The Rising Role of Consent Settlement in the Internet Industry

Posted on    by Jihye Jeong

 

Abstract

Consent Settlement is a mechanism seeking to remedy and voluntarily resolve anti-competitiveness, compensate consumer damages, or restore the fairness of the transaction, based on mutual agreement among the KTFC, the company under suspicion and relevant government agencies. Consent Settlement has never been applied until now, but the internet advertisement market is going through the procedure for the first time in Korea through the Naver and Daum case. Meanwhile, the internet industry possesses unique characteristics, such as aiming to involve as much participants as possible, based on the diversity and openness and being so borderless that compulsively applying Korean laws to foreign corporations is almost impossible. Taking the properties into consideration, consent settlement will play a critical role in the internet industry as quick and easily implementable remedy in fast-evolving markets as well as maximizing the range of recovery and relieving the difficulties in demonstration of intent. Consent settlement is criticized for being unable to supply criteria to determine if a conduct violates any competition law. However raising predictability in the internet industry can be attained from a different approach such as the KFTC`s ‘Standards of Transaction in Internet Searching Industry’.

 

The Rising Role of Consent Settlement in the Internet Industry[1]

 

Ⅰ. Introduction

On December 19, 2013, Korea Fair Trade Commission(KFTC) made up its mind to take the ‘Consent Decision’ procedure on the allegation of Daum and Naver abusing their market-dominating position. This is the very first case of Consent Decision in Korea. In their tentative settlement, Naver promised to spend about 20 billion won once every 3 year to build a nonprofit foundation for monitoring unfair advertisement and mediating conflicts, as well as a 50 billion won contribution toward local business foundation. Daum also agreed to implement a Commission on Fund operation, supporting 10 billion won for promoting welfare of internet users and 30 billion won in 3 years for owners running small businesses.

Meanwhile, world`s largest web portal, Google has undergone a similar situation. According to the U.S. Federal Trade Commission (FTC), on January 3, 2013, Google Inc. has made a consent decision on changing some of its business practices to resolve FTC concerns that “those practices could stifle competition in the markets for popular devices such as smart phones, tablets and gaming consoles, as well as the market for online search advertising. Under a settlement reached with the FTC, Google has agreed to give online advertisers more flexibility to simultaneously manage ad campaigns on Google’s AdWords platform and on rival ad platforms; and to refrain from misappropriating online content from so-called “vertical” websites that focus on specific categories such as shopping or travel for use in its own vertical offerings.”[1] However, the EU Commission for Competition (EC) has rejected Google`s offer regarding the same allegation.

“’Consent Decision’ is a mechanism that allows the KFTC to stop an enforcement procedure without any determination of wrongdoing by adopting a measure to the same effect as a remedy that a business entity or business association under investigation or adjudication by the KFTC has proposed to voluntarily resolve an anti-competitiveness, compensate consumer damages, or restore the fairness of the transaction,”[2] pursuant to Art. 51-2 of the Monopoly Regulation and Fair Trade Act. Consent Decision has been barely used in Korea, unlike in the EC and the FTC. The reason is that from the moment Consent Decision was introduced in 2005, it was confronted with harsh criticism that it indulged corporations, and that it was disparate with the overall structure of law. However, despite the unfavorable atmosphere, KFTC has applied Consent Settlement for the first time to the case of giant search engine companies, Naver and Daum. Similarly, the FTC and the EC also have applied Consent Decision to the Google case, though it seems just one of many cases where Consent Decision was applied, it might provide a common platform on which to use Consent Settlement for large web portals in each country.

In my opinion, Consent Settlement should be employed, when handling anti-competitive cases of the internet industry, instead of Prohibition Decisions. To elaborate on this, I will briefly introduce Consent Settlement in Article 51-2 of the Monopoly Regulation and Fair Trade Act, and illustrate the characteristics of the internet industry. Added to this, I will deal with the advantages and predictable disadvantages of Consent Settlement, especially in the internet industry.

 

Ⅱ. Art. 51-2 of the Monopoly Regulation and Fair Trade Act

  1. Definition

Article 51-2 of the Monopoly Regulation and Fair Trade Act recognizes ‘Consent Settlement’ as follows. “(1) Any undertaking or trade association under investigation or adjudication of the Fair Trade Commission may ask the Fair Trade Commission to enter into Consent Settlement in accordance with Paragraph (3) for the purpose of voluntary elimination of anti-competitive circumstance caused by the conduct under investigation or adjudication of the Commission, redress to consumers, or improvement of fairness in trade.”

