Decision of Administrative or Quasi-judicial gencies


Chapter 5 Trade Associations

 1. Restraint on competition and business activities of member enterprises by three children's wear wholesale market associations

(FTC Resolution No. 94-18)

 

I. Overview of the facts

The enterprises under scrutiny in this case are A Children's Wear Market Association, B Children's Wear Market Association, and C Children's Wear Market Association, which are sub-organizations of the Seoul Namdaemun Market(Ltd.) The enterprises are arbitrary groups of wholesale and retail businesses in children's wear whose objective is market development and the enhancement of their common interests. Each association is managed by its own platform, board, and decision making bodies and is run using monthly maintenance fees collected from member enterprises. These trade associations are designated by Article 2, (4) of the Act. They did not file a trade association establishment registration and filed the registration with the FTC during the investigation process of this case.

Each association is comprised of 123, 78, and 155 enterprises that use a common trademark(trademarks jointly filed and licensed by two or more persons according to Article 54, (5) of Trademark Law, that require the consensus of all users in alienation or establishment of users' rights) under the names of `Bourden,' `Mama,' and `Seoul One.' Member enterprises of the associations form a market sphere (hereinafter referred to as the Namdaemun market sphere) in the form of a group market in Namdaemun Market located in Namchang-dong, Chung-gu, Seoul. The three enterprises form the core of the seven group markets of children's wear. The Namdaemun market sphere takes up 70% of the national wholesale market. Meanwhile, Dongdaemun Market(referring to the filers of this case, which is located inside Dukwoon and Heungin Markets, as well as Pyungwha, Shinpyungwha, and Dongpyungwha Markets) is a group market(hereinafter referred to as Dongdaemun Market sphere) comprised of middle wholesalers that purchase out-of-season products, excess inventory, or products without trademarks from Namdaemun Market for discount resale to retailers or consumers(called 'tang' sales).

Member enterprises of the associations met with a capital shortage after a fire on December 4, 1991 that burnt down the Bourden and Mama Children's Wear building(s) forced them to operate shops on the streets for six months. In order to solve the money problems, some of them engaged in double-price sales(sales at different wholesale prices according to the credibility of the buyer), or discount sales(called 'quasi-tang' sales, which are sales offered at a discount of normal wholesale prices, regardless of the buyer's credibility or time of discount sale in both in-season and inventory products) in transactions with Dongdaemun Market merchants. This led to Dongdaemun Market's middle wholesale prices being the same as the wholesale prices or even lower than wholesale prices in Namdaemun Market, and provincial retailers that used to make purchases at Namdaemun Market transferred their business to Dongdaemun Market, leading to declining sales in Namdaemun Market. Alarmed by this change, each of the associations conducted the following actions with their member enterprises.

 1) The management committee of A Children's Wear market decided on the following measures to correct the distribution process, in the regular consultation meeting held on July 15, 1992 at its office (participants: president and 9 consultation members) to prevent product sales to 'tang' sales enterprises in Dongdaemun Market and others and implement discount sales according to rules. It notified member enterprises of the decision and placed an announcement of the decision on the walls of the market.

A Children's Wear market notified its member enterprises of the above-stated decision. But when some members continued sales to Dongdaemun Market or double-price sales in the economic recession, it held many discussions to fully stop the sale of products to Dongdaemun Market in its monthly consultation meetings.

2) The management committee of B Children's Wear market in its regular consultation meeting in its office on August 14, 1992, decided "each enterprise must not engage in 'quasi-tang' sales, and if it does it must not sell under 10% of the normal price to maintain the Namdaemun Market price level. If it sells under 10%, it must cut off the label or make a cross or a diagonal line on the label with a magic marker. Violators of this decision will be subject to a punishment decided in an operational meeting." When the committee found some member enterprises secretly transacting in violation of this decision, it did not punish them but waited to make an in-house announcement on April 20, 1993 that first time violations will be subject to 1,000,000 won in fines and second time violations will be subject to 2,000,000 won in fines. Third violations will be subject to a shutdown of the business and revocation of its membership. On April 28, 1993, it issued notifications similar to the A management committee's to its member enterprises to solicit compliance.

 3) The management committee of C Children's Wear market in its regular consultation meetings held on November 13, 1993 in its office decided to "react strongly to the dumping and require 1,000,000 won in fines from first time violators, 2,000,000 won in fines from second time violators, and 3,000,000 won in fines from third time violators." It posted a written announcement inside the building, stating that to protect trademark rights, any violation of Article 28, (5) of the rule banning "sales of trademarks through abnormal methods(ex. inventory sales) unless the trademarks designated by the committee are eliminated from the product. Violations of this rule are subject to punishment according to the resolution of the consultation meeting."

 When some member enterprises failed to comply with the decision of each association as stated above, the associations decided to jointly deal with violators. The associations held a presidents' meeting at the Sara Grill on the second floor of Mama Children's Wear market building on May 7, 1993 to decide on the following, and sent written notifications to all member enterprises as well as making an in-house announcement.

