[1] Whether a “act of inducing customers by fraudulent means” under Article 36(1) [Attachment 1-2] [Attachment 1-2] 4(b) of the former Enforcement Decree of the Monopoly Regulation and Fair Trade Act should be established (negative)

[2] The purpose of prohibiting "act of inducing customers by fraudulent means" under Article 36 (1) [Attached Table 1-2] 4 (b) of the former Enforcement Decree of the Monopoly Regulation and Fair Trade Act, and the method of determining whether an enterpriser's act constitutes an act of inducing customers by fraudulent means as an unfair trade practice

[3] The meaning of "transaction" in unfair trade practices under Article 23 of the former Monopoly Regulation and Fair Trade Act

[4] Whether a competitor's customer who is the object of the act of inducing a customer by fraudulent means includes the other party who is likely to become a competitor in the process of forming a new transactional relationship with the competitor as well as the other party who maintains the existing transactional relationship with the competitor (affirmative)

[5] Whether the "other measures necessary for correction" under Article 24 of the former Monopoly Regulation and Fair Trade Act includes all the measures deemed necessary to correct the violation (affirmative) and the limitation of the contents of such measures

[1] Article 23(1)3 and (2) (see current Article 23(3)) of the former Monopoly Regulation and Fair Trade Act (Amended by Act No. 12095, Aug. 13, 2013); Article 36(1) [Attachment 1-2] subparagraph 4(b) of the former Enforcement Decree of the Monopoly Regulation and Fair Trade Act (Amended by Presidential Decree No. 25173, Feb. 11, 2014); Article 23(1)3 and (2) (see current Article 23(3) of the former Monopoly Regulation and Fair Trade Act (Amended by Act No. 12095, Aug. 13, 2013); Article 36(1) [Attachment 1-2] subparagraph 4(b) of the former Enforcement Decree of the Monopoly Regulation and Fair Trade Act (Amended by Act No. 25173, Feb. 11, 2014; Presidential Decree No. 25130, Mar. 1, 20197]

[1] Supreme Court Decision 2001Du4306 Decided December 26, 2002 (Gong2003Sang, 521) / [3] Supreme Court Decision 2008Du14739 Decided January 14, 2010 (Gong2010Sang, 335) / [4] Supreme Court Decision 2001Du4306 Decided December 26, 2002 (Gong2003Sang, 521)

ELB Co., Ltd. (Law Firm LLC, Attorneys Lee Jong-chul et al., Counsel for the plaintiff-appellant)

Fair Trade Commission (Law Firm Song, Attorneys Yellow-hun et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2012Nu33869 decided November 21, 2014

All appeals are dismissed. The costs of appeal by the Plaintiff are assessed against the Plaintiff, and the costs of appeal by the Defendant are assessed against the Defendant.

The grounds of appeal are examined.

1. Case summary and key issue

A. Case summary

According to the reasoning of the judgment below, the following facts are revealed.

(1) Market status

The Plaintiff, Samsung Electronic Co., Ltd. (hereinafter referred to as “stock company” in the name of each company), panty house (hereinafter referred to as “three manufacturers”) is a domestic business operator who manufactures mobile phones (hereinafter referred to as “terminal”). At the time of 2010, the third manufacturers’ market share at the time of 2010 came to approximately 85% in total. In the domestic mobile communications service market, the domestic mobile communications service market is competing with esther, K, LBS (hereinafter referred to as “three mobile communications”).

(2) Terminal distribution structure

(A) approximately 85% of the devices distributed in Korea were supplied to agents, sales stores, etc. (hereinafter referred to as “distribution network”) through mobile operators (hereinafter referred to as “business model”). In the case of a device directly supplied from a manufacturer to a distribution network without going through a mobile operator, only the mobile operator registered the device information but the mobile operator was able to open the device. Accordingly, the structure of the mobile operator’s central distribution of the device was formed.

