Consent Decision in Korean Competition Laws:
Naver and Daum Case Study
Gee Hong Kim1
1. Settlement Mechanism in Enforcement of Competition Laws
The conventional method of enforcement of competition laws is for the competition
authority to determine the facts of competition law violations and issue corrective
measures or levy fines based on its fact findings.
However, of late there has been an increasing interest in the enforcement method using
a settlement mechanism.
Such enforcement method means the process by which a
party subject to the competition authority’s investigations agrees to take the necessary
actions to stop the alleged illegal activities and restore competitive order in exchange for
the end of such investigations.
This enforcement method is referred to differently in
different jurisdictions: the “consent order” or “consent decree” in the United States, the
“commitment decision” in the European Union (“EU”), and the “undertaking” in Australia,
and the conditions and procedures have slight differences among jurisdictions. But the
crux of it all that the party under investigation and the competition authority agree to
end the dispute prior to the formal finding of any infringement is the same for all
jurisdictions.
There are many discussed benefits for the negotiated settlement method. First, it can
reduce enormous expenses and efforts involved in the competition authority’s decisionmaking process and the likely appeals to the courts thereafter. Second, the competition
authority can make use of the resources saved from matters concluded through such
negotiated settlements on more complex matters requiring extensive resources and
efforts.
Third, instead of sanctions focused on general prohibitions, diverse corrective
measures tailored to effect maximum impact can be selected.
Fourth, the market
problems underlying a competition investigation can be remedied more quickly than
through the conventional methods.
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In today’s fast-moving markets, swift problem
Gee Hong Kim is a partner in the Litigation and Competition practice areas at Jipyong.
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solving is all important.
If the procedures are prolonged, the effectiveness of corrective
measures may very well be compromised. A good example of this is the case involving
Microsoft’s bundling of its web browser Internet Explorer with its Windows operating
system. By the time the settlement was reached three years after the case was initiated
by the U.S. Department of Justice, Netscape which had been the market leader was
effectively pushed out of the browser market.
2. Introduction of Consent Decision System in Korea
In December 2011, Korea adopted the settlement procedure of “consent decision” in the
Monopoly Regulation and Fair Trade Act (the “Fair Trade Act”).
The discussions for the adoption of the “consent decision” method began from early
2006. Even the bill was drafted adopting the consent decision procedures, but it did not
pass the National Assembly.
This bill was criticized by some who said that the consent
decision went against the sense of justice, for it encouraged negotiations and settlement
with violators of laws. For the same reason, the adoption of plea bargaining has been
discussed to no avail, and the leniency system which has been adopted is still the target
of much criticism.
Despite the opposition, the consent decision procedures were adopted in 2011 due to
the Free Trade Agreement between the U.S. and Korea (the “KORUS FTA”). The KORUS
FTA went into effect in October 2011, and it required a method for terminating
competition law enforcement by agreement. (See Article 16.1(5), KORUS FTA) To
implement this requirement, the Korean government adopted the consent decision
procedures.
3. Consent Decision System in Korea
The consent decision in Korea is different from the consent decree in the U.S. in that it
does not need the court’s approval. Rather it is similar to the consent order issued by
the U.S. Federal Trade Commission and the commitment decision allowed by the EU
Commission.
The procedures for obtaining the consent decision in Korea is as follows: i) the party
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subject to investigations by the Korea Fair Trade Commission (“KFTC”) requests the
issuance of consent decision from KFTC, ii) KFTC determines whether such party can
initiate the consent decision procedures, and whether the consent decision is appropriate
measure for the resolution of the case, iii) once the consent decision procedures get
under way, KFTC and the party under investigation negotiate and agree on corrective
measures to be taken and KFTC drafts the consent decision based on such agreement, iv)
KFTC then distributes the draft to the interested parties and relevant governmental
authorities in collecting their comments, and iv) after collecting comments from various
parties, if KFTC deems the corrective measures agreed by the party under investigation
are proper, KFTC will render its consent decision accordingly.
Pursuant to the Fair Trade Act, a case cannot be settled with the consent decision if it is i)
related to cartel activities or ii) clear and important violation of the Fair Trade Act. 2
Korea’s consent decision is different than the consent order or consent decree in the U.S.
which is not subject to any such limitation.
