On May 24, 2018, the Korea Fair Trade Commission (“KFTC”) announced an action plan, seeking to eliminate unfair distributor transactions (the “Action Plan”).

Background:

From August to December 2017, the KFTC surveyed approximately 4,800 companies and 150,000 distributors (of which approximately 5,900 distributors submitted a response) to better understand the wide range of distributorship models and arrangements in preparing the Action Plan.  Based on the survey results, the KFTC determined that distributor transactions present an inherently heightened risk of unfair trade practices by suppliers, because most distributors are small-to-medium sized enterprises with limited resources.  

With the Action Plan, the KFTC aims to empower distributors by enabling them to better protect and further their own rights.  Further, the Action Plan reflects the KFTC’s active enforcement stance on investigating and penalizing unfair distributor transactions, and promoting best practices based on model distribution agreements prepared by the KFTC.

Details:

Specifically, the KFTC highlighted the following five focus areas to achieve the objectives of the Action Plan:

1. Strengthened detection efforts  

The KFTC plans to launch and operate a whistleblowing program, and conduct an annual industry survey to better detect and investigate suppliers’ violations of fair trade practice against their distributors.

2. Strengthened sanctions and scope of violations expanded  

The KFTC plans to promulgate new decrees to facilitate stricter scrutiny of violations, and to expand the scope of restricted activities to include: bundling bestselling products and newly launched products; significant decrease of or delay in delivery of products or services; leveraging termination of distribution agreement to impose unfair terms and forcing costs; and demanding the distributors to expand stores or improve the store environment without justifiable reasons.

3. Encouragement to improve industry practice  

The KFTC plans to prepare and promote the use of model distribution agreements tailored for various industries, which will include a unilateral right on the part of distributors to renew the distribution agreement for a minimum of three consecutive years, an allocation of costs and expenses between suppliers and distributors (e.g., supplier will be required to bear at least 50% of all promotional costs and expenses), and a prior notice requirement to notify distributors of any new distributor in their neighborhood.

4. Strengthened distributor negotiation leverage  

The KFTC plans to propose a legislation to legalize formation of a union or a similar association among distributors, and to prohibit false or misleading information by suppliers.

5. Expanded and strengthened remedies  

The KFTC plans to propose an amendment to the Fair Agency Transactions Act to: (i) allow distributors to bypass the KFTC and petition the court to stop unfair transactions; (ii) expand the scope of punitive damages to impose punitive damages for malicious retaliatory actions by suppliers; and; (iii) to expand the scope and authority of document production orders (beyond those provided under the Korean Civil Code) to force production of trade secrets where relevant to establishing a damage amount (and if the relevant documents are not produced, the distributor’s allegations will be deemed to be true).

Significance:

The KFTC has recently expressed its intent to more actively investigate and to take enforcement actions against supplier companies that do not adopt the terms and conditions of the model distribution agreements (and accordingly, increased attention to model distribution agreements would be warranted).  

Given the KFTC’s keen interest in supplier-distributor relationships and this latest development in announcing the Action Plan, companies with a third-party distributor network are advised to review, assess and address their compliance status regarding distributor arrangements.