[How Big Tech Regulation Works]② Forced 'Lowest Price Guarantee' Abuse... Legal 'Blind Spot'

Fair Trade Commission, which strongly promoted the Onple Act emphasizing 'Gapjil sanctions', abruptly shifts to self-regulation after regime change

Recently, a voluntary regulation plan aimed at improving transaction practices between delivery platform operators and tenant businesses was unveiled. The Korea Fair Trade Commission (KFTC) emphasized the achievements of voluntary regulation, but concerns have been raised that it could lead to neglecting unfair trade practices by platforms. In the National Assembly, seeing the limitations of voluntary regulation in curbing the abusive practices of platform companies, numerous legislative bills focusing on regulation have been proposed. Since the inauguration of the Yoon Seok-yeol administration, the KFTC, having shifted its stance, plans to resolve power imbalance issues through voluntary regulation. Discussions on effective methodologies to regulate the ‘gapjil’ (abuse of power) by platform companies are resurfacing.

[Image source=Yonhap News]

Representative Platform ‘Gapjil’: Forcing ‘Lowest Price Guarantee’... Ambiguity in Current Legal Sanctions

One of the representative types of ‘gapjil’ caused by platform companies is the demand for ‘Most Favored Nation’ (MFN) treatment. MFN means that platform companies require tenant businesses to apply prices and transaction conditions for services or products that are equal to or more favorable than those offered through other sales channels. For example, delivery apps or open markets often demand tenant businesses to set the prices of products sold on their platforms as the ‘lowest price’ compared to other distribution channels.

Global open market platform Amazon also required tenant businesses to sign agreements containing a ‘lowest price guarantee’ clause. Due to Amazon’s policy, consumers found it difficult to purchase goods cheaper on other open markets than on Amazon. Following criticism of the MFN demand, Amazon voluntarily removed the clause. The clause was deleted after investigations in Europe in 2013, and the wording was revised in the United States in 2019.

In South Korea, the open market Coupang was also criticized for requiring tenant businesses to sign agreements containing an MFN clause. The clause stipulated that ‘sellers must set transaction conditions for all products sold using the marketplace service so as not to be disadvantageous compared to other sales channels.’ Notably, the ‘other sales channels’ that Coupang defined as not being more disadvantageous included offline sales outlets, leading to criticism that the MFN demand was excessively strong. Eventually, in August last year, the KFTC conducted a comprehensive investigation of the terms of use between seven open market companies, including Coupang, and tenant businesses, after which Coupang voluntarily deleted the clause.

Hotel reservation platforms such as Interpark and Booking.com (OTA, Online Travel Agency) also caused issues by demanding MFN treatment from domestic hotels. They prohibited lodging businesses from offering better prices or room availability on other OTAs or their own hotel websites than those provided on their platforms. For example, if a particular hotel sells a room for 100,000 KRW through platform A, the same room must not be sold for less than 100,000 KRW on the hotel’s website or other OTAs. After the KFTC reviewed the clauses of these OTAs in 2021, the OTAs voluntarily corrected their MFN clauses.

“Difficult to Prove Market Dominance... Also Hard to Prove Abuse of Transaction Status”

Both Coupang and the OTA platform companies voluntarily corrected the relevant clauses following KFTC investigations. However, experts in fair trade law believe that if these platform companies had not chosen voluntary correction, even if the KFTC regulated them, it would be difficult for courts to uphold such measures if companies filed administrative lawsuits. First, it is difficult to regard Coupang or Interpark as market-dominant businesses, making it hard to punish them for ‘abuse of market-dominant position.’ Moreover, there is no explicit provision in the Fair Trade Act prohibiting MFN agreements.

It is also challenging to prove ‘abuse of transaction status (gapjil)’ among general unfair trade practices. To sanction a company’s gapjil, the KFTC must first prove that the company holds a ‘transaction status’ (‘gap’ position) superior to tenant businesses, but proving the transaction status of platform companies is not easy.

To prove transaction status, it must be recognized that tenant businesses have been transacting exclusively (exclusivity) and continuously (continuity) with the platform for a long period. However, in the platform economy, proving exclusivity and continuity is difficult. This is because a new pattern called ‘multi-homing’ has become commonplace. Multi-homing refers to users simultaneously using multiple platforms for transactions. Tenant businesses typically use various open markets such as Coupang, Naver, and 11st.

A KFTC official said, “It is not impossible to prove transaction status and sanction platform companies under the Fair Trade Act,” but added, “To qualify as abuse of transaction status, the counterparty business must be unable to find alternative trading partners (exclusivity), which is difficult to prove in the platform economy.” Another KFTC official explained, “Even though platform companies do not require long-term contracts from tenant businesses, considering that tenant businesses voluntarily use the platform due to switching costs or network effects, proving exclusivity and continuity is challenging.”