 

  1. Exceptions to the Application

According to Article 51-2, the Commission shall not enter into Consent Settlement, but shall proceed adjudication under this Act, in the case wherein:

  1. Conduct in question amounts to a violation of Article 19 (1)
  2. Conduct in question meets the conditions in Article 71 (2)
  3. Applicant withdrawn the application

Article 19(1) prohibits ‘unjust concerted practices’, engaging in fixing prices, determining transaction conditions and any of the conducts presented in Article 19(1) by contract, agreement, resolution, or any other means. Article 71(2) stipulates that any conduct in violation of this Act apparently constitutes serious offence provided in Articles 66 and 67 that causes a significant harm to competition. The conduct dealt with by Article 66 and 67 makes market competition suffer such significant damages that it is punished by imprisonment or fine. Lastly, elements that a proper application should satisfy are provided in Article 51-2(2). Complying with Article 51-2(2), the application shall be made in written form, including:

  1. Facts to identify the conduct in question
  2. Proposed remedies that are necessary to restore competition or improve fairness in trade, such as halting the conduct in question, restitution
  3. Proposed remedies that are necessary to redress or prevent consumers or other undertakings’ damages

KFTC actually has a stricter form of Consent Settlement compared to other countries such as the United States and EU, considering the fact that KFTC excludes ‘unjust concerted practice’ – regardless of whether it is hard-core or soft-core cartel – and ‘significant, obvious offence’ when applying Consent Settlement. On the contrary, the United States contains all alleged conducts in the market and EU counts out only ‘significant, obvious offence’ including soft-core cartel, which is shown with further details in the table below:

http://www.lawnb.com/lawinfo/contents_view.asp?CID=4070A85FA1CF4670AB5469160E86E099 (last visited January 29, 2014)

 

  1. Procedure

After investigating on the conduct in question, KFTC may make a decision that is consistent with proposed remedies, named ‘Consent Settlement’, closing the procedure of adjudication. Article 51-3 provides more specific procedure of it, as follows.

(1) Taking into account of the necessities for prompt measure, compensation for damages to consumers, and other factors, the Fair Trade Commission shall determine whether to initiate the procedure of Consent Settlement.

(2) Before entering into Consent Settlement, the Fair Trade Commission shall give notice for a period not less than 30 days, to the applicant and interested persons for their opportunity to present their opinions, by the personal service of the official gazette, the website of the Commission, or any other proper means.

(3) The Fair Trade Commission shall inform information to the heads of the relevant agencies of the Government, and hear their opinions, and shall consult with the Prosecutor General.

(4) The Fair Trade Commission shall deliberate and decide Consent Settlement or the revocation thereof under Article 37-3.

(5) The applicant who entered into Consent Settlement shall submit the implementation plan of Consent Settlement and the result of implementation thereof to the Fair Trade Commission.

 

According to Article 51-4, KFTC may revoke its Consent Settlement for any reasons in the case that 1) Consent Settlement became inappropriate due to the significant change in the market or 2) it turns out that information submitted by the applicant was incomplete and inaccurate, or falsification was committed or any other dishonest methods were used by the applicant, or 3) the applicant failed to implement Consent Settlement without any justifiable reason.

The overall procedure is represented efficiently in the following table:

http://www.lawnb.com/lawinfo/contents_view.asp?CID=4070A85FA1CF4670AB5469160E86E099 (last visited January 29, 2014)

 

Ⅲ. The Characteristics of Regulation on the Internet Industry

The internet industry is fundamentally ruled by the ‘network effect’, which means that the more people use internet service, the more value the internet industry acquires. Additionally, if the ’tipping effect’, where increasing customers lead to rising number of sellers and the increased sellers then absorb more customers and ‘locked in effect’, where people tend to repeatedly buy what they are used to buying, are combined, it could be fairly possible that the internet industry become a natural monopoly market. Furthermore, given the property of the internet, a borderless network, a monopoly market could be generated spanning all over the world. In other words, a world-wide monopoly corporation could emerge.[3]

However, a traditional form of regulation – vertical governmental intervention to the market – is not desirable when it comes to the internet industry, because of its inherently retains different characteristics. Radically, the internet industry aims to involve as much participants as possible, based on diversity and openness. For example, the number of ‘Facebook’ users has already reached over 1 billion in 2012. In a traditional view, Facebook would not be a great corporation on the ground that it does not possess enormous tangible assets. All they possess is a network stretching out more than 1 billion peoples on earth. Though, the size of network virtually means how much money Facebook can earn from their business, because companies that are trying to advertise their brand new product are willing to pay for the usage of Facebook`s huge network.

