Why the FTC’s “Internal Dealings” Regulation Is Not Just Abnormal but Anti-Civilizational

A Premodern Notion: Blocking Inter-Firm Collaboration to Stop Rapid Growth

Banning Transactions on “Non-Normal” Terms? What Is the Standard for “Normal”?

The Fair Trade Commission has recently been stepping up pressure by imposing surcharges and other penalties on cases in which work has allegedly been funneled to owner families through affiliates. Under the Fair Trade Act, when a company in a large business group trades with an affiliated company, it is prohibited from engaging in unusually favorable transactions and, at the same time, from conducting transactions of a considerable scale. This is what is called the regulation on funneling work to affiliates, and it has been controversial ever since its introduction in 2014. The standards were vague, raising concerns about excessive restrictions on business activity. Those concerns are now becoming reality.

When companies form a group, strong vertical integration and collaboration among companies within that corporate group can create business synergies. The Fair Trade Act is effectively telling them not to do that. It is an anti-civilizational idea to block collaboration among firms, prevent synergy effects, and broadly suppress the rapid growth of businesses.

First, transactions on unusually favorable terms that deviate from normal conditions are prohibited. But this raises the question: what is the standard for a “normal transaction”? The issue of “calculating a normal price” has been the biggest point of contention in lawsuits involving allegations of work funneling. In many cases, there is no normal price to begin with. In fields such as building computer systems, purchasing computer equipment, and system integration (SI)—that is, in the service sector or IT services sector—there is no such thing as a normal price. By the nature of the service industry, most costs consist of labor, and labor costs vary enormously between experts and beginners, so there is no normal price.

Accordingly, large companies accused of funneling work to affiliates have filed administrative lawsuits against the Fair Trade Commission demanding disclosure of the materials used to calculate the normal price—specifically, the “transaction price information of third-party companies,” which serves as the comparative benchmark in calculating unjust enrichment. Yet in response to this entirely reasonable demand from companies, the Fair Trade Commission argues that it is difficult to disclose materials such as the transaction prices of third-party companies used in calculating the normal price, on the grounds of protecting trade secrets. This cramped argument by the Fair Trade Commission amounts to excessive stonewalling. Such information should of course be disclosed to guarantee a company’s right to defend itself. Only when the standard is disclosed can companies understand why they are being punished and prevent similar cases from recurring. Even though the court made a final decision ordering disclosure in the Harim Co., Ltd. case, the Fair Trade Commission still refused to disclose it. Harim Co., Ltd. has again filed suit in response.

Next, the ban on transactions of a considerable scale is also problematic. A “considerable scale” means cases where internal transactions exceed 20 billion won or account for at least 12% of annual sales. In May, the Fair Trade Commission imposed corrective orders and a surcharge of 4.391 billion won on 10 affiliates, including Mirae Asset Consulting, claiming that affiliates of the Mirae Asset Group engaged in transactions of a considerable scale with Mirae Asset Consulting without rational consideration or comparison, thereby transferring unjust profits to related parties—the controlling shareholder and his relatives. One might say that there would be no problem if rational consideration and comparison had been made, but in many cases rational comparison is impossible. In a diversified economic environment like Korea’s, who exactly gets to decide what is “rational”?

If the largest shareholder is sanctioned for violating the Fair Trade Act, that shareholder may not serve as an executive of a financial company and may not make investments, making the damage substantial. If the company receives even an institutional warning, it also becomes difficult for a financial firm to enter new business areas that require approval or licensing from supervisory authorities. Moreover, there is concern that the National Pension Service may classify the company as a target for monitoring, resulting in disadvantages in the exercise of voting rights. That is why companies are willing to go to court. As lawsuits against the Fair Trade Commission increase in this way, cases in which the Commission wins outright in court are actually rare. Of the 10 final judgments issued in administrative lawsuits over unfair support cases sanctioned by the Fair Trade Commission over the past five years, it is said that the Commission achieved a complete victory in only two.

The Fair Trade Commission’s regulation has gone too far. It must strongly refrain from enforcing these premodern and anachronistic regulations on funneling work to affiliates. If things continue this way, the Commission itself will have no answer if it is called the “Unfair Trade Commission.”

Junseon Choi, Emeritus Professor, Sungkyunkwan University Law School

---

Original title: 공정위 '일감 규제' 비정상 넘어 반문명인 이유

Author: Jun-seon Choi

Date: 2020-08-26

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=19&idx=23037