Afterwards, the associations held many discussions on ways to ensure member enterprises' compliance with the decision and to strongly react to violations in the monthly consultation meetings of each association. To ensure compliance, they set up joint task forces comprised of security personnel and consultation members from each association, to dispatch to Dongdaemun Market for inspections. Announcements of violators found by the task force were made.

On May 17, 1993, it found two or three violators of inventory sales and many violators of the decision in children's wear and notified the violators of the findings. At the end of May, 1993(exact date unknown), they imposed 1,000,000 won in fines on two member enterprises of Seoul One Children's Wear market management committee that had sold new products. At the end of November, 1993(exact date unknown), seven violating member enterprises of A Children's Wear market were imposed fines of 1,000,000 won and a one day suspension of business.

 

II. Summary of the Ruling

 The FTC deems the associations' action of banning sales by member enterprises to specific transacting partners including Dongdaemun Market and discount outlets to be an unfair restriction that limits the member enterprises' freedom to choose their transacting partners. Member enterprises of the associations must be given the freedom to choose their transacting partners according to their own judgment and business strategies, even if they are sharing trademarks in children's wear. Such action by the associations are deemed pursuant to Subparagraph 4 of Article 19, (1) of the Act that defines "restriction of transacting partners" by the FTC. As to the "certain transaction areas," the FTC sees the children's wear wholesale business as a "relevant market" and pointed to the fact that member enterprises' share in the market is large, which makes the impact of restriction of competition in that transaction field.

Therefore, the FTC deems the actions of the associations pursuant to Subparagraph 4 of Article 19, (1) of the Act, and violations of Subparagraph 1 of Article 26, (1) of the Act, since they substantially restricted competition in that transaction field.

The correction order demanded that the associations do away with the resolution of the presidents' meeting to ban sales by member enterprises to Dongdaemun Market and others. It also called for the elimination, amendment or deletion of in-house resolutions, announcements, and rules of each association that ban member enterprises' sales to specific transacting partners. The FTC also demanded that the association send written notifications of receipt of the correction order to all member enterprises.

 

III. Application of the Act

The actions of the associations that banned the supply of products of member enterprises to Dongdaemun Market and discount outlets is pursuant to Article Subparagraph 4 of Article 19, (1) of the Act, and violations of Subparagraph 1 of Article 26, (1) of the Act. The actions of the associations that banned double-price sales or discount sales of member enterprises and punishment of member enterprises that violated the operational hours, and B Children's Wear market management committee's action of requiring approval in advance for 'quasi-tang' sales and dumping sales are violations of Subparagraph 3 of Article 26, (1). Therefore, the FTC applied Article 27 of the Act to decide on the following judgment.

 <Judgment>

  1. The associations must take the following measures and must not engage in actions that substantially restrict competition in children's wear wholesale business such as banning sales of member enterprises to Dongdaemun Market. The associations must not unfairly restrict business activities of member enterprises such as banning double-price sales or discount sales.

  1. The associations must immediately do away with the resolution of the presidents' meeting on May 7, 1993.

  2. Seoul Namdaemun Market (Ltd.) A Children's Wear market management committee must immediately do away with ?,?, and ? of the resolution made by the regular consultation meeting on July 15, 1992 and resolution of the emergency consultation meeting on December 6, 1993.

  3. Seoul Namdaemun Market (Ltd.) C Children's Wear market management committee must immediately do away with the resolution of the regular consultation meeting on November 13, 1992, and immediately amend or delete Article 30, (4) of its rules.

  1. The associations must send written notifications of its receipt of the correction order from the FTC by engaging in the action in 1. which is a violation of the Act within fourteen days of receipt to all member enterprises. The wording of the notification must be coordinated with the FTC in advance.

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 2. Restriction of competition and business activities of member enterprises by A Pharmaceutical Products Wholesale Association

(FTC Resolution No. 96-318)

I. Overview of the facts

a. Status of the association

- The association is formed by wholesale enterprises dealing in pharmaceutical products to promote order in product distribution and the welfare of members. It is a business group designated by the provision in Article 2, (4) of the Act.

 b. Acknowledged facts

(1) New membership for wholesalers requires submission of admission fees, annual membership fees, and association building construction funds to their local branches. Along with that, new members must also submit admission fees, annual membership fees, and building construction funds to the association. The association raised membership fees(compared with 1992 rates, 1996 admission fees for regular members and special members by 300%, associate members 500%, annual membership fees 114.3%, and building construction funds, 66.7% for regular and special members, and 100% for associate members).

(2) The associations received contributions in the form of event expenses and other payments from pharmaceutical companies and others totaling 36,800,000 won in 1991, 18,279,000 won in 1992, 265,250,000 won in 1993, 39,100,000 won in 1994, 8,400,000 won in 1995.

