By Park Kwang-Chun, Lee International
E: kcpark@leeinternational.com
The Moon administration is seeking reforms in a variety of areas of the Korean economy, based on its vision of “an economy pursuing co-prosperity”. The appointment of Sang-Cho Kim to lead the Korean Fair Trade Commission (FTC) also added support to this initiative as Kim is well-known for his long-standing efforts to reform chaebols (Korean business conglomerates).
Additionally, Korean fair trade-related laws, including the Monopoly Regulation and Fair Trade Act (Fair Trade Act) and the Fair Transactions in Franchise Business Act (Franchise Business Act), have been revised recently.
Main amendments to the Fair Trade Act
(1) Introduction of criminal punishment for refusal and obstruction of investigations (Article 67, implemented on July 19, 2017)
Before the revision, the Fair Trade Act imposed only a fine when a person refused, obstructed or avoided an investigation by failing to submit or falsely submitting materials requested by the FTC, by concealing, removing, forging or falsifying materials, or by refusing to grant access to materials. However, under the revised Act there is now criminal punishment: imprisonment of not more than two years or a fine not exceeding W150 million.
(2) Introduction of a financial penalty to compel businesses to correct their failure to meet reporting obligations and/or failure to submit materials or objects to FTC (Article 50-4, to be implemented on October 19, 2017)
Under the prior Fair Trade Act, a company would be fined if it failed to take corrective measures related to anti-competitive activities. But under the revised act, a company that fails to report or submit required materials or objects to the FTC, will be required to pay a fine amounting to 3/1000th of its average sales per day for each day that it fails to comply with the FTC’s order.
Main revisions to the Franchise Business Act: Introduction of a punitive damages provision (Article 37-2, to be implemented on October 19, 2017)
Under the new Act, a franchisor will be required to pay damages to a franchisee, in an amount up to three times the losses incurred by the franchisee, in the event that the franchisor (i) provides false or exaggerated information; (ii) conceals or understates factual information that materially impacts a franchise contract; or (iii) illegally suspends, refuses or significantly restricts the provision of goods or services or support to a franchisee. Further, the franchisor will bear the burden of proof to show that the franchisor was not at fault and/or had no intent to violate the Act in any of the above-mentioned ways.
Predicted policy change
On August 25, 2017, during a “core policy discussion” that occurred during a meeting attended by the Korean president and heads of three major government authorities (Ministry of Strategy and Finance, FTC, Financial Services Commission), the FTC announced its new policy and action plan to fulfil its mission. The following are some of the FTC’s proposed actions:
- Ex officio investigations into conglomerates alleged to have violated laws;
- Award of prize money when the illegal actions of a conglomerate owner family is reported to the appropriate government authorities;
- Designation of more conglomerates, the status of which is required to be publicly disclosed;
- In subcontract transactions, prohibiting large companies from forcing persons to sign a subcontract only with the company or business operators designated by the company without reasonable grounds;
- As to mandatory purchase items (required to be purchased by a franchisee), increasing the scope of information the franchisor is required to disclose (eg, identifying royalties that the franchisor takes from each purchase) ;
- Introducing liability arising from “owner risks” (damages incurred by a company as a result of irregularities or corruption involving the chaebol families who own/control the company); and
- Revision of standard franchise contracts: adjusting franchise amounts (royalties, prices to purchase necessary products, etc) to correspond to costs that have increased, such as minimum wage costs.
Implications
The Moon administration is ratcheting up its efforts to impose stronger regulations and enforcement in fair trade areas. In this new business climate, companies failing to adjust their business practices risk exposing themselves to serious losses. To successfully adjust, companies need to understand the revised regulations, closely track policy developments and be careful to avoid activities in their business operations that will run afoul of the FTC’s new rules and requirements.
E: kcpark@leeinternational.com
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