Again it is akin to EU’s commitment
decisions as EU’s Regulation 1/2003 places limitation on commitment decisions by
providing that they are not appropriate in cases where EU Commission intends to impose
fines.
One distinction about Korea’s consent decision and its procedures is that in the event
that fines may be levied for competition law violations, it is required that the amount
needed to implement corrective measures by the party under investigation should
balance with the estimated fines.3
Such condition was put in place to allay the concern
that violators would be absolved from their just punishment, but as will be explained
below, this begets other problems.
4. Naver and Daum Case
Korea’s first consent decision came in March 2014 regarding the Naver and Daum case.
Naver and Daum are Korea’s number 1 and 2 players respectively in the internet search
service market. In this way, they hold the position equivalent to Google and Yahoo in
2
Monopoly Regulation and Fair Trade Act, Article 51-2(1).
3
Monopoly Regulation and Fair Trade Act, Article 51-2(3)(1), Regulations on Operation and
Procedures for Consent Decisions, Article 5(1)(4).
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the U.S. KFTC made issue of two business practices engaged by Naver and Daum, and
they are similar to the charges that EU’s Commission made against Google in its
Statement of Objection in April 2015.
First, KFTC charged that Naver and Daum engaged in unfair trade practices by not
distinguishing their “specialized search” services from the regular search results and by
treating the former more favorably listing them first in the order of search results. For
example, Naver offers the “Smart Shopping” service through which Naver features prices
of shopping items from various online vendors, and Naver receives certain fees if an
online user is directed to and makes use of such online vendors.
KFTC pointed out that
when an item is searched, the regular search results for such item and the results of the
Smart Shopping service were not sufficiently distinguished. The results from the Smart
Shopping service were listed ahead of the regular search results, and in this way, the
results from the Smart Shopping received more clicks from online users. KFTC charged
that this constitutes unfair tying of products and an abuse of dominant market position.
Second, KFTC charged that Naver and Daum’s “keyword search advertisement” service
constituted an unfair trade practice.
Naver and Daum sold keywords to online
marketers, and if an online user made a search using any of such keywords, the website
of the online marketer that had paid for such keyword would come up first among the
search results.
This is a form of paid advertisement, and because there was not
sufficient distinction between paid advertisement and regular search results, KFTC
deemed it to be an unfair trade practice.
Naver and Daum received KFTC’s Statement of Objections regarding the above charges
of unfair trade practices, and they in turn made a request for the issuance of KFTC’s
consent decision. After negotiations with Naver and Daum, KFTC issued its first consent
decision.
5. Benefits of Consent Decision as seen in Daum and Naver Case
The Naver and Daum case clearly shows the benefits of consent decision procedures.
First and foremost, the consent decision did away with uncertainties in the case and
saved much time, expenses and resources.
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There existed legitimate questions as to
whether KFTC charges could indeed be proven to be unfair trade practices. There were
many unclear issues, including ones about how to identify the relevant markets in which
Naver and Daum wield dominant positions and if the business practices in question
could indeed be construed as tying of products.
The conventional practice of KFTC
making its infringement decision, followed by the court appeal, would have taken up
great deal of time and efforts, and the efficiency of the consent decision benefitted all
parties.
Another benefit was the swift resolution of the case. Naver made a request for consent
decision in November 2013 and the final KFTC consent decision was issued in March
2014 followed by immediate implementation of the corrective measures in such consent
decision. The process took less than 6 months to complete. This is a stark contrast to
the conventional approach.
A good example of the conventional approach is KFTC’s
corrective orders against Naver for the abuse of dominant market position that was
made in August 2008, but the case was not resolved until the Supreme Court ruling
came out in November 2014.4
The drastic difference in the time it took to resolve these
two cases attests to one of the significant benefits of the consent decision procedures.
6. Problems of Consent Decision as seen in Daum and Naver Case
The Naver and Daum case also showed the problems underlying Korea’s consent
decision procedures.
KFTC’s consent decision for the Naver and Daum case called for two corrective measures.
The first was immediate correction of the problems pointed out by KFTC.
Naver and
Daum agreed to clearly distinguish their specialized search services and keyword search
advertisements from regular search results.
The second was for Naver and Daum to increase consumer welfare and promote small
4
KFTC Decision dated 2008. 8. 28., No. 2008-25.
