The Application of the Monopoly Regulation and Fair Trade Law to the Shipping Industry

The Application of the Monopoly Regulation  and Fair Trade Law to the Shipping Industry

 

Abstract

Recently, there exists a debate whether freight agreement between shipping operators constitutes a violation of the Fair Trade Act in South Korea. The Fair Trade Act is in principle a general law that applies to all industrial sectors. However, the Marine Transportation Act is a special law that has a clause that recognizes the maritime alliance. This has led to the question of which of the two laws should be applied in the agreement in shipping industry.

The KFTC believes that in order for a joint action of shipping to be recognized as an exception to the Fair Trade Act, it must meet all the requirements of Article 29 of the Marine Transportation Act. On the other hand, the MOF and the shipping operators insist that it shall be dealt with in accordance with the Marine Transportation Act even if it has violated the requirements of Article 29.

This confusion will result in a lack of legal stability and predictability, which will impede the development of the marine shipment industry. To solve this problem, the Fair Trade Act should clearly stipulate whether the marine shipment industry is under the subject of the law. Also, the KFTC and the MOF should secure the integrity of the decision-making system in order to make clear judgments. Finally, the expertise of the judging agency is required to make a judgment considering the special nature of the shipping industry, and thus the active role of the MOF is needed.

 

I. Introduction

The shipping industry in South Korea has long been one of the key industries in the Korean economy since 99.7% of the imports and exports are made through ocean freight shipping.[1] Meanwhile, as the regulations on antitrust and fair trade of the shipping industry are being tightened, the relationship between the Antitrust Law and the Shipping Act has become an issue.

On May 2021, Korea Fair Trade Commission (hereinafter referred to as “KFTC”) reviewed the imposition of fines on 12 major domestic shipping companies and 11 foreign shipping companies, including HMM, Sinokor Merchant Marine, KMTC and SM Line. KFTC claims that those 23 liner operators are suspected of violating the competition law by simultaneously raising freight rates for the South Korea – South-east Asia route. If the allegations turn out to be true, shippers will have to pay fines ranging from 8.5 to 10 per cent of their sales from South-east Asia route shipping.[2]

In 2017, the bankruptcy of Hanjin Shipping, the No. 1 shipping company in Korea, caused huge slump in the Korean shipping industry for several years. Since the total amount of fines expected to be imposed is astronomical, KFTC’s upcoming decision should have a significant impact on the Korean shipping industry’s future.

Korea Marine Transportation Act states the maritime joint action in Article 29, but at the same time, the Fair Trade Act does not include any exclusion clause regarding the shipping industry. There are conflicting views between KFTC and the shipping operators on which of these provisions should be applied. Therefore, relevant legal issues and directions of improvements should be reviewed regarding this issue.

 

II. Monopoly Regulation and Fair Trade Act

  1. Overview

Monopoly Regulation and Fair Trade Act (hereinafter referred to as “Fair Trade Act”) has first introduced in 1980.[3] Article 1 states that “The purposes of this Act are to promote fair and free competition, to encourage thereby creative business activities, to protect consumers, and to strive for balanced development of the national economy, by preventing business entities from abusing their market-dominant positions and any excessive concentration of economic power and by regulating illegal cartel conduct and unfair trade practices.”

Unlike other laws, the Fair Trade Act is monitored by KFTC for its violations. KFTC is a ministerial-level central administrative organization under the authority of the Prime Minister which functions as a quasi-judicial body.[4] KFTC can file an exclusive complaint to the violation of the Fair Trade Act, and its decision of imposition has the same effect as the court’s decision.

  1. Application

When the Fair Trade Act was first enacted, the range of application was limited, and the shipping industry was not included. However, this was gradually expanded to operators in all areas in the seventh amendment in 1999[5], stated in Article 2 as “business entity” meaning an entity that engages in manufacturing business, service business, or any other business.[6]

The Fair Trade Act stipulates four anti-competitive restraints as follows: [7]

  1. the prohibition on abusing a dominant market position
  2. the prohibition of anti-competitive agreements between competitors
  3. the prohibition of unfair trade activities
  4. preventing excessive concentration of economic power.
  5. Exemption

Article 58, 59, 60 of the Fair Trade Act provides the exception under the law and in the case of a maritime alliance, whether it falls under Article 58 is especially the issue.