(3) Cysco Trading(Ltd.) registered as a pharmaceutical products wholesaler in October 27, 1994 and joined as a member in February 3, 1995. At its expanded presidents' meeting on March 7, 1995, the association discussed "ways to end general comprehensive wholesale activities by directly-run pharmaceutical wholesalers." It decided to call the president of Cysco Trading to its office on March 13 and 14, 1995, and recommend a voluntary shut down of its business before March 18, 1995. Around March 13-14, 1995, the executive director of the association and Vice President Kim Jin Mun met with the president of Cysco Trading in the association's office and persuaded Cysco to deal in Ilsung Pharmaceuticals' products only and not to engage in other pharmaceuticals' products, since Cysco is managed by Ilsung Pharmaceuticals. On March 21, 1995, a board meeting was held in the conference room of Small and Midsized Businesses' Association building and decided to persuade Ilsung to shut down its business, since the Cysco issue relates to pharmaceutical products wholesale business. The association restricted the business activities of Cysco by leaving the task of shutting down the business to the presidents' meeting.

(4) When Handok Pharmaceuticals(Ltd.) planned to form a capital alliance with Zuellig, a Swiss pharmaceutical products wholesaler which was moving into the Korean pharmaceutical products wholesale market, the association held an expanded meeting of presidents on August 25, 1995, with the president and vice president of Handok present, and tried to dissuade them against Handok's participation in Zuellig's establishment of a distribution company. On September 6, 1995, its advisors and members of the presidents' meeting met with Handok's President to repeat the request for Handok not to participate in the venture. On September 21, 1995, an emergency expanded board meeting was held to ban the Handok-Zuellig joint venture from moving into wholesale business by all means. On October 4, 1995, Handok withdrew from its plan to establish a joint venture distribution company with Zuellig.

 

II. Summary of the Ruling

a. On all membership fees

- The FTC deems that it is not easy to do wholesale business in pharmaceutical products' wholesale without becoming a member of the association, since the provision in Subparagraph 7 of Article 57 (1) of the enforcement regulations of the Pharmacists Act states pharmaceutical products manufacturers must put forth efforts to sell their products to medical institutions and pharmacies via wholesalers of pharmaceutical products, and the supply of products to general hospitals must be conducted through the wholesalers unless there is an explicit reason against it, and also since as of September 1996, 95% of the pharmaceutical products wholesalers in the nation are members of the association.

The association protested that it raised its membership fees in the interest of fairness with existing members, who have contributed to growth of the wholesale industry over a long period of time. The FTC replied that membership fees should be kept to the minimum level necessary to fund various business activities to achieve the goals of the business group. The fact that the association increased membership fees fourfold for regular members and sixfold for associate members within two years and made membership difficult for new members is a restriction of the business activities of other enterprises and a restriction on competition in pharmaceutical products transactions.

b. On contributions

- The members of the association enjoy a superior position over pharmaceutical companies in transactions. The association admitted to some degree of coercion in receiving annual contributions from pharmaceutical companies in the name of event funds. The FTC deemed the association's action of receiving contributions from pharmaceutical companies that have business relationships with its member enterprises is a restriction on the business activities of other enterprises and a restriction on competition in pharmaceutical products transaction.

c. On the restriction of the business activities of Cysco Trading

- The association claimed that Cysco Trading is a pharmaceutical wholesaler, despite the fact that pharmaceutical manufacturers that double as wholesalers and full-time wholesalers are both licensed to conduct business in "general pharmaceutical products" and have no limits on the products they deal in. It cited Cysco Trading's impact on full-time wholesalers as grounds to persuade the company from engaging in the general wholesale business, which the FTC deemed an unfair restriction of business activities on member enterprises.

d. On the restriction of the business activities of Handok(Ltd.)

- The association persuaded Handok Pharmaceuticals, a member enterprise, not to engage in the joint venture with Zuellig, despite the fact that Handok should be free to decide whether or not to establish a relationship as wholesaler of pharmaceutical products with Zuellig. This action is deemed the unfair restriction of business activities on a member enterprise.

 

III. Application of the Act

The above-cited facts (1) and (2) are pursuant to Article 19, (8) of the Act, and violations of Subparagraph 1 of Article 26, (1). Facts (3) and (4) are violations of Subparagraph 3 of Article 26, (1) of the Act. Therefore, the provision in Article 27 is applied to issue the following judgement.

<Judgment>

  1. The association must not restrict competition in pharmaceutical products transactions by restricting the business activities of other enterprises such as limiting new memberships by raising membership fees excessively over a short period of time, or accepting excessive contributions from pharmaceutical companies by abusing its superior position.

  2. The association must not unfairly restrict the business activities of its member enterprises by persuading pharmaceutical companies and its special members against the general wholesale of pharmaceutical products or joint investments with foreign wholesalers who seek an entrance into the local market.

 

Chapter 6 Acts of Resale Price Maintenance

 

1. The action of resale price maintenance by A

(FTC Resolution No. 95-231)

 

I. Overview of the facts

  1. The enterprise is a manufacturer and seller of aloe products, and its products are sold through branch offices and dealers.

