Regulatory overlap, turf wars plague enforcement landscape in South Korea

10 Apr 2020 12:00 am

Regulatory overlap and turf wars have emerged as a subject of debate in South Korea, triggered in part by a request in February by the Ministry of SMEs and Startups to the Korea Fair Trade Commission to refer McDonald’s Korea and four local companies to prosecutors for alleged violations of the subcontracting and franchise law. The case is part of a wider pattern of regulators stepping on each other's toes and leaving businesses with a host of uncertainties.

The KFTC had already sanctioned the companies but decided referral was not necessary at the time. However, the request obliges it to retract its previous decisions and send the case to prosecutors. Under the mandatory referral system launched in 2014, the SMEs Ministry can request the KFTC to send cases to prosecutors to initiate criminal investigations.

Now, under new leadership, the SMEs Ministry is seeking more aggressively to get a firmer grip on companies and their business activities that it deems unfair. A bill that would enable the ministry to investigate and impose penalties on unfair behavior passed a subcommittee of the National Assembly and was submitted for a final review last year.

The SMEs Ministry’s attempt to enhance its power highlights growing concerns about regulatory enforcement overlaps in South Korea. Companies, especially tech firms, are likely to face challenges from multiple regulators across different sectors as enforcers more closely scrutinize their activities. Confusion and uncertainty has resulted from these turf wars among regulatory agencies.

— KFTC vs. KCC —

Notably, global tech giants such as Google and Netflix have found themselves simultaneously in the crosshairs of both the KFTC and the Korea Communications Commission, South Korea' privacy and telecoms regulator.

Over the years, the two agencies have seen overlaps in their oversight of “unfair trade practices” in areas such as telecommunications, media and more recently the Internet.

This was a persistent problem in the telecommunications sector and led the two agencies to sign a memorandum of understanding to coordinate their regulatory activities in 2008.

However, redundant regulatory activities continue to resurface. That duplication results from similar responsibilities bestowed upon the two regulators by different laws without a clear division, such as the Regulation of Terms and Conditions Act and the Consumer Protection in Electronic Commerce Act, overseen by the KFTC, and the Telecommunications Business Act overseen by the KCC.

The KFTC, for instance, last year looked into Netflix, Google, Facebook and other local Internet companies such as Naver and Kakao for alleged violation of the terms and conditions act and successfully had them heed its demands.

The regulator is also reportedly looking into Google and its media service YouTube, as well as Netflix and their local over-the-top media-services rivals for alleged failure to give a notice to customers for expected subscription payment when a free-trial period ends and whether the suspected behavior violates the electronic commerce act.

This latest case brought against OTT-service providers resembles a recent action against Google by the KCC.

In January, the KCC sanctioned Google after determining that its YouTube Premium Service and its terms of service restricted the rights of South Korean customers. The sanctions were based on the telecommunications business act, which stipulates businesses give prompt notice to customers for refund policies and their right to cancel services.

The duplication stems from the lack of clarity on which law takes precedence over others. For instance, Certain overlaps exist between the Act on Labeling and Advertising of Foods, overseen by the Ministry of Food and Drug Safety, and the Act on Fair Labeling and Advertising, enforced by the KFTC. However, Article 3 of the former clearly states that the law “prevail[s] over other statutes with respect to the labeling and advertising of food, etc.” Such clarification is necessary to reduce overlaps between the KFTC and KCC, experts say.

— SMEs Ministry weighs in —

It isn’t just Internet companies feeling the regulatory heat from multiple angles.

Large companies that have allegedly stolen technologies from small- and medium-sized enterprises, or SMEs, are also facing tougher scrutiny.

The KFTC has the authority to oversee such a case in accordance with the Subcontracting Act. Its latest such case was against South Korean conglomerate Hanwha for using technologies for solar-cell screen printers developed by a small subcontractor without proper consent.

The SMEs Ministry, however, can also regulate such behavior through the Act on Support for Protection of Technologies of Small and Medium Enterprises. Revisions to the law in 2018 allow SMEs to file complaints to the ministry, which can open a probe and even conduct on-site searches.

While the ministry cannot impose coercive sanctions for now, it can issue “corrective recommendations” and publish its findings, which could lead to formal probes by entities with administrative and criminal authority such as the KFTC, the police or prosecutors.

The SMEs Ministry's more active approach is in line with the policy direction of the Moon Jae-in administration to create a “fair economy.” The administration has vowed to level the playing field between large, family-run conglomerates, or chaebols, and SMEs.

The ministry has been especially aggressive in using its enforcement options under minister Park Young-sun. Appointed in April last year, Park is trying to place the ministry at the frontline of the regulatory struggle against unfair and anticompetitive conduct by large companies. Under her leadership, the ministry is trying to use the mandatory referral system on quarterly basis.

— Prosecutors expand their turf —

When it comes to more traditional antitrust issues such as cartels, the apparent attempt by South Korean prosecutors to expand their turf is the source of regulatory uncertainties.

Proposed reforms to the country’s antitrust law include a plan to end the exclusive right of the KFTC to send antitrust cases to prosecutors. While the bill is unlikely to pass, prosecutors continue their efforts to increase their sway, especially with the appointment of new prosecutor-general Yoon Seok-yeol.

Most recently, the case of abuse of dominance by South Korean vaccine maker Korea Vaccine, sent to prosecutors by the KFTC in May, was expanded into a cartel investigation and has led to the arrest of executives of several South Korean and global pharmaceutical firms including French pharma giant Sanofi. The case is a clear indication that one could expect tougher and expanded probes when their cases are sent for prosecution.

The prosecutors’ office has recently distributed criminal-antitrust guidelines for prosecutors conducting antitrust probes, which are meant to clarify criminal-antitrust procedures. But there is still confusion among lawyers on leniency applications, whether they need to file for immunity first to the KFTC or to prosecutors, or simultaneously. Some are concerned that if they fail to submit leniency application to prosecutors, then they could later face stiffer criminal sanctions by disgruntled prosecutors. The two agencies are trying to unify the channel to receive applications from whistleblowers, but that appears not yet to have been implemented.

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