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Article 19(1) of the Monopoly Regulation and the Fair Trade Act (“Fair Trade Act”) stipulates enterprisers shall not jointly engage in any of the act that unfairly restrict competition (“unfair collaborative acts”) or allow enterpriser to perform such unfair collaborative acts by means of contracts, agreements, resolutions or any other means.

In the recent BMW case (No. 2010DU18703 decided April 26, 2012) involving six BMW car dealers’ price fixing South Korea, the Supreme Court of South Korea reversed the original Seoul High Court’s decision (No. 2009NU9873 decided July 22, 2010), mainly because of a lack of market definitions.

The purpose of this paper is to discuss which illegality tests apply to the unfair collaborative act under the Fair Trade Act and to comment on BMW cases based on the interpretation of “unfair restriction of competition” requirements.

Unfair collaborative acts prior to the 7th Amendment of the Fair Trade Act were agreed by competitors as to restrict competition substantially. In 1992, the National Assembly amended the Act that requires an unfair collaborative act, composed not of “substantial restriction of competition” but of “unfair restriction of competition.” The term “practices substantially restrict competition” means, with the intention of a certain enterpriser or enterprisers’ organization, any act that may affect the determination of price, quantity, quality, other terms or trade conditions due to a sharp decline in competition in a particular business area (the Fair Trade Act Subparagraph 8-2 of Article 2). Also, the term “particular business area” means districts where competition exists or may exist for each subject, stage, or geographical region of a trade (Subparagraph 8 of Article 2), which corresponds to “relevant market” in antitrust theory.

The rationale for the market definition process in the antitrust case is to enable the inference of market power of the company in question. In the U.S., if the offense in question is about firms’ price fixing, courts typically hold it per se illegal without defining market or measuring the market share. Moreover, the European De Minimis Notice illustrates that the European Commission does not impose strict restrictions, including price fixing a safe harbor.

The European Court and European Commission do not allow market definitions as a precondition for confirming the illegality of hardcore cartels, including price fixing. Also, most of the commentators of the Korean Fair Trade Act understand that under the current law, there is no requirement to define a relevant market to prove the hardcore cartel.

Thus, the Supreme Court’s position in the BMW case is criticized for being too rigid and only following formal logic. In addition, the Supreme Court has two problems in terms of competition policy.

First, since hardcore cartels such as price fixing can be established as anticompetitive cartels except in special circumstances, approval of hardcore cartels may result in wasteful use of execution resources and time and costs, which require defining markets and evaluating market share in courts.

Second, an offense like price fixing has little social costs in proportion to strengthening deterrence by applying per se rule. Generally speaking, hardcore cartels do not benefit society when there is a lack of market power, and they simply do not affect. A per se rule significantly reduces costs and increases the effectiveness of enforcement. Even if this leads to over enforcement in the sense that discourages effects to fix prices, or even punishes attempts to fix prices but failed to do so, the over-enforcement (false-positive) would not inhibit any socially valuable conduct. Rather, it inhibits ineffective attempts that are both harmful and unlawful.

Therefore, I propose the amendment of Article 19(1) to include a provision that applies to per se rule kind applicable to hardcore cartels.