This blog post examines the criteria used under the Fair Trade Act to distinguish hard collusion from soft collusion, and why they require different levels of scrutiny regarding their restrictive effects on competition. This helps understand the core principles of market regulation.
The ‘unfair joint conduct’ under the Republic of Korea’s Monopoly Regulation and Fair Trade Act (hereafter ‘Fair Trade Act’), commonly referred to as cartels or collusion, constitutes the most core regulated behavior under the Fair Trade Act. This is because when competing businesses collude to unfairly raise prices rather than competing fairly on price or quality, the normal functioning of the market is disrupted and consumer interests are also severely harmed. The regulatory framework for ‘unfair concerted practices’ under the Fair Trade Act has historically developed primarily under the influence of the U.S. cartel regulation system.
The cartel regulation doctrine formed through U.S. case law is distinguished by the ‘principle of per se illegality’ and the ‘rule of reason’. The ‘per se rule’ is a principle that deems certain transactional restrictions, such as price-fixing agreements that unfairly restrict competition, illegal in and of themselves, without requiring detailed analysis of their purpose or economic effects. Traditionally, price-fixing, output-fixing, bid-rigging, and market-sharing have been recognized as typical conduct subject to the ‘per se rule’. Conversely, the ‘principle of reasonableness’ involves meticulously examining both the purpose or intent of the transaction restriction and its positive and negative effects on competition. It then comprehensively considers these factors to determine illegality on a case-by-case basis. This ‘principle of reasonableness’ is primarily applicable to acts where unfairness is difficult to determine solely based on the act itself, such as joint investment agreements or joint research and development agreements.
Applying the ‘principle of per se illegality’ to a particular act allows the government enforcing the law or the plaintiff, who is the party harmed by the transaction restriction, to avoid having to prove the negative effects on competition or demonstrate market dominance, such as market share. This significantly conserves judicial resources. The government or plaintiff need only rigorously prove illegality by applying the ‘principle of reasonableness’ to the remaining types of conduct to which the ‘principle of inherent illegality’ does not apply. This dichotomous distinction clearly categorizes the methods for examining the unfairness of transaction restrictions, thereby providing clear criteria for determining illegality and ultimately enhancing the efficiency and predictability of law enforcement.
The ‘principle of inherent illegality’ has developed inductively in the United States, which follows a case law system, through the process of law enforcement grounded in the ‘principle of reasonableness’ that forms the basis of legal judgment. It stems from the judgment that it is reasonable to treat certain types of conduct as inherently unlawful without undergoing complex scrutiny, as they are almost invariably deemed illegal. Even if the possibility of exceptional judgment errors exists in this process, it was considered sufficiently tolerable when weighed against the enormous costs of individually analyzing all conduct under the ‘principle of reasonableness’.
In the Republic of Korea, which adopts a codified legal system, the Fair Trade Act stipulates that businesses must not agree (i.e., engage in ‘unfair joint conduct’) to certain acts, such as determining, maintaining, or altering prices, that ‘unfairly restrict competition’ in concert with other businesses through contracts, agreements, resolutions, or any other means. In this context, the question arises whether, through interpretation of the Fair Trade Act provisions, it is possible to apply the ‘principle of per se illegality’ to specific acts—as in the United States—to determine illegality without in-depth scrutiny. In South Korean legal practice, when determining whether a joint act by businesses constitutes an ‘unfair joint act’, the restriction on competition is assessed individually based on the legal requirement of whether it ‘unfairly restricts competition’. This can be seen as an unavoidable interpretation method given the structural provisions of the Fair Trade Act.
Does this mean there is absolutely no room in South Korea to adopt the advantages of the U.S.’s dual-track review approach? South Korean legal practice also distinguishes between hard-core joint conduct, such as price-fixing, which clearly only produces competition-restricting effects, and soft-core joint conduct, which can simultaneously generate both market efficiency-enhancing effects and competition-restricting effects. In practice, the Fair Trade Act tends to assess the competitive restraint of hard collusion relatively simply, such as through market share analysis, while requiring more complex analysis to strictly prove the competitive restraint effects of soft collusion. This practical framework indicates that South Korea also distinguishes between two types of joint conduct requiring different levels of proof rigor, suggesting it has adopted a modified version of the U.S. dual-track approach to cartel regulation.
