Case on the Compulsory Purchase of LocalSoju

[8-2 KCCR 680, 96Hun-Ka18, December 26, 1996]

A. Background of the Case

In this case, the Court struck down the Liquor Tax Act provision that compelled soju wholesalers to purchasesojuproduced in their local areas.

Since the beginning of the 1970s, the government sought to consolidate, under a policy of one producer per one province, more than 400sojuproducers then competing nationwide and in 1981, reduced them into 10 producers. Also, in order to prevent monopoly by one particular company and promote a regionally balanced growth, a system that requiredsojupurchases to be made locally (National Tax Service Order No. 534, June 24, 1976) was introduced. The system was abolished in late 1991, but was revived as a provision in Article 38-7 of the Liquor Tax Act on October 1, 1995.

Article 38-7 Section 1 of the Liquor Tax Act provided thatsojuwholesalers must purchase more than 50 percent of the total monthly purchase from producers located in the same province or city. Article 18 Section 1 Item 9 allowed the director of the competent tax office to suspend liquor sales or the license if such purchasing orders were violated.

The petitioner was suspended from operating business as per Article 18 Section 1 Item 9 for violating Article 38-7 of the Liquor Tax Act, and sought the nullification of the suspension through administrative action. At the same time, he requested constitutional review of the provision, which was granted by the presiding court and referred to the Constitutional Court.

B. Summary of the Decision

The Constitutional Court held that Article 38-7 and Article 18 Section 1 Item 9 of the Liquor Tax Act violated the Constitution.

The compulsory purchasing program excludes free nationwide competition by requiring regionalsojuproducers to have a minimum of 50 percent regional market shares, and thereby solidifies regional monopolies. Therefore, this is not an appropriate means to achieve the public interest of regulating monopoly.

The primary aim of regional economic development is the reduction of economic disparity among regions. However, there is no causal relationship

between promoting the regional economy and maintaining onesojuproducer in each province, and thus this cannot constitute a public interest that justifies the infringement of fundamental rights.

Meanwhile, the protection of small and medium-sized enterprises (SMEs) must be realized in principle by strengthening the rules of competition on the foundation of a competitive order and by making up for the disparities arising out of free competition through the support of the state, for the purpose of maintaining and promoting competition. The compulsorysojupurchasing system cannot be an appropriate means to achieve such public interest.

Therefore, Article 38-7 and Article 18 Section 1 Item 9 of the Liquor Tax Act excessively restrict not only the occupational freedom ofsojuwholesalers, but also the freedom of competition and entrepreneurship ofsojuproducers, and consumers' right to self-determination. Accordingly, the aforementioned provisions are unconstitutional.

Further, if the compulsory local purchasing was aimed at the legislative purpose of regulating monopoly and protecting SMEs, there is no rational reason to apply it only tosojuwholesalers, treating them differently from other wholesalers. If the legislative purpose was aimed at reducing distribution costs and the amount of traffic arising out of transportation of goods, there is no rational reason to regulatesojuwholesalers and producers differently from wholesalers and producers of other products. Therefore, the above provisions also violate the principle of equality.

Justices Cho Seung-Hyung, Chung Kyung-Sik, and Koh Joong-Suk dissented, characterizing the compulsory purchasing system as a program preventing monopoly by large-scale producers and protecting regionalsojumakers, thereby giving effect to the constitutional economic objectives of monopoly regulation and regional economic development. Therefore, a minor instance of discrimination incurred by this system is justified by a rational cause.

C. Aftermath of the Case

A media outlet reported that while the compulsory local purchasing program was introduced to ease the financial hardships of localsojumakers that were overpowered by giantsojucompanies, and did result in an increase in sales of local brands, it had been criticized for involving a restriction on competition by the government to protect only local businesses in a particular industry, when there is no reason for such protection under the capitalist economic order that

runs on competition. Thus, the report found the Court’s decision to be appropriate. (Seoul Economic Daily, December 27, 1996).

Following this decision, the compulsory localsojupurchasing program was repealed.