  2. The enterprise engaged in the following action in the sale of its products under transaction contracts with its branch offices and dealers.

  1. The enterprise put coded markings identifying branch offices on the products it supplied, and the offices that received these products with secret markings made additional markings identifying dealers, in order to restrict sales to other transaction parties. The enterprise also established a distribution inspection team at the company headquarters to verify whether its products were sold with the consent of the headquarters or branch offices to other buyers, and when violations were found, shipments of products were halted or contracts cancelled.

  2. The association took action against dealers and branch offices that did not comply with designated prices as determined by its "distribution reinforcement committee," which is comprised of dealers and branch offices under its consent.

 

II. Summary of the Ruling

 a. On the facts in 2. a. above

(1) The branch offices and dealers are independent enterprises that should be left to determine for themselves their transacting partners based on their business capabilities and plans.

(2) As seen by the facts in 2. a., the enterprise restricted its branch offices and dealers. Taking into consideration that the enterprise is a market-dominating enterprise in the local aloe market along with Kim Jung Mun Aloe(Ltd.) and Pulmuwon, and fact (1), such an action by the enterprise poses the risk of restricting competition in the market by restricting its transacting partners' freedom of trade and choice of buyers. It is deemed to be a transaction based on the condition of the unfair restriction of transacting partners on its branch offices and dealers.

(3) In regard to 2. a., the enterprise claims this was part of its self-rescue efforts, since aloe products are prone to cause side effects when sold without the advice of those having expertise and knowledge. But aloe products are not pharmaceutical products but supplemental health foods that can be selected by any consumer who can read on the effects. Therefore, the claims of the enterprise are invalid.

b. On the facts in 2. b.

The enterprise set sales prices when it supplied its products to its dealers and branch offices and took actions when they failed to comply. Such actions by the enterprise is an action of resale price maintenance that is banned in Article 29, (1) of the Act. The product in this case is not designated by the FTC as a product subject to resale price maintenance according to Article 29, (2). Therefore, the enterprise's action of resale price maintenance is illegal.

 

III. Application of the Act

The action by the enterprise in 2. a. is pursuant to Article 7, (2) of the Notification of Types of and Criteria for Determining Unfair Business Practices and a violation of the provision in Subparagraph 5 of Article 23, (1) of the Act. Therefore, the FTC applies the provision in Article 24 of the Act. The action of the enterprise in 2. b. is a violation of Article 29, (1) of the Act, and the FTC applies the provision in Article 31 of the Act to decide on the following judgment.

 

<Judgment>

  1. The enterprise must not operate under the condition of unfairly restricting its transaction partners in the sale of products to their buyers, or predetermine sale prices of its transacting partners.

  2. The enterprise must send written notifications of its violation of the Act and the subsequent correction order from the FTC to all its dealers and branch offices within fourteen days of receiving this correction order. The wording of the notification must be coordinated with the FTC in advance.

 

2. The action of resale price maintenance

by A

(FTC Resolution No. 94-83)

 

I. Overview of the facts

  1. The enterprise under scrutiny is a manufacturer and seller of cameras and other equipment, designated by the FTC in Article 2 (1) of the Act. It was also designated as a market-dominating enterprise from 1989 to 1994 according to Article 4 of the Act.

  2. The enterprise stipulated in Article 5 (sales price) of its sales contracts with its dealers that in the sales of its products, it holds the right to establish the consumer price and the right to sanction dealers in cases of violations of the sales price. It took sanctions against dealers that violated the provision, making dealers sell products at list prices established by itself.

 

II. Summary of the Ruling

  1. The dealers are independent enterprises that should be given the freedom to set prices according to their business strategies and capabilities through market competition. However, the enterprise designated list prices for the dealers in their sales to consumers as well as recommending the sales prices that they should abide by. Furthermore, the enterprise stipulated that it would take sanctions against dealers that fail to comply with the set prices in its transaction with dealers, coercing them to sell products at consumer prices decided by itself in the contract. Such actions are deemed as maintenance of resale prices.

  2. The enterprise had not been designated by the FTC as an enterprise that has the approval to maintain resale prices according to Article 29, (2) of the Act.

 

III. Application of the Act

The action of the enterprise in the fact 2. is a violation of Article 29, (1) of the Act. Therefore, the FTC applies the provision in Article 31 of the Act to decide on the following judgment.

<Judgment>

  1. The enterprise must delete or amend Article 5 of its dealership contract that stipulates its ability to designate consumer prices and recommend compliance of the dealers within thirty days of receiving this correction order, and must not engage in actions of resale price maintenance from henceforth.

  2. The enterprise must send written notifications of the fact that it received a correction order from the FTC for violation of the Act by engaging in the action in 1. within fourteen days of being notified of the order to all its dealers. The wording of the notification must be coordinated with the FTC in advance.

 

Chapter 7 Wrongful Representation or Advertisements

 

1. Wrongful advertisements of A

(FTC Resolution No. 96-323)

 

I. Overview of the facts

  1. The enterprise is a manufacturer and seller of soju and other types of liquor designated in Article 2, (1) of the Act.