The Supreme Court ruling regarding this
KFTC decision came out on 2014. 11. 13, but the penalties levied by KFTC were cancelled.
(Supreme Court Decision dated 2014. 11. 13, No. 2009du20366).
in by KFTC were proven futile.
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Basically 7 years of efforts put
and midsize companies by, among others, making contributions to non-profit
organizations for such purposes and spending on internet education for children and
university students. For implementing these measures, Naver, the number one market
participant, committed to spend USD 100 million in 3 years, whereas Daum committed
USD 4 million for the same period of time.
The second corrective measure was inserted to relieve or prevent the charged damages
to consumers or other businesses pursuant to the Fair Trade Act.5
But the negotiations
between the parties focused almost solely on the total amount of the costs to implement
corrective measures as opposed to their relevance and effectiveness.
KFTC as an
enforcement agency specializes in determining whether business activities constitute
unfair trade practices pursuant to the Fair Trade Act and does not have expertise in
evaluating and determining what measures would benefit the consumer welfare and
promote growth of small and midsize companies. This is true for Naver and Daum as
well.
Nonetheless the total amount for implementing corrective measures in the consent
decision became the focal issue because a fixed number would be clear and potentially
invite criticism from the media and public. KFTC wanted to raise the amount as much as
possible to thwart any criticism that the violators were not held to their just punishment.
On the other hand, the parties under investigation cling to the hope that if they make an
appeal to the courts, they may be relieved of all KFTC penalties.
So there was a huge
gap between KFTC and the parties under investigation. What is more, the Fair Trade Act
calls for balancing the estimated fines and the costs to implement corrective measures.
But at the point of settlement procedures, it was not only hard to determine whether the
parties under investigation were legally liable let alone responsible for any definite
estimated damages. This became clearer in light of the fact that the consent decision
procedures generally lend themselves, unlike cartel cases, to cases where proving
violations is uncertain and the estimates damages are unclear. Accordingly, coming to
agreement on corrective measures between KFTC and the parties under investigation was
difficult.
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Monopoly Regulation and Fair Trade Act, Article 55-2(2) and (3).
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At the end, Naver agreed to include in the consent decision the contribution of USD 50
million to non-profit organizations that it had already committed to make the year
before and this is unrelated to the case, and this invited much criticism that the amount
of the consent decision was exaggerated.
Given the above, it would be best to do away with the Fair Trade Act’s requirement that
the cost amounts related to the consent order be balanced against the estimated fines.
If the amendment to the Fair Trade Act is not feasible at this time, the enforcement of
such condition should be applied flexibly and be relaxed in practice.
7. Future of Korea’s Consent Decision System
The adoption of the consent decision system in Korea has only recently happened, but it
is expected that the impact and use of consent decision will continue to increase in
Korea. Not yet one year since the consent decision of the Naver and Daum case was
issued, there already have been 2 requests for consent decision. For one case involving
the abuse of market dominant position of SAP Korea, a corporate software company, the
final consent decision was issued by KFTC in December 2014. Another case involving
Microsoft’s acquisition of Nokia’s mobile phone business, the consent decision
procedures were commenced in February 2015.
Looking at EU’s example, after the
commitment decision system was adopted in May 2005, there have been 44 corrective
orders issued by EU’s Commission, and 28 of them, equivalent to 64%, were commitment
decisions. It would seem that the use of consent decision system would be in line with
EU’s case.
Moreover, Korea’s consent decision system stands to make more active KFTC’s
enforcement against unilateral conduct violations of competition laws. It has been the
case that more than 95% of the fines levied by KFTC are related to collusion activities by
cartels. The representative case for unilateral conduct violation of competition laws is
the abuse of dominant market position. There was 1 such case in 2012, and none in
2013 and 2014.
This is a stark contrast to the 40-60 cartel cases that are reported
annually. The reason for the low number of such cases is because, unlike cartel cases
where evidence can be secured through leniency programs and where there is little
dispute about restraint on competition, it is harder to prove the charged activities and
their impact on competition.
As the use and impact of the consent decision system
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expands, it is expected that KFTC would be more active on cracking down on the
unilateral conduct violations.
KFTC does not necessarily have to render its final
infringement decision but have the option instead to use the settlement procedures in
the consent decision system.
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