In 2018, as part of its initiative to reduce unfair trade practices in distributorship transactions, the Korea Fair Trade Commission (“KFTC”): (i) created a new division, named the Distribution Transactions Division (“DTD”), with exclusive authority to enforce the Fair Distribution Transactions Act (“FDTA”); (ii) conducted market surveys of three industries, namely apparel, food & beverage and telecommunications; (iii) enacted the Guideline for Specific Types of Unfair Trade Practices Prohibited under the FDTA; and (iv) actively undertook enforcement actions.
1. Survey results may lead to investigations
The KFTC conducted market surveys from November 20 through December 14, 2018 of three industries widely known to employ distributorship arrangements in their business model, namely the apparel, food & beverage, and telecommunications industries.
From the surveys (to which a total of 188 suppliers and 12,295 distributors responded), the KFTC found that “coercion to meet sales targets” and “territorial restriction” were the most common practices cited by respondents in each industry, followed by other types of (varying) practices depending on the industries. Specifically:
- In the food & beverage industry, a significant number of respondents (distributors) replied that their suppliers impose restrictions on product returns. This may not be surprising given that foods and beverages characteristically have short shelf lives, and the KFTC noted a need for suppliers to shoulder their fair share of the risks and expenses accompanying product returns.
- Coercion to meet sales targets occurred most frequently in the apparel industry, followed by the telecommunications and food & beverage industries. In all three industries, a large number of distributors replied that they experienced disadvantages for failure to meet a sales target established by their suppliers.
- In the telecommunications industry, a large number of distributors replied that they had been paid less than due consideration because of suppliers’ failure to provide accurate breakdowns of sales commissions.
- Unfair trade practices in supplier-distributor transactions occurred three to four times more often where transactions were conducted under discretionary distributorship agreements as compared to distributorship agreements in the form of (i.e., adopting) the KFTC model contract.
- As to the question of whether there exists any difference in the supply price to offline distributors versus online channels, distributors and suppliers differed – distributors replied a significant difference exists, whereas suppliers generally replied no difference exists. The KFTC acknowledged the considerable perception gap between suppliers and distributors with respect to offline and online supply prices, and noted suppliers’ pricing policy may potentially lead to conflicts with their distributors.
In June 2019, the KFTC conducted investigations against three companies for alleged FDTA violations identified in the survey results, and announced to launch a new round of market surveys on supplier-distributor transactions in other industries later this year. Given such an announcement and the KFTC’s plans reflected in its previously published Enforcement Plan for 2019 (that the KFTC plans to focus on monitoring, investigating and taking enforcement actions against channel stuffing, coercion to meet sales targets and illegal abuse of superior bargaining position by suppliers), companies employing a distributorship business model are advised to internally review their current practices and distributorship structure.
2. Expected policy changes
As previously announced in its Enforcement Plan for 2019, the KFTC is expected to publish a new series of model contracts (currently available only for the apparel and food & beverage industries) to govern distributorship arrangements in other industries. Companies should take note of the KFTC’s plans to grant certain privileges to suppliers employing KFTC model contracts in their distributorship agreements in connection with the KFTC’s fair trade agreement evaluations, which were launched on July 1, 2019.
The KFTC’s policies on distributor transactions are expected to continually evolve given their previously announced policy plans (e.g., to enact into law distributors’ right to form distributor organizations and imposition of punitive damages for retaliatory conduct). Companies are encouraged to closely monitor the related developments.
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#Distributor #Antitrust & Competition #2019 Issue 2 #Newsletter