  1. The manufacturing process of soju products

Soju is categorized into distilled soju or diluted soju, based on Article 3 (3)(classification of soju products) of the Liquor Tax Act. Distilled soju is made from a mixture of additives, water, and alcohol extracted from a device known as a 'one-step distiller,' while diluted soju is made from a mixture of alcohol extracted from a device known as a 'continuous distiller,' as well as additives, water, and grain alcohol or distilled soju solution(the Liquor Tax Act classifies liquor with less than 20% of grain solution or distilled soju solution in total alcohol content as diluted soju). The difference between the two types of soju is whether the alcohol is extracted from a one-step or a continuous distiller.

  1. The product in question, "Chamnamu(Oak)-barrel fresh soju" is diluted soju. According to the report on manufacturing methods filed with the National Tax Administration, its ingredients are alcohol, additives and water added to a distilled soju solution. The distilled soju solution(extracted from a one-step distiller) is made from polished rice. The solution is aged in an oak(chamnamu) barrel for over a year before being used to make the Chamnamu-barrel fresh soju. The aged distilled soju solution makes up about 5-9% of the total alcohol content in the product.

 

  1. The enterprise marked the picture described in the following c. on the products' bottles and placed advertisements using expressions in the following a. and b. in the daily Joongang Ilbo and other media.

 

  1. "Chamnamu-barrel fresh soju is made from a distilled soju solution of pure rice. The solution is aged in an oak barrel for over a year," "A new type of aged soju, only aged soju can..."

  2. A picture of the product's bottle in a broken oak barrel in the advertisement that gives the impression that the entire product is aged in an oak barrel

  3. "A solution made from pure rice and distilled before a 365-day aging period in an oak barrel, to be blended..."

 

II. Summary of the Ruling

 

  1. As to the expression in 2. a.("Chamnamu-barrel fresh soju is made from a distilled soju solution of pure rice. The solution is aged in an oak barrel for over a year," "A new type of aged soju, only aged soju can..."),

 As seen in 1. b., it is true that the distilled soju solution used partially in the product is made from polished(pure) rice and aged for over a year in an oak barrel. But 91-95% of the total alcohol content is not aged alcohol, and only 5-9% of the content is an aged distilled soju solution(oak barrel-aged solution). The fact that the enterprise's advertisements as in 2. a. can or might mislead consumers into thinking the entire product is aged soju or made 100% from a distilled soju solution makes the advertisements exaggerated.

The enterprise claims that the wording "made from a distilled soju solution of pure rice, and blended with solution that is aged in an oak barrel for over a year...Jinro Chamnamu soju" in the picture of the advertisement under the trademark signifies that the product is made by blending a mixture of an aged soju solution with other ingredients and not made from aged soju solution only. It also claims the label markings indicate that it is a diluted soju, and there is no chance consumers would be misled by the wording in 2. a.

 However, it uses the term "aged soju solution" to describe the blended ingredients, which can or might mislead consumers into thinking that the product is made from a mixture of other aged soju solutions and not just the partial blending of an aged soju solution. It also claims the label marks the product as a diluted soju. However, this does not eliminate the possibility of a consumer's misunderstanding of 2. a. that the entire product is made from aged soju. In relation to this case, the FTC commissioned Media Research(Ltd.) to conduct phone surveys. The survey results indicate that 36.0% of the 300 respondents who saw the advertisement in question thought the entire product was aged in an oak barrel, signifying the advertisement had already led many consumers to misunderstand the facts. Therefore, the enterprise's claims cited above are deemed invalid.

  1. On the picture advertisement in 2. b.(the picture of the product's bottle in a broken oak barrel)

 The advertisement shows the product's bottle in a broken oak-barrel with the words in 2. a.("Chamnamu-barrel fresh soju is made from a distilled soju solution of pure rice. The solution is aged in an oak barrel for over a year," "A new type of aged soju, only aged soju can...").

The wording in 2. a. and the picture of the bottle pose a high possibility of misleading consumers into believing the entire product was made from a distilled soju solution that was aged for over a year in an oak barrel. This advertisement is deemed as an exaggerated advertisement that can or might lead consumers into thinking the entire product is made from a soju solution aged in an oak barrel.

  1. On the wording in 2. c.("A solution made from pure rice and distilled before a 365-day aging period in an oak barrel, to be blended...")

The enterprise uses the term "a solution blended...aging period..." Blending is known as the technique of mixing more than two types of alcohol to control the taste of a liquor. In this product, alcohol (approximately 24%), additives (approximately 1%), and a distilled soju solution(2.6-5%) are mixed with water(approximately 70%), which is for dilution(meaning the mixing of water is to lower potency). However, the enterprise's wording of the advertisement can or might mislead consumers into believing the product is made only by a mixture of different alcohol solutions, making it an exaggerated advertisement and misrepresentation.