(B) In essential complementary relationship between a device and a mobile communications service, the consumer generally purchased a device from the distribution network and entered into a mobile communications service contract together with the mobile communications service contract. The promotional method for the mobile operator to lead the distribution of a device and to provide a device on the condition of subscription to the mobile communications service was activated.

(3) Mobile price structure

(A) Generally, the price at which a manufacturer sells a device to a mobile operator is called “supply price”, and the price at which a mobile operator sells a device to an agency is called “ex-factory price.” The ex-factory price of a device is known to consumers through the press, etc.

(B) A manufacturer or a mobile carrier shall pay to an agency various nominal incentives, such as manufacturer incentives, mobile operator incentives, and joint sales promotion incentives for manufacturers and mobile carriers, in order to promote the sales of a mobile device. An agency establishes its profit width in consideration of the size of the incentive, and determines the retail price of the mobile device. In this case, the width in which an agency discountss the price of the mobile device (i.e., the cost of the mobile device) is called “non-contract subsidies”. Meanwhile, a mobile carrier provides a consumer who has purchased mobile communications services for marketing of the mobile device with a discount on the mobile device or the mobile device fee. Among them, the amount of discount on the mobile device varies depending on the type of mobile device, the period of agreement, and the rate of use, which is called “agreement subsidies” for the mobile device.

(C) The majority of consumers, excluding the consumers who purchase only a device or the consumers who purchase a device without purchasing a specific mobile communications service consistent with the policy for the payment of incentives of the mobile operator, purchase the device at a price lower than the ex-factory price by receiving the deduction of out-of-contract subsidies or agreed subsidies.

(4) The instant disposition

On July 10, 2012, the Defendant issued a corrective order under Article 23(1)3 and (2) of the former Monopoly Regulation and Fair Trade Act (amended by Act No. 12095, Aug. 13, 2013; hereinafter “Fair Trade Act”) to the Plaintiff on the ground that “In relation to a part model device that the Plaintiff released and supplied at the time of 2008 to 2010, the Plaintiff raised the financial resources for the out-of-contract subsidy to be paid to consumers by withdrawing the supply price or ex-factory price through consultation with the three mobile communications companies, and entices consumers to purchase a device at a discounted price and at a discounted price, thereby inducing them to buy the device.” Article 23(1)3 and (2) of the former Monopoly Regulation and Fair Trade Act, the former Enforcement Decree of the Monopoly Regulation and Fair Trade Act (amended by Presidential Decree No. 25173, Feb. 11, 2014; hereinafter “Enforcement Decree of the Fair Trade Act”).

B. Key issue of the instant case

The key issue of this case is whether the plaintiff's act constitutes an inducement of customers by fraudulent means, whether the calculation of penalty surcharge is illegal, and whether the corrective order (disclosure order, reporting order) is illegal.

2. Whether it constitutes an act of inducing customers by fraudulent means (the Plaintiff’s ground of appeal Nos. 1 through 7)

A. Relevant legal principles

Article 23(1)3 of the Fair Trade Act provides that “an act of inducing or inducing customers of competitors to deal with oneself” as one of the unfair trade practices. Article 23(2) of the Enforcement Decree of the Fair Trade Act provides that “an act of inducing or inducing customers of competitors to deal with oneself shall be determined by the Presidential Decree.” Article 36(1) [Attachment Table 1-2] 4(b) of the Enforcement Decree of the Fair Trade Act provides that “an act of inducing customers to deal with oneself by misunderstanding or misleading customers as to the contents of goods or services supplied by oneself or transaction terms and conditions other than unfair labeling or advertising, or other transaction terms and conditions are significantly superior or more favorable than actual or more favorable to competitors.” Meanwhile, in order to establish the act of inducing customers by deceptive means, it is sufficient that customers might be mistaken due to deceptive or deceptive inducement, and it does not necessarily mean that the act of inducing customers to deal with oneself may have an effect on customers’ choice or decision-making of goods or services.”