  • Article 58 (Lawful Acts under Statutes)

The provisions of this Act shall not apply to any lawful acts done by business entities or trade associations in accordance with other Acts and orders issued under such Acts.

However, the South Korea Supreme Court has declared in several judgements that the “lawful acts” in Article 58 means “a necessary or minimal act performed within the scope of a law or an order by law that specifically recognizes exceptions to free competition in a business in which competition restrictions are deemed reasonable due to the specific nature of the business concerned or business that requires high public regulation in terms of publicity while the exclusive status of the operator is guaranteed by the accreditation system.” (Supreme Court Decision 2007Du19584 delivered on December 24, 2008)[8]

Similarly, there is a precedent case for airway freight fixing in the air transport industry in 2012. In the Supreme Court decision 2012Du13689 delivered on May 16, 2014, the court declared the violation of the Fair Trade even though the Aviation Act Article 117 is stipulating a joint act on air freight. The court says that Article 117 (1) do not rule out the price competition for fares themselves, but rather limit the extent where they are not excessive.[9]

  1. KFTC’s Standards

KFTC stated that if the joint actions of operators fall under the relevant special law, including the Shipping Act, the law shall be applied first to the joint activities and not be considered as a violation of the Fair Trade Act. However, for the joint actions to be justified under the Shipping Act, they must meet the additional requirements on Article 29 of the Shipping Act, which are as follows:

  1. negotiate with the shipppers’ organization in advance by writing
  2. report the contents of the joint actions to the Minister of Oceans and Fisheries
  3. do not restrict withdrawal from the joint actions

KFTC has also stated that they will take the special characteristics of the shipping industry into account while deciding on the shipping operators’ joint actions.[10]

 

III. Maritime Alliance

The Maritime Alliance is an agreement reached by two or more shipping companies on the same route in connection with international sea transportation to avoid unnecessary competition internally and to take uniform action on freight and transportation conditions to strengthen the economic status of the parties.[11] Korea’s shipping law describes it as “an agreement on freight, etc.”

While the maritime alliance has advantages such as reducing operating costs, stabilizing fares, and maintaining regular operations, it is pointed out that it strengthens the monopoly and weakens the competitiveness of small shipping companies.[12]

 

IV. Relevant Legal Issues

  1. Marine Transportation Act

In the case of Korea, the joint action in the shipping industry is accepted by Article 29 of the Marine Transportation Act, which states that “any person who has registered overseas cargo transportation services may enter into an agreement on cargo rates, allocation of vessels, stowage of cargo, and other transport terms and conditions, or into the joint activities with other providers of overseas cargo transportation services.” However, the article also says that the one who has entered into an agreement shall file a report on its terms with the Minister of Oceans and Fisheries (hereinafter referred to as “MOF”) and shall also exchange sufficient information and consult with a shippers’ association in advance. In addition to this, the agreement shall not unreasonably restrict participation in or withdrawal of a particular party.[13] [14]

Meanwhile, there are conflicting views on the issue of joint action of the shipping operators regarding the violation of Article 29 of the Shipping Act. As previously described in Part II-4, the KFTC claims that if all the requirements of Article 29 are not met, the agreement will be subject to regulation in the Fair Trade Act. However, the shipping industry and the MOF are making different interpretations. They say that even in this case, only the fines for violating the Marine Transportation Act shall be imposed, not the Fair Trade Act.

This disagreement appears to arise from how to identify the relationship between the Marine Transportation Act and the Fair Trade Act. Under the Korean legal system, the Fair Trade Act acts as a general law while the Marine Transportation Act acts as a special law. Following the principle of Lex Specialis, special laws prevail over general laws. However, the KFTC’s position is that even if a special law exists, it would be subject to sanctions by the Fair Trade Act if all requirements were not met, and similar judgments were made for the air transport industry in the 2012Du13689 case.