 

III. Application of the Act

The action of the enterprise in fact 2. is pursuant to Article 9, (1) of the Notification on the Types of and Criteria for Unfair Business Practices(FTC Notification No. 1995-6) and a violation of Subparagraph 6 of Article 23, (1). Therefore, the provision in Article 24 is applied to decide on the following judgment.

<Judgment>

  1. The enterprise must not make exaggerated advertisements or representations that might mislead consumers as follows in advertisements of its product, "Chamnamu-barrel fresh soju."

  1. Since the distilled soju solution takes up only 5-9% of total alcohol content in this product, the wording of the advertisement as "Chamnamu-barrel fresh soju is made from a distilled soju solution made from pure rice that was aged for over one year in an oak barrel," or "a new type of aged soju, only aged soju can..." are exaggerated advertisements that might mislead consumers into thinking 100% of the content of the product was an aged distilled soju solution or the product was an aged soju.

  2. Exaggerated advertisements such as using pictures of the product bottle in a broken oak barrel, as if the entire product was aged in an oak barrel.

  3. Expressions such as "a solution made from pure rice and distilled before a 365-day aging period in an oak barrel, to be blended..." that exaggerate the facts of the product as if it were made from a mixture of different distilled solutions, when the fact is that the product is diluted soju made by diluted alcohol and a distilled soju solution. The expression 'blending of solutions' might mislead consumers.

  1. The enterprise must make public the fact that it violated the Act by engaging in action 1. and received a correction order from the FTC within thirty days of being notified of the order, by placing a four column by 15cm announcement in the weekly edition of three major daily newspapers(all editions) in which it already placed many such exaggerated advertisements. The scope of the newspaper, page, wording and type size of the announcement must be coordinated with the FTC in advance.

 

2. Wrongful advertisements by A

(FTC Resolution No. 94-204)

 

I. Overview of the facts

  1. The enterprise under scrutiny is a manufacturer and seller of cosmetics and detergents, designated by Article 2, (1) of the Act.

  2. The enterprise used the following expressions in advertisements of its cosmetic products such as the "Hwayong series" and "Cherry series" in advertisement leaflets, magazine and newspaper advertisements.

- Allergy-free cosmetics

- Patented cosmetic products well acknowledged for their functionality

- Trustworthy cosmetics made from bears' gallbladder

- IDCA, the best natural ingredient that helps in moisture absorption and enhances the effects of bears' gallbladder

- Cherries, the holy water of beauty according to the famous Oriental medical almanac, Dongeuibogam

- The world's one and only patented cherry cosmetics

- AHAS prevents pimples, liver spots, freckles, and blemishes

- Edible cosmetics with no side effects

 

II. Summary of the Ruling

 

  1. On the expression "allergy-free cosmetics"

An allergy is a state of over-sensitivity that arises or is found after a certain substance has been injected, consumed, applied or touched by a human being. Even if the product underwent long-term clinical testing, it cannot be said that allergies do not exist; they are only not discovered, and the possibility of an allergic reaction is not ruled out. The enterprise's use of the expression "allergy-free cosmetics" without offering an explanation of objective criteria, limits, or conditions poses the risk of misleading consumers into thinking the product offers a perfect performance, when the effects of the product are not objectively confirmed or yet undiscovered. Therefore, it is deemed as a wrongful and exaggerated advertisement.

  1. On the expression "patented cosmetic products well acknowledged for their functionality"

The expression "well acknowledged for their functionality" was used vaguely without an objective means of evaluation or the objective approval of a certified institution. Therefore, it is a wrongful and exaggerated advertisement that poses the risk of misleading consumers into thinking the performance of the product was clearly proven, when in fact it has not.

The enterprise had not yet received a patent for the "Hwayong series" which was filed on March 29, 1993(No. 93-4989), yet it used the expression "patented cosmetics." Article 2 of the Patent Act stipulates "patented inventions are inventions that have been granted patents." The procedure of the Patent Act states the definition of "patented" as inventions that were assigned registration numbers after reviews. The action of describing products pending a patent issuance as patented products poses the risk of misleading consumers into thinking the product has been patented, and thus is deemed to be a wrongful and exaggerated advertisement.

  1. c. On the phrase "trustworthy cosmetics made from bears' gallbladders"

Regarding the phrase "cosmetics made from bears' gallbladders," the enterprise claims that it used the phrase since its "Hwayong series" is made from UCDA, which is an ingredient found in a bear's gallbladder. However, the substances of a bear's gallbladder are very complex including unidentified substances beside UDCA. Even if UCDA was used to make the product, it is only a partial truth, and the overall description might mislead consumers. It is also taking advantage of a trend for a vague public preference for bear's gallbladder based on traditional beliefs, and is deemed an exaggerated advertisement.

  1. On the phrase "IDCA is the main substance of the gallbladder of the Manchurian black bear and the best natural ingredient that helps in moisture absorption and enhances the effects of the bears' gallbladders"

The enterprise was unable to provide the evidence or basis for this advertisement slogan, which is not true, and therefore is a wrongful and exaggerated advertisement.