The purpose of prohibiting the act of inducing customers through fraudulent means is to prevent any infringement on the rational choice of goods by deceptive means or deceptive means, and to maintain fair competition order or trade order through competition on prices, etc. among enterprisers in the relevant industry. Therefore, in determining whether an enterpriser’s act constitutes an act of inducing customers by deceptive means as an unfair trade practice, it is necessary to comprehensively examine comprehensively the impact that an act may cause an injury to the fair competition order or trade order of the whole industry, such as where a reasonable choice of ordinary consumers with experience and care is impeded or many consumers are likely to ultimately damage the whole industry, and thus, such an act is likely to interfere with the fair competition order or trade order of the whole industry; the existence and degree of ripple effects; the number or scale of enterprisers adopted through a business strategy; whether the act in question is likely to imitate; the scale of the relevant trade; the type of ordinary trade; the specific form of the enterpriser’s competitive means used by the enterpriser; whether such competitive means exceed the permissible level in light of the general trade practice and the good faith principle; and whether such competitive means continuously and repeatedly

B. Review of the reasoning of the lower judgment and the record reveals the following facts.

(1) Determination of the supply price and ex-factory price of the business model

(A) In the case of a non-contractual model:

On March 208, 2008, the 3rd mobile communications company requested more contributions to the 3rd manufacturer. The 3rd manufacturer demanded more than the 3rd manufacturer to provide the subsidies that should be allocated at the request of the 3rd manufacturer. Moreover, the 3rd manufacturer not only needs to provide the funds for the subsidies that should be paid at the request of the 3rd manufacturer, but also sought to reflect the ex-factory price in the form of the device similar to that of the 3rd manufacturer. Accordingly, the Plaintiff presented a proposal for ex-factory price to the 3rd mobile communications company and requested to determine the ex-factory price in response thereto. The Plaintiff determined the scale of the subsidy for the use of non-contractual subsidies, etc. after consultation with the 3rd company of mobile communications, and then decided the amount of the subsidy for the use of non-contractual subsidies, etc. (hereinafter referred to as the net price) to the net market (hereinafter referred to as the “pre-factory subsidy”). Accordingly, the 3rd manufacturer’s agreement on the ex-factory price agreement is made at the same time.

(B) In the case of a contract model:

The contract model is a device that is promised by a mobile carrier to purchase a certain quantity from the time of the delivery of a device to secure a strategic device separate from other mobile operators, and is supplied as a net price for mass purchase. Unlike the existing practice that has determined the ex-factory price at the level added to the distribution cost, in the case of a contract model, the factory price was determined at the level that reflects the amount to be used as the advance incentives in consultation with the Plaintiff in the case of a contract model. The Plaintiff actively participated in the decision of the ex-factory price by presenting a high level of ex-factory price for the ex-factory price determined by the three mobile operators, not only in supplying the contract model to the third mobile operators, but also in offering a proposal for the ex-factory price determined by the third mobile operators.

(2) Execution of advance incentives

The mobile communications three suppliers paid the advance incentives to the distribution network on the premise that most of the advance incentives reflected in the supply price or ex-factory price after consultation with the Plaintiff will be used as the out-of-contract subsidies.The three mobile operators involved in the execution of the advance incentives, such as distributing the policy table arranging the criteria for the payment of the advance incentives to the agencies from time to time in consideration of the consumer price by the mobile device model that the Plaintiff consulted with the Plaintiff, or conducting training on the agency employees through the marketing team

The distribution network led consumers to purchase a device and purchase a mobile communications service by providing that "the ex-factory price of a device is long, and if the mobile communications service use agreement is made, the store shall discount the number of times, and the actual purchase price of a device by receiving an additional contract subsidy when the period of use exceeds a certain period."

C. Whether a deceptive scheme or deceptive inducement constitutes a fraudulent inducement, and whether to recognize the harmfulness of fair trade (ground of appeal Nos. 1, 4, and 7)

(1) Examining these facts in light of the legal principles as seen earlier, the Plaintiff’s act constitutes “the act of inducing customers by misunderstanding that the terms and conditions of transaction of goods, etc. are more favorable than actual ones.” The reasons are as follows.