  1. Certificate for Registration of Competition-restriction Activities

In 1981, the KFTC’s predecessor, the Economic Planning Institute, issued a certificate of registration of competition-restriction activities that allowed shipping companies to conduct joint activities.[15] It may be questionable whether this certificate of registration falls under the case stated in Article 19(2), which exempts application of the Fair Trade Act if the joint action has the purpose of “industrial rationalization, research and technology development, recession overcome, industrial restructuring, streamlining transaction conditions, and improving competitiveness of small and medium enterprises” and obtaining approval from the KFTC.

However, it seems difficult to say that the certification is subject to Article 19(2) of the Fair Trade Act, given that the certification was not received directly from the KFTC. Moreover, the issue of retrospective application of the law may also be raised in that the certification was given in 1981, but the exemption from Article 19(2) was first introduced in 1996.

  1. Convention on a Code of Conduct for Liner Conferences

South Korea joined the Convention on a Code of Conduct for Liner Conferences (hereinafter referred to as “Liner Convention”) in 1983, and there exists a view that the maritime alliance does not need to file a report to MOF regarding the joint action based on Article 14 of the Convention. Article 14 of the Liner Convention states that “A conference shall give notice of not less than 150 days, or according to regional practice and/or agreement, to shippers’ organizations or representatives of shippers.” [16]

The Liner Convention is an agreement that does not require the consent of the National Assembly to join[17], and therefore it makes the legal effect of the Convention weaker than the domestic law. In this context, it seems unlikely for the Liner Convention to override the Marine Transportation Act.

 

V. Problems

  1. Legal Stability

The controversy over the application of the Fair Trade Act to the shipping industry needs to be considered in terms of legal stability and predictability. First of all, the problem is that predictability is not guaranteed when the law does not clearly stipulate whether the Fair Trade Act is applied to the shipping industry. If the KFTC is to maintain its current position, introducing a provision that explicitly includes maritime joint action as a subject of the Fair Trade Act can increase legal stability.

Next, it is important to clarify the charge of legal judgment. Under the current legal system, the Fair Trade Act is judged by the KFTC, and the MOF judges violations of the Marine Transportation Act. Therefore, it is necessary to ensure integration between government agencies by clarifying the system of judgment on the relevant matters. When considering that the violation of Article 29 of the Marine Transportation Act is a premise of the KFTC’s application of the Fair Trade Act, the MOF shall make a primary judgment on violations of Article 29, and if the breach is recognized, the KFTC should launch an investigation thereafter. By establishing this one-way system, the integration of administration between government agencies will be ensured.

  1. Distinct Features of the Shipping Industry

In addition, the special nature of the shipping industry should be considered. Freight agreement is inevitable in the process of multiple shipping companies operating together on the same route through joint action. KFTC will need to take these features into account when determining the violation and the level of sanctions. The active role of the MOF, which has expertise related to the shipping industry, is also required. It is necessary to manage and supervise the detailed procedures related to Article 29 of the Marine Transportation Act.

 

 

References

Korea Customs Service – Trade Statistics, “Trade Statistics for Export/Import (2019)”, https://unipass.customs.go.kr/ets/index_eng.do. (Access Date: 2021-07-22)

Yang, Byoung-Chan. “A Study on the Improvement Tasks of Legal Systems in Marine Transport One Year after the Bankruptcy of Hanjin Shipping Co., Ltd.” Business Law Review Vol.31 No.3 (2017): 9-31

Korea Legislation Research Institute & Korea Law Translation Center, <Monopoly Regulation and Fair Trade Act>, https://elaw.klri.re.kr/kor_service/lawView.do?hseq=53138&lang=ENG (Access Date: 2021-07-23)

Korea Legislation Research Institute & Korea Law Translation Center, <Marine Transportation Act>, https://elaw.klri.re.kr/kor_service/lawView.do?hseq=49569&lang=ENG (Access Date: 2021-07-23)

Kim, Doo-Jin. “Application of Antitrust Law in the Context of Maritime Transport”, Journal of Business Administration & Law Vol.21 No.2 (2011): 649-685

Park, Kwang-So. “A Study on the Direction for Revision of Korea Shipping Act and Monopoly Regulation and Fair Trade Act”, The International Commerce & Law Review Vol.49 (2011): 213-236