  1. On the phrase "cherries, the holy water of beauty according to the famous Oriental medical almanac, Dongeuibogam"

The source of the quoted phrase submitted by the enterprise is not Dongeuibogam, but a largely unknown translation of another book(original title : Beauty Tips According to Oriental Medicine, by Han Sung Ho, Hanglim Publishing Co.(China)). The action is deemed to be exaggerated advertisement since the enterprise quoted a different reference to take advantage of consumers' trust in the efficacy of cherries, one of the ingredients in the "Cherry series" products, and poses the possibility of misleading consumers into thinking the widely-known book Dongeuibogam provides proof of cherries' efficacy.

  1. On the phrase "the world's one and only patented cherry cosmetic"

The registration review and procedures have not yet been completed for the "Cherry series" products of the enterprise, with the application for a patent(No. 92-22950) filed on December 1, 1992, and therefore the products are not patented. However, the enterprise's misuse of the term "patented cosmetic" and "the world's one and only" pose the risk of misleading consumers. It is deemed that the phrase constitutes a wrongful and exaggerated advertisement.

  1. On the phrase "AHAS prevents pimples, liver spots, freckles, and blemishes"

The enterprise's advertisement says that its "Hwayong series" products contain a substance called AHAS and as a result are effective for preventing pimples, liver spots, freckles, and blemishes. This is a wrongful and exaggerated advertisement that poses the risk of misleading consumers into thinking the product is effective for the treatment or prevention of disease, although its pharmaceutical efficacy has not been certified by the Ministry of Health and Welfare or other authoritative bodies.

  1. On the phrase "edible cosmetics with no side effects"

Article 2, (8) of the Pharmacists Act states the usage and purpose of cosmetics as follows: "cosmetics are goods used to clean or beautify the human body, or maintain the health of skin or hair by application, spraying or other means, with negligible side effects on the human body." The enterprise's advertisement slogan that claims the product is usable in ways other than specified by the Pharmacists Act might mislead consumers, and it is deemed that to be a wrongful or exaggerated advertisement.

?�

III. Application of the Act

The action of the enterprise as stated in fact 2. is pursuant to Article 9, (1) of the Notification on the Types of and the Criteria for Determining Unfair Business Practices, and a violation of Subparagraph 6 of Article 23, (1) of the Act. Therefore, the FTC applies the provision in Article 24 to decide on the following judgment.

<Judgment>

  1. The enterprise must not engage in wrongful advertisements of the products that it sells using the following phrases that might or can mislead consumers contrary to the truth.

- Allergy-free cosmetics

- Patented cosmetic products well acknowledged for their functionality

- Trustworthy cosmetics made from bears' gallbladders

- IDCA, the best natural ingredient that helps in moisture absorption and enhances the effects of bears' gallbladders

- Cherries, the holy water of beauty according to the famous Oriental medical almanac, Dongeuibogam

- The world's one and only patented cherry cosmetic

- AHAS prevents pimples, liver spots, freckles, and blemishes

- Edible cosmetics with no side effects

  1. The enterprise must make public the fact that it received correction orders from the FTC for its violation of the Act by engaging in the actions in 1. within fourteen days of being notified, by placing a four column by 15cm announcement in the weekday installment of two major daily newspapers(all editions) that have already carried its advertisements. The scope of the newspaper, page, wording and type size must be coordinated with the FTC in advance.

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3. Wrongful representation by two department stores

(FTC Resolution No. 97-1)

 

I. Overview of the facts

1. The enterprise

  1. The enterprise A and B are department store enterprises that have been designated by Article 2, (1) of the Act.

  2. Mr.Kim joined New Core on May 5, 1983, and began working as the manager of the supermarket division in the basement floor of A(located in Chamwon-dong, Seocho-gu, Seoul) on November 10, 1996. Mr.Lee joined B on June 2, 1987, and began working as the manager of the food business division in the basement floor of B(located in Daechi-dong, Kangnam-gu, Seoul) on July 1, 1996. These two people are in positions to engage in actions of wrongful representation of the processing dates in this case.

 

2. Wrongful representation

a. Actions

(1) Actions by A

A rewrapped inventory products such as seafood and prepared side dishes to make them appear as being processed and displayed on the rewrapping day by removing the barcodes that indicate processing dates and replacing them with the barcodes of new processing dates(the new date) right before opening hours and displaying and selling them to consumers from August 1, 1995 to December 16, 1996.

(2) Actions by Mr.Kim (A supermarket division manager)

Kim led the action by A in (1) while working as the supermarket division manager from November 10 to December 17, 1996. For instance, on December 11, 1996, he along with other employees removed from seafood and prepared side dish products the barcodes that showed the processing date as the previous day(Dec. 10, 1996), rewrapped the products in plastic wrap, and applied new barcodes of Dec. 11, 1996 before displaying them on shelves for sale. By doing this, Kim misrepresented the processing date as if the products were processed and displayed for the first time on that day.