(A) The Plaintiff and the three mobile communications companies agreed to increase the ex-factory price by reflecting the advance incentives in the supply price or ex-factory price of the device, and paid the advance incentives to the distribution network, and made the consumers pay out the out-of-contract subsidies funded by the advance incentives on the terms of subscription to the mobile communications service through the distribution network (hereinafter “instant violation”).

(B) The reason why the Plaintiff and the 3 mobile communications company committed the instant violation was to use it as marketing means that the ex-factory price recognized as an indicator indicating the upper part of the device was similar to the actual ex-factory price of the competing company’s device. Moreover, the Plaintiff and the 3 mobile communications company established a high ex-factory price by reflecting the advance incentives, but paid out the out-of-contract subsidy on the condition of subscription to the mobile communications service, thereby lowering the actual purchase price, thereby making the high-priced device at a discounted price on the condition of subscription to the mobile communications service.

(C) Meanwhile, the price is one of the most important factors considered by the buyer in determining whether to purchase the goods or services. Competition between competitors is the most basic means of competition in the market economy system. Since competition between competitors may benefit both the other party and the general consumers, free price competition in the market should be generally protected. Moreover, there may be cases where a business entity is recognized to be in need of granting incentives to the distribution network in order to compete with the same business entity and promote the sale of the goods or services. The creation and enforcement of these incentives are similar in substance to the price reduction, so it is not easy to distinguish them from the normal means of competition such as the general price discount, and in itself, it is not evaluated as a means of inducing customers by fraudulent means.

However, the issue in this case is that the Plaintiff and the three mobile communications companies reflect in advance the supply price or the ex-factory price, which is determined not to belong to them. Moreover, the nature of the advance incentive differs from the normal incentive, such as the Plaintiff and the three mobile communications companies, which are the means to form the appearance of lowering the retail price on the premise that a considerable portion of the profits, excluding a part of the profits that the distribution network takes through the distribution network, would be paid as the out-of-contract subsidy to consumers.

In addition, the Plaintiff and the mobile communications three suppliers had already determined the supply price and the ex-factory price by reflecting the advance incentive at the time of the withdrawal of the device, and agreed on the appropriate consumer price after consultation. This may be viewed as only the nominal price not scheduled at the actual selling price in the case of a device that reflects the advance incentive price. Meanwhile, the Plaintiff and the mobile communications three suppliers agreed on the advance incentive, the supply price, etc. based on the net price after deducting the advance incentive to be borne by the manufacturer at the supply price in the non-contract model transaction as well as the contract model that is made at the net price. The Plaintiff calculated the profit and loss rate based on the net price. This supports that, in the case of a device that reflects the advance incentive price, the net price was the same as the actual supply price in the negotiation between the Plaintiff and the mobile communications three suppliers.

(D) On the other hand, while recognizing that a device with a high ex-factory price is excellent performance and quality, a consumer purchases a device based on the information or explanation of the distribution network provided by a mobile operator without properly understanding the complex price structure or system of the device or the mobile communications service, and was subscribed to the mobile communications service. However, the Plaintiff and the mobile communications three companies have created a prior incentive that does not have any financial relationship with the mobile communications service agreement and the price of the device itself, reflecting it in the form of the device price itself, and paid out out the out-of-contract subsidy through the distribution network only when the consumer subscribed to the mobile communications service, concealing this fact as the source of the out-of-contract subsidy. Moreover, the distribution network intended to purchase the device in the form of the amount obtained by deducting a certain amount of subsidy from the ex-factory price only for the mobile communications service.

Ultimately, due to the instant violating act, consumers are likely to misunderstand that they purchased a device with a high ex-factory price at a low price by receiving a discount, regardless of the absence of substantial discount benefits, and such discount was made because they subscribed to a specific mobile communications service, and that the source of discount was not already included in the ex-factory price of the device itself, but was part of the profits that they obtained by the mobile operator due to their subscription to the mobile communications service.