Han Ki-jung, Chairman of the Fair Trade Commission, is delivering opening remarks at the "Delivery Platform Self-Regulation Plan Presentation" held on the 6th at the Korea Federation of Small and Medium Business in Yeouido, Seoul. Photo by Kang Jin-hyung aymsdream@

Need to Focus on Countermeasures Against Platform ‘Gapjil’ Such as Multi-Homing Restrictions and Tying Sales

These regulatory difficulties are not limited to MFN demands. Similar issues arise with platform companies’ ‘multi-homing restrictions’ (platforms directly or indirectly restricting tenant businesses from using competing online platforms) and ‘tying sales’ (forcing tenant businesses or service users to transact other products or services together with the platform’s offerings).

If a company holds an overwhelming market share as a market-dominant business, the KFTC’s ‘Guidelines on Abuse of Market-Dominant Position by Online Platform Operators,’ enacted in January this year, can be applied. However, effective regulation of unfair practices by general platform companies that are not market-dominant is difficult.

Therefore, there are opinions that separate legislation or amendments to the Fair Trade Act are necessary to sanction such ‘gapjil.’ Dr. Yang Yong-hyun of the Korea Development Institute (KDI) said, “Abuse of transaction status has mainly been regulated through the Subcontracting Act, Franchise Business Act, and Large-scale Distribution Act,” and added, “Specialized separate laws or provisions are needed to regulate such unfair practices by platform companies.”

The KFTC also included provisions to establish standards for unfair trade practices by online platform intermediaries in the ‘Act on Fairness in Online Platform Intermediated Transactions,’ submitted in January 2021 during the tenure of former Chairman Cho Sung-wook. The bill specified types of unfair trade practices using transaction status by online platform intermediaries and stated that detailed criteria for determining superior transaction status would be set by notification.

Han Ki-jung, Chairman of the Fair Trade Commission, is delivering a keynote speech at the 'Delivery Platform Self-Regulation Plan Presentation' held on the 6th at the Korea Federation of Small and Medium Business in Yeouido, Seoul. Photo by Kang Jin-hyung aymsdream@

KFTC’s Sharp Policy Shift After Yoon Administration’s Inauguration... Strengthening ‘Voluntary Regulation’ Solutions

At that time, the KFTC was strongly considering easing the exclusivity and continuity requirements for judging transaction status of platform companies through notifications or new guidelines, treating them as ‘auxiliary conditions.’ It was likely to introduce new criteria such as ‘data holding scale’ or ‘transaction frequency.’ If the scale of data held from transactions with users exceeded a certain level, the company could be deemed to have transaction status. This was intended to more effectively sanction platform companies’ gapjil.

However, after the inauguration of the Yoon Seok-yeol administration and the shift of platform regulation policy toward ‘voluntary regulation,’ the KFTC’s policy direction changed drastically. Unlike the previous administration, the KFTC decided to resolve power imbalance issues through ‘voluntary regulation.’ The core idea is that stakeholders pre-agree on contract terms with tenant businesses so that the platform companies’ unilateral ‘gapjil’ is self-regulated in the market. Chairman Han Ki-jung publicly stated that while the monopoly issues of big tech platform companies are under consideration for legislation, power imbalance issues will be resolved through voluntary regulation.

On the 6th, a voluntary regulation plan to improve transaction practices between platform operators and tenant businesses in the delivery app sector was established. Platform operators such as Baedal Minjok and Yogiyo, along with small business groups, agreed to include ‘criteria for determining search exposure order’ and ‘methods of applying fees and advertising costs’ as mandatory items in delivery platform tenant agreements (contracts). However, there are ongoing criticisms that voluntary regulation alone has limitations. Researcher Kim Yoon-jung of the Korea Legislation Research Institute pointed out, “It is difficult to intervene when unfair practices occur by companies not participating in the voluntary regulation plan.”

Inside and outside the KFTC, there are opinions that relying solely on companies’ goodwill makes it difficult for gapjil to be effectively self-corrected. A KFTC official said, “Although voluntary regulation was chosen because it aligns with government policy, whether it will truly be effective remains to be seen.” A National Assembly official lamented, “Until the previous administration, the KFTC emphasized passing the On-Platform Fairness Act (OnPla Act) to curb gapjil and persuaded the National Assembly hundreds of times, but it is regrettable that the KFTC changes its stance to fit the regime.”