(3) Actions by B

The enterprise engaged in same actions as A, described in a. (1) in sales of meat and seafood products in the food market on the basement floor of B from December 1, 1994 to December 11, 1996.

(4) Actions by Mr.Lee(Grand Department Store Food Business manager)

Lee led the actions of Grand Industrial Development in (3) while working as the manager of the food business division of B from July 1 to December 17, 1996. For instance, on December 15-16, 1996, with other employees he removed from meat and seafood products the barcodes that showed the processing date as the previous day(Dec. 14 and Dec. 15, 1996), rewrapped the products in plastic wrap, and applied new barcodes of Dec. 15 and Dec. 16, 1996 before displaying them on shelves for sale. By doing this, Lee misrepresented the processing date as if the products were processed and displayed for the first time on that day.

 

II. Summary of the Ruling

 

a. Deception and risk of misleading consumers

(1) In general, consumers who purchase food products from department stores place an emphasis on freshness and product qualities, which is why they choose to shop at department stores. The average consumer without the expert knowledge makes purchasing decisions based on the credibility of the department store and bases their decision largely on the processing date indicated on the packaging of products as a way to determine freshness.

(2) The enterprises replaced processing dates on products left over from the previous day's sales while washing them with saline, then applied the date of the rewrapping, as if washing with saline and rewrapping was to be considered the 'processing.' The day on which that action took place could be taken as the 'processing date.' However, consumers in general do not think of the 'processing date' as the day of rewrapping but the day the products were processed for the first time and placed on display. It would be appropriate for the enterprises, therefore, to mark the 'repackaging date' or 'reprocessing date' as well as the original 'processing date' when repackaging them.

(3) In a consumer survey conducted by Media Research(Ltd.) commissioned by the FTC in relation to this case, almost all of the respondents(92.6%) said they checked the 'processing date' when purchasing packaged food products at a department store. Even more respondents(99.3%) said the 'processing date' was an important criterion for them in making purchasing decisions. 71.5% of respondents thought the 'processing date' was the 'day the product was first processed or packaged,' and 26.0% thought it was 'the day the product first arrived at the department store.' 99.0% of respondents said department stores should indicate whether they rewrapped or reprocessed inventory food products. 46.5% of those polled said they would not purchase these products even if they were discounted, if the same type of product was available for sale. Taking all this into consideration, consumers are well aware of the fact that there is a large qualitative difference between originally packaged and repackaged products.

(4) Therefore, the enterprises' failure to use the phrase 'repackaging date' or 'reprocessing date' in repackaging food products and not offering other means of sale for repackaged products such as discounts, and the fact that they are unable to prove these points, makes the actions in 2. a. liable to deceive or mislead consumers into thinking the products were fresh products placed on display on the day of purchase, and therefore these actions are deemed to be false or deceptive representations.

(5) Meanwhile, the enterprises had been notified by the department stores' association of the fact that the FTC gave correction orders and issued fines to C, D, E and F for engaging in the same type of action as stated above in July 1994, which is pursuant to Subparagraph 6 of Article 23, (1) of the Act, with the announcement that the recurrence of such an unfair business practice would be subject to filing complaints. Therefore, it is deemed that the enterprises engaged in the above-stated action in a., fully knowing that it to be an unfair business practice.

 

III. Application of the Act

(1) Action 2. a. (1) of A and action 2. a. (3) of B are pursuant to the provision on wrongful representations in Subparagraph 6 of Article 23, (1) of the Act, Article 9, (1) and (2) of the Notification on the Types of and Criteria for Determining Unfair Business Practices(FTC notification 1995-6, July 8, 1995). Therefore, in relation to violations of the provision in Subparagraph 6 of Article 23, (1) of the Act, A and B are deemed to be the responsible parties under Article 67, (2) of the Act, according to the provision in Article 70 of the Act.

(2) Kim and Lee are the instigators of the wrongful representation action in 2. a. (1) by A and the action in 2. 1. (3) by B, and led the employees of their respective department stores in these actions. They are responsible for violations of Subparagraph 6 of Article 23, (1) of the Act, and according to the provision in Article 70 of the Act, they are responsible according to the provision in Article 67, (2) of the Act.

(3) The provision in Article 24 is applied to issue the correction order, and the provision in Article 71 is applied to file a complaint against them. The following is the judgment.

 <Judgment>

  1. In the sale of food products such as meat, seafood, and prepared side dishes in their respective food market divisions, the enterprises, A and B must not engage in false or deceitful representations that might deceive or mislead consumers into believing the products were processed and put on display for the first time on that day of sale by marking the repackaging date as the 'processing date,' when the fact of the matter is that they are unsold inventory products left over from the previous day's sales.

  2. The FTC files a complaint against A, B, Mr.Kim and Mr.Lee .

 

Chapter 8 Prohibition of Unfair Subcontract Transaction Actions

 

1. Unfair subcontract transaction of A

(FTC Resolution No. 95-206)

 

I. Summary of the facts

  1. The enterprise A is a construction enterