^[100] Additionally, these operators typically transact with multiple business users, including those with smaller business capacity. When these online platform operators try a new business model with an innovative idea in the intermediary service market, very often the new model will entail the need for rearranging trade terms with business users, different from what has been prevalent in the market. Further, the rearranged terms may include terms appearing unfavorable to business users, thereby triggering ASTP provision of the AFITOP.^[101] In such a situation, the concerned online platform operator should anticipate that, in case of a legal challenge against its practice, it will have to undertake the de facto burden of proof that the practice does not constitute ASTP.

Of course, as a matter of law, whether the practice constitutes ASTP should be judged by reviewing the overall terms, not just partial terms. Therefore, the online platform operator could demonstrate that other terms are favorable to business users, offsetting any negative effects, and that overall the new business model has a reasonable basis for benefiting consumers. However, in the operation of the ASTP provision, it is not a simple matter. The online platform operator should prove to legal authorities that the novel business model is workable and that business users would not be disadvantaged overall, even if certain terms may appear unfavorable in the operation of the model. This is not a simple task at all. Furthermore, the legal outcome is hard to precisely predict because the legal authorities will decide based on various circumstantial factors ex post. Therefore, in order for an online platform operator to attempt a new business model, taking a certain level of legal risk is unavoidable.

If the online platform operator is judged by the KFTC to have committed ASTP, the operator faces corrective measures (e.g., corrective orders, orders to publicize the fact of being sanctioned by the KFTC, etc.) and/or administrative fines.^[102] Additionally, there is a possibility of being liable for an enormous amount in damage compensation under civil law. In sum, there will be a risk of not only a huge monetary loss but also substantial damage to the firm’s reputation.

In this situation, the subject entities of the AFITOP would be pressured or incentivized to follow the practices adopted by the majority of similar businesses to minimize legal risks related to the ASTP prohibition. Such pressure or incentives, if realized, will generate the side effect of discouraging entrepreneurship from experimenting with new business models involving new types of transactions or trade terms.

4.2 Effect on Efficiency in the Allocation of Law Enforcement Resources

As Section 3.1 suggests, the primary goal of the MRFTA is increasing efficiency, and the protection of small businesses is only a secondary concern. However, law enforcement history shows a situation of putting the cart before the horse, since enforcement is heavily tilted towards UTP including ASTP.

Also, if the AFITOP is legislated, for single firm conduct by online platform operators, the KFTC is very likely to rely on the AFITOP’s ASTP provision instead of applying the abuse of market-dominant position under the MRFTA, due to the difficulties involved in defining the relevant market, proving a market-dominant position, etc.^[103] This implies that the KFTC’s inclination to use ASTP will become more pronounced.

This will result in inefficiency in the allocation of law enforcement resources because allocating substantial resources to the provisions most relevant to pursuing the law’s primary goal while putting a smaller amount resources towards secondary goals would be most efficient.