The amended Organizational Regulation of the Korea Fair Trade Commission (“KFTC” and such amended regulation, the “Amended Regulation”) became effective on November 6, 2018.  

The Amended Regulation is designed to establish a new division, the Distributor Transaction Division, which will be headed by the Distribution Policy Officer, a newly created Director-General level position within the KFTC, and to reinforce manpower dedicated to monitoring and investigating unfair trade practices in the supplier-distributor field.

Key Aspects of the Amended Regulation:

1. Investigations commenced on the KFTC’s own motion is expected to increase

Under the Amended Regulation, the Distributor Transaction Division will consist of nine officials, who will be solely dedicated to and responsible for enforcing the Fairness in Distributor Transactions Act (“FDTA”).  Currently, the FDTA is enforced by the KFTC’s Anti-Monopoly Bureau.  

With the creation of the Distributor Transactions Division, the KFTC’s ex officio initiative is expected to increase based on the whistleblowing system and increased written surveys. 

The KFTC has already laid the legal foundation to enforce its policies relating to distribution arrangements, having amended the FDTA to make the FDTA applicable to agreements in place before the enforcement date of the FDTA.  The KFTC has also set forth legal grounds to provide rewards to whistleblowers, and to undertake written surveys.  

In addition, starting January 1, 2019, distributors can seek dispute resolution through the Distributor Dispute Mediation Council located in each city and province. 

Also, on September 4, 2018, the KFTC announced the draft Notification on Specific Types and Standards of Unfair Trade Practices Prohibited under the FDTA (the “Notification”), which includes specific examples of each of the five types of unfair trade practices prohibited under the FDTA (previously open to public comment from September 4 to 27, 2018).  Once the Notification is promulgated, the KFTC will be able to fully undertake its enforcement activities through the Distributor Transaction Division.

2. In its annual surveys, the KFTC is expected to focus on several major items

On May 24, 2018, by announcing the Measures to Eradicate Unfair Trade Practices in the Distribution Industry (the “Measures”), the KFTC has indicated that it will conduct annual industry surveys to identify business practices that require improvement, and accumulate information to use for its ex officio investigations. 

Based on the KFTC’s model distribution agreements (food & beverages and apparel industries), the Notification and the Measures, the KFTC appears to view the following practices as problematic and requiring improvement in the distribution sector:

• Unfavorable changes to payment conditions (e.g., sales incentives) during the term of the agreement;
• Unfair prohibition or limitation imposed on product returns; 
• Imposition of excessive transaction costs;
• Excessive allotment of expenses (e.g., promotional expenses);
• Unfair interference with business activities and demands for store improvements;
• Forced sales by means, such as false sales records or bundling; and
• Unilateral termination during term of the agreement and unfair refusal to renew.

Potential Impact / Prospects for Policies and Enforcement on Distributor Transactions:

In light of the above changes, the KFTC is expected to pursue vigorous enforcement efforts in the distribution sector.  As such, companies should assess the impact of the relevant policies, and consider making changes to existing distribution practices from a longer-term perspective, as well as having in place a concrete compliance system tailored to the company’s specific circumstances.