KFTC Proposes Enactment of Fair Transactions in Online Intermediary Services Act

On September 28, 2020, the Korea Fair Trade Commission (“KFTC”) published a bill to introduce the Act on Fair Transactions in Online Intermediary Services (the “Act”), which will be open for public comments for a period of 40 days.  According to the KFTC’s press release, the purpose of the Act is to effectively respond to a rise in online platforms with a superior bargaining position and a greater possibility of abusive conduct resulting in unfair trade practices against the sellers on those platforms, as the volume of online transactions has grown dramatically in recent months due to a rapid expansion of digital marketplace and the COVID-19 pandemic. Comments will be accepted through Monday, November 9, 2020.

A summary of the bill is as follows.

1. Applicability

The Act will apply to platform operators providing online intermediary services that meet certain monetary thresholds as follows (“Platform Operators”):

  i. (Definition) Platform Operators are defined as any provider of intermediary services for trades of goods or services between consumers and online sellers in a contractual relationship with such service provider, by allowing online sellers to provide information and receive orders via the service provider’s online platform.  Examples of online platforms offering intermediary services include open markets, delivery applications, application markets, accommodation reservation applications, taxi applications, price comparison sites, information services on real estate or used car, and search advertisement services.

  ii. (Size requirement) A Platform Operator will be subject to the Act if it generates in the immediately preceding fiscal year either (a) revenues (fee income) from the provision of online intermediary services and value-added services equal to or greater than an amount to be determined by a presidential decree (such minimum amount not to exceed KRW 10 billion) or (b) sales of all goods and services sold through its online intermediary services equal to or greater than an amount to be determined by a presidential decree (such minimum amount not to exceed KRW 100 billion).

  iii. (Applicability to offshore transactions) The Act will apply to online intermediary services rendered for all trades between a domestic online seller and a domestic consumer, irrespective of the location, or the law governing incorporation, of the Platform Operator.

Platform operators of smaller size will continue to be regulated under the Monopoly Regulation and Fair Trade Act (the “MRFTA”).

2.  Obligation to prepare and deliver a written contract

The Act will require Platform Operators to prepare a written contract that addresses 13 essential contract terms and deliver it to each online seller conducting business on their platforms, in order to conduct transactions in a transparent manner and prevent potential disputes.  A summary of the key provisions of the 13 essential contract terms is as follows:

  i. Details of the online platform intermediary services to be provided to online sellers and the method of calculating fees for such services and procedures for fee collection;

  ii. Term of contract, procedures for renewal or amendment thereof, termination rights and procedures for termination;

  iii. Requirements and procedures for the commencement, limitation and suspension of online platform intermediary services;

  iv. Criteria and procedures for the return, refund and exchange of goods sold; and

  v. Methods of settlement of sales proceeds, and procedures and timing of final payment.

Other details governing the rights and obligations of the parties will be further prescribed by a presidential decree.

3. Obligation to give prior notice

The Act will require Platform Operators to give prior notice of any amendment to the contract terms or any limitation, suspension or termination of its services, in the following manner:

  i. For any amendment to the contract terms, at least 15 days’ notice must be given, unless amendment is specifically permitted under a presidential decree.

  ii. For any limitation or suspension of services, at least seven days’ notice must be given, describing the event and reasons for such event.

  iii. For termination of services, at least 30 days’ notice must be given, describing the event and reasons for such event, unless termination is specifically permitted under a presidential decree.

  iv. If a Platform Operator fails to give notice as required, any amendment made to the contract will be null and void; any limitation or suspension of services will be subject to regulatory surcharges; and any attempted termination will not be enforceable.

4.  Prohibition of unfair trade practices

The Act will introduce a clause similar to an MRFTA clause prohibiting abuse of a superior bargaining position (MRFTA Article 23(1)-4) but tailored to the unique characteristics of the online platform industry.

Any conduct by a Platform Operator that constitutes abuse of a superior bargaining position will be penalized with an administrative fine of up to double the “amount of violation” to be further defined in a presidential decree (or, where the “amount of violation” cannot be set, a fixed amount of administrative fine not exceeding KRW 1 billion).  In determining whether a Platform Operator has a superior bargaining position, special attributes of the platform industry will be considered such as the structure of the online platform industry, use of the platform by consumers and online sellers and the level of its concentration, and any gap in business capacity between the Platform Operator and its online sellers.

The following types of conduct will constitute abuse of a superior bargaining position in the platform industry, subject to further details to be prescribed by a presidential decree:

  i. (Coercion to purchase) Unreasonably coercing online sellers into purchasing goods or services against their will.

  ii. (Coercion to provide economic benefits) Unreasonably coercing online sellers into providing the Platform Operator with money, goods, services or other economic benefits.

  iii. (Unfair loss-shifting) Unreasonably shifting any losses incurred in transactions to online sellers.

  iv. (Conferral of disadvantage) Unreasonably setting or changing transaction terms to the disadvantage of online sellers or conferring a disadvantage in the performance of transaction terms.

  v. (Interference in management) Unduly interfering with online sellers’ management activities.

On the other hand, Platform Operators engaged in abuse of a market dominant position or unfair trade practices with anti-competitive effects (including refusal to deal, exclusive dealing and unfair discrimination) will continue to be regulated under the MRFTA.

5. No retaliatory actions

The Act will prohibit Platform Operators from conferring disadvantages to online sellers for filing an application for dispute mediation, reporting of violation of law, submitting documents in response to written surveys or cooperating with investigators.  Any violation will be subject to criminal punishment (imprisonment not exceeding 2 years or criminal fine not exceeding KRW 150 million).

6.  Other matters

The Act will provide a legal basis for the KFTC to develop standard contract forms that Platform Operators can use to avoid engaging in unfair trade practices and facing disputes.  To meet the constantly evolving needs of the online platform industry, different standard contract forms will be made available for different platform types.  The bill contains a clause that encourages Platform Operators and online sellers to enter into mutually-beneficial arrangements designed to improve the overall business landscape, and while the standard form contracts will not be binding, the clause provides for extension of support for the implementation of such arrangements.

The Act will also provide for the establishment of a dispute resolution body dedicated to the online platform sector under the Korea Fair Trade Mediation Agency, in order to enable quick dispute resolution based on industry expertise.  Additionally, the KFTC will be allowed to carry out written surveys for fact-finding purposes in order to promptly identify and address prevailing market practices, difficulties experienced by online sellers and existence of unfair trade practice, etc. in the fast-changing online platform industry.  Further details such as the procedures, corrective orders, regulatory fines and damages conform to the MRFTA amendment bill currently pending at the National Assembly. 

For more details on the Act and its implications, please contact us.