In addition, the internet industry is borderless so that all foreign countries can be potential competitors with Korean companies. And without enforcement measures, compulsively applying Korean laws to foreign corporations has been almost impossible, as is shown in the You Tube Korea case. In 2009, You Tube Korea was designated as a website that needed to confirm users` identification by Article 44-5 of the Information Communications Network Act so that the Korea Communications Commission requested its cooperation. However, with the purpose of protecting anonymity, instead of conforming Korean law, You Tube rendered the uploading system inactive, if a user set his nation as Korea. In such situations, if Korean companies are only regulated by harsh Korean law, the foreign companies would comparatively enjoy advantages in competition and eventually conquer Korean market. Hence, vertical regulations could wipe out all the potential ground of growth in the internet industry.[4]

Therefore, even though monopoly is not an ideal situation on the internet in light of predominance of just one player in the market, reckless government intervention should be refrained. That is because control over the internet industry by government would lead to irrecoverable detriment to the industry. From this point of view, it is certain that Consent Settlement plays a substantial role especially in regulating the internet industry.

Ⅳ. The Need for Expanding the Implementing of Consent Decision in the Internet Industry

  1. To Reap Benefits from Quick and Easily Implementable Remedies in Fast-Evolving Markets

Since infringement procedures of the KFTC typically take more than a year, it is expected that its measures are not likely to be exactly fitted to present market conditions. Such consequence is obvious especially for the ‘fast-evolving’ markets like the internet industry. An example of the fast-growing internet industry is advertisement market. According to the Korea Digital Media Industry Association, until 2013, it has never occurred that internet advertisement market would excel printed advertisement market. Specifically, the total cost of internet advertisement is 2.08 trillion won, while that of printed advertisement amounts to 2.06 trillion won. Though the precise numbers of other internet markets areas are not shown in this article, it may be acceptable that most of internet industries including ‘Social Commerce’ and ‘Social Network Service’ are expanding their market shares consistently. In addition, the internet industry will dramatically evolve into what we have never been able to imagine.

Therefore Consent settlement is suitable to the internet industry, given the fact that an agreement takes less time to settle, because when consent settlement is undertaken, all that are needed is to find out common ground of feasible remedies, instead of arguing over every single factual details of the case. In a similar context, “the vice president of the European Commission responsible for competition policy Joaquin Almunia, concerning Google, stated that fast moving markets would particularly benefit from a quick resolution of the competition issues identified, restoring competition swiftly to the benefits of users at an early stage is always preferable to lengthy proceedings.”[5]

 

  1. To Maximize the Range of Recovery

Considering that the internet industry is borderless and nearly infinite, it is impossible to compensate countless victims without a creative solution that could be generated only by making Consent Settlement with professionals in the relevant area. Even though KFTC orders to take corrective measures or imposes certain amount of surcharges, it cannot be guarantee victims` full recovery. On imposing surcharges, the Monopoly Regulation and Fair Trade Act also provides remedial measures for all type of violations, such as halting such conduct by announcing the fact that it is charged with the remedial order, and issuing any other necessary remedial measures. However, the fact that the KFTC does not have as much expertise in pertinent markets as the alleged company makes it difficult for KFTC alone to save victims.

For instance, in the Naver & Daum case, mentioned above as the potential first Korean Consent Settlement case, Naver and Daum suggested the following corrective plans: first of all, they will spend a significant amount of money to build a nonprofit foundation for monitoring unfair advertisement and mediating conflicts, and contribute to local business foundations. This measurement also covers local business owners who were not a directly harmed but indirectly had their opportunities for competition limited due to Naver and Daum`s abuse of their dominant positions in the advertisement market. Without consent settlement, such owners would be forgotten. Furthermore, they promised to indicate ‘search advertisements’ among the search results. Though this measure is criticized on the point that ‘search advertisement’ is not exposed until a user clicks a tiny mark besides it, this kind of ‘creative’ action that only consent settlement can generate is far more pragmatic and effective in restraining potential victims than simple surcharges or remedial measures. And any other demerits of suggested measures will definitely be discussed in further procedures to reach the best answer.