(E) Unlike general electronic equipment, in the case of a mobile device distribution market, there was a practice of paying subsidies on the condition that the mobile device and the mobile device are combined and sold, and the mobile device and the mobile device are traded. In such a situation, the instant violation committed by three mobile carriers and three manufacturers to enjoy marketing effects by setting the ex-factory price high by reflecting the incentives from the phase of the release, and then granting subsidies funded with the incentives, thereby discounting the device. The instant violation is an act that interferes with the reasonable choice of consumers by misunderstanding consumers, thereby hindering the competition of the normal cost of delivery of the mobile device and the mobile communications fee.

In a situation where some interests in the increase in sales between manufacturers and mobile communications operators are consistent with the combined sales method of a device and mobile communications service, even if there exists a “necessary” to coincide with the conflicting interests between the “price policy on manufacturing” and the “request for the reduction of the price of a mobile communications company” and such competitive means have been used, the instant violation is not justified due to such “necessary”.

(2) In the same purport, the lower court determined that the Plaintiff’s instant violation constituted “act of inducing customers by misunderstanding that the terms and conditions of transaction of goods, etc. are more favorable than actual ones,” and that fair trade undermining was also recognized. Furthermore, the lower court determined that there was no illegality of deviation or abuse of discretionary authority inasmuch as the Defendant calculated the “average percentage of the ex-factory subsidy accounts for the ex-factory price” to the Plaintiff, taking into account such circumstances, and excluded the Plaintiff from the subject matter, on the grounds that the Defendant calculated the “average percentage of the ex-factory price” of the “the ex-factory price” in response to the change in the market situation after the removal of the device.

In addition, the lower court determined that the instant violation constituted an act that misleads, misleads, or is likely to mislead, customers (consumers) as being significantly more favorable than actual terms and conditions of transaction for the Plaintiff’s device, taking into account the following: (a) the size of the ex-factory price in the case of a device that became the object of the instant violation among the business model that the Plaintiff released in 2008 to 2010 was small; (b) the ex-factory price was considerably higher than the ex-factory price; and (c) the ex-factory price was lower than the ex-factory price; and (d) the portion of the ex-factory price accounts for the ex-factory price was lower;

(3) Such judgment below is based on the legal principles as seen earlier. In so doing, contrary to what is alleged in the grounds of appeal, there were no errors by misapprehending the legal principles regarding “act of inducing customers by deceptive means”, “the requirements of integrity,” and “fair trade damage”, or by exceeding the bounds of the principle of free evaluation of evidence

D. Whether “the transaction terms of goods, etc. supplied by oneself” fall under “the grounds of appeal No. 5” (ground of appeal)

(1) According to the relevant provisions and legislative purport of the Fair Trade Act regarding unfair trade practices, “transaction” in the context of unfair trade practices shall be deemed not to refer to individual contracts, such as trade and purchase, but to the general means of business or trade order as a wider meaning (see Supreme Court Decision 2008Du14739, Jan. 14, 2010).

(2) The lower court determined that there was a transactional relationship between the consumer who purchased the device and the consumer who purchased the device by mediating the mobile operator and the agency, on the grounds that the Plaintiff’s consultation on the payment of incentives, which is the source of the subsidy outside the agreement, premised on the fact that the Plaintiff would be paid to the consumer in selling the device (business model) to the third party mobile communications, can be evaluated as a means for the Plaintiff’s business

(3) Such judgment below is based on the legal principles as seen earlier, and contrary to what is alleged in the grounds of appeal, there were no errors by misapprehending the legal principles on “the terms of transaction for goods supplied by oneself.”