Korea Fair Trade Commission, “Who We Are”, https://www.ftc.go.kr/eng/contents.do?key=493 (Access Date: 2021-07-22)

Jeong, Sang-Keun. “Legal Matters Related Shipping Alliances in Korean Shipping”, Kangwon Law Review Vol.50 (2017): 749-770

Korea Shipowner’s Association. “Statement regarding the KFTA’s investigation”, KSA news July 14, 2021. https://www.shipowners.or.kr:4432/news/media.php?ptype=view&idx=17946&page=1&code=media (Access Date: 2021-07-23)

Kim, El-Jin. “Shipping conference issues need focusing on the Convention for Liner Conferences”, Hyundai Marine News, July 8, 2021. http://www.hdhy.co.kr/news/articleView.html?idxno=14942 (Access Date: 2021-07-24)

 

 

[1] Korea Customs Service – Trade Statistics, “Trade Statistics for Export/Import (2019)”, https://unipass.customs.go.kr/ets/index_eng.do. (Access Date: 2021-07-22)

[2] Kim, El-Jin. “Shipping conference issues need focusing on the Convention for Liner Conferences”, Hyundai Marine News, July 8, 2021. http://www.hdhy.co.kr/news/articleView.html?idxno=14942 (Access Date: 2021-07-24)

[3] Korea Legislation Research Institute & Korea Law Translation Center, <Monopoly Regulation and Fair Trade Act>, https://elaw.klri.re.kr/kor_service/lawView.do?hseq=53138&lang=ENG (Access Date: 2021-07-23)

[4] Korea Fair Trade Commission, “Who We Are”, https://www.ftc.go.kr/eng/contents.do?key=493 (Access Date: 2021-07-22)

[5] Kim, Doo-Jin. “Application of Antitrust Law in the Context of Maritime Transport”, Journal of Business Administration & Law Vol.21 No.2 (2011): 649-685

[6] Korea Legislation Research Institute & Korea Law Translation Center, <Monopoly Regulation and Fair Trade Act>, https://elaw.klri.re.kr/kor_service/lawView.do?hseq=53138&lang=ENG (Access Date: 2021-07-23)

[7] Park, Kwang-So. “A Study on the Direction for Revision of Korea Shipping Act and Monopoly Regulation and Fair Trade Act”, The International Commerce & Law Review Vol.49 (2011): 213-236

[8] Supreme Court Decision 2007Du19584 delivered on December 24, 2008

[9] Supreme Court Decision 2012Du13689 delivered on May 16, 2014

[10] Korea Shipowner’s Association. “Statement regarding the KFTA’s investigation”, KSA news July 14, 2021. https://www.shipowners.or.kr:4432/news/media.php?ptype=view&idx=17946&page=1&code=media (Access Date: 2021-07-23)

[11] Jeong, Sang-Keun. “Legal Matters Related Shipping Alliances in Korean Shipping”, Kangwon Law Review Vol.50 (2017): 749-770

[12] Kim, Doo-Jin. “Application of Antitrust Law in the Context of Maritime Transport”, Journal of Business Administration & Law Vol.21 No.2 (2011): 649-685

[13] Korea Legislation Research Institute & Korea Law Translation Center, <Marine Transportation Act>, https://elaw.klri.re.kr/kor_service/lawView.do?hseq=49569&lang=ENG (Access Date: 2021-07-23)

[14] Yang, Byoung-Chan. “A Study on the Improvement Tasks of Legal Systems in Marine Transport One Year after the Bankruptcy of Hanjin Shipping Co., Ltd.” Business Law Review Vol.31 No.3 (2017): 9-31

[15] Korea Shipowner’s Association. “Statement regarding the KFTA’s investigation”, KSA news July 14, 2021. https://www.shipowners.or.kr:4432/news/media.php?ptype=view&idx=17946&page=1&code=media (Access Date: 2021-07-23)

[16] Korean Law Information Center, <Convention on a Code of Conduct for Liner Conferences>, https://www.law.go.kr/LSW/trtySc.do#licTrty308 (Access Date: 2021-07-23)

[17] Ministry of Foreign Affairs, https://treatyweb.mofa.go.kr/ (Access Date: 2021-07-23)

 

Posted in Spring 2022.