 

  1. To Alleviate the Difficulties in Demonstration of Intent

Internet industries are governed mostly by algorithm, complex mathematical formulas or other computer system languages. There is no system concocted only for anti-competitive purposes so that it is quite hard to prove that anti-competitive intention outweighs the primary purpose of enhancing the user experience. Even if KFTC tries to prove an alleged company`s intent to commit any antitrust crime in the internet industry, the commission will likely be forced to pour out an enormous amount of resources to acquire evidence in vain. To be specific, in the Google case, “the FTC did not bring charges against Google after a19-month investigation into whether the company favored its own products and services in its search results and unfairly harmed rivals. That was because it could not find enough evidence that Google manipulated search results to favor its own products.”[6]

In addition, most articles in the Monopoly Regulation and Fair Trade Act are fitted to the manufacturing industry so that applying them to the issues generated from internet industry is quiet tough. In 2008, KFTC concluded that NHN Corporation (Naver) prohibiting PandoraTV from inserting any advertisement without its approval an abuse of dominant market position that violates the Monopoly Regulation Fair Trade Act, Article 3-2 and imposed 227million won as surcharge. However, Seoul High Court revoked such resolution on the ground that Naver`s dominant market position was hardly recognized just by searching market share and sales, considering that the internet industry has a very low barrier to entry and consumers are able to freely transfer to other markets whenever they want.

 

Ⅴ. Expected Disadvantage of Implementing Consent Decision in the Internet Industry

However, recurring consent settlement is unable to supply certain criteria to determine if a conduct violates the Monopoly Regulation and Fair Trade Act or not. “Despite the creation of legal certainty inter-parties and on a case-by-case basis, consent settlement provides limited guides to the business community at large. This is because consent decisions disclose very few facts and include only cursory legal and economic analyses.”[7] However, the internet industry has been around for no more than a few decades, which means there has been almost no chance to establish sure criteria to determine whether a conduct of company violates the Monopoly Regulation and Fair Trade Act. Naturally, it brings uncertainty into the internet industry and limits most parts of business.

To settle this problem, in December, 2013, KFTC offered ‘Standards of Transaction in Internet Searching Industry’. According to the Standards, Service providers should create a fair, transparent and open internet searching circumstances, disclosing chief principles of search and not unfairly manipulating the results. Specific patterns of unfair conducts and recommendations on making a deal between search service providers and contents suppliers are also represented. Regarding repeating consent settlement in the internet industry, this sort of standards will be able to give a certain degree of predictability to the market.

 

Ⅵ. Conclusion

Consent Settlement is a mechanism seeking to remedy and voluntarily resolve anti-competitiveness, compensate consumer damages, or restore the fairness of the transaction, based on mutual agreement among the KTFC, the company under suspicion and relevant government agencies. Consent Settlement has never been applied until now, but the internet advertisement market is going through the procedure for the first time in Korea through the Naver and Daum case. Meanwhile, the internet industry possesses unique characteristics, such as aiming to involve as much participants as possible, based on the diversity and openness and being so borderless that compulsively applying Korean laws to foreign corporations is almost impossible. Taking the properties into consideration, consent settlement will play a critical role in the internet industry as quick and easily implementable remedy in fast-evolving markets as well as maximizing the range of recovery and relieving the difficulties in demonstration of intent. Consent settlement is criticized for being unable to supply criteria to determine if a conduct violates any competition law. However raising predictability in the internet industry can be attained from a different approach such as the KFTC`s ‘Standards of Transaction in Internet Searching Industry’.

No one pours new wine into old wine skins. Likewise the brand new internet industry must be treated by a befitting measure, Consent Settlement.

 

 

[1] In this article, the internet industry means ‘any businesses utilizing internet network’, unless additional accounts are given.

[1] http://www.ftc.gov/news-events/press-releases/2013/01/google-agrees-change-its-business-practices-resolve-ftc (last visited January 18, 2014)

[2] Jin-Hee Ryu and Ji-pil Choi, A study on the Issues and Problems of the Consent Decision in the Korean Monopoly Regulation and Fair Trade Act, 고려법학, vol. 64 (March 2012), p. 397.

[3] 윤종수, 인터넷 산업에 대한 법적 규제 및 활성화 방안, 저스티스 통권 제121호(2010. 12), p. 739

[4] Ibid., at 742,743

[5] Yves Botteman and Agapi Patsa, Towards a more sustainable use of commitment decisions in Article 102 TFEU cases, Journal of Antitrust enforcement (2013), p. 9, available at http://antitrust.oxfordjournals.org/content/early/2013/08/13/jaenfo.jnt009.full

[6] Google Dodges Antitrust Hit, The Wall street Journal (January. 3, 2014)

[7] Supra note 3, at 17

 

Jihye623@hotmail.com

Posted in Spring 2014.