E. Whether a competitor entices a customer of the competitor to deal with oneself (ground of appeal No. 6)

(1) The other party which is the object of the act of inducing a customer by fraudulent means, that is, the customer of a competitor is not limited to the other party whose existing transaction relations are maintained with the competitor and also includes the other party who is likely to be the customer of the competitor in the process of forming a new transaction relationship (see Supreme Court Decision 2001Du4306 delivered on December 26, 2002).

(2) The lower court determined that the instant violation constituted an act of inducing competitors to make their customers deal with the Plaintiff’s mobile devices and other mobile communications services that are likely to be used or likely to be used by the consumers in the future.

(3) Such judgment below is based on the legal principles as seen earlier, and contrary to what is alleged in the grounds of appeal, there were no errors by misapprehending the legal principles on the “act of soliciting customers.”

3. Whether the calculation of penalty surcharge is illegal (Plaintiff’s ground of appeal No. 8)

A. The lower court rejected the Plaintiff’s assertion that the penalty surcharge payment order was unlawful on the grounds that the amount of the penalty surcharge is excessive, on the grounds that the Plaintiff’s sales effect inducing consumers to purchase the device due to the instant violation occurred, and thus, it should be deemed that the Plaintiff gain profit.

B. Examining the reasoning of the lower judgment in light of the relevant legal principles and records, the lower judgment did not err by misapprehending the legal doctrine regarding the calculation of penalty surcharges.

4. Whether disclosure order and reporting order are illegal (Defendant's ground of appeal)

A. Article 24 of the Fair Trade Act provides that “The Fair Trade Commission may order the relevant enterpriser to suspend unfair trade practices, to delete the relevant contract provisions, to publish the fact that there is an act in violation of the provisions of Article 23(1).” In light of the language and text of such provision, the purport of the corrective order system, and the need to ensure its effectiveness, “other necessary corrective measures” as provided in the above provision includes all such measures as deemed necessary to correct the violation. Accordingly, the Fair Trade Commission may take such measures as are deemed necessary to correct the violation, taking into account the specific form of the violation, structure and characteristics of the relevant market, etc. Therefore, the Fair Trade Commission may order the correction of the violation. Such measures are limited to the extent necessary to restore or maintain the fair competition order harmed by the violation, and measures not recognized as having substantial relation with the violation. Furthermore, the contents of such measures should be proportional to the contents and degree of the violation in question.

B. The lower court determined that the instant disclosure order and reporting order violated the principle of proportionality on the grounds as delineated below.

(1) The Defendant ordered the Plaintiff to disclose the factory price and sales incentive details by model of all devices manufactured by the Plaintiff on the Plaintiff’s website. The Defendant ordered the Plaintiff to report to the Defendant the first supply price, the first shipment price, sales volume, the total payment incentive, the total payment incentive, the amount of incentives, and the amount of incentives per unit

(2) The Defendant deemed that the Plaintiff’s act of reflecting considerable amount of the advance incentives in advance on the supply price or ex-factory price of the device was unlawful in order to raise the financial resources of the out-of-contract subsidy to be paid to consumers who subscribed to the mobile communications service through “consultation” with the three mobile communications companies, and does not deem the creation and payment of all grants unlawful.

(3) It is not proportional to the content and degree of the violation that all devices are subject to disclosure order and reporting order, without considering whether there was consultation on incentives between the Plaintiff and the mobile operator, and include all devices not related to the instant violation in the device.

(4) Furthermore, in the case of incentive for a contract model subject to disclosure order and reporting order, it is difficult for the Plaintiff, the manufacturer, without consultation with the mobile carrier, to understand it. Therefore, the Plaintiff is also difficult to implement this part.

C. Although the reasoning of the lower judgment partially inappropriate, it is based on the legal doctrine as seen earlier. In so doing, contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the legal doctrine on deviation and abuse of discretion in the disclosure order and the reporting order.

5. Conclusion

Therefore, all appeals are dismissed, and the costs of appeal by the Plaintiff are assessed against the Plaintiff, and the costs of appeal by the Defendant are assessed against the Defendant. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Jong-hee (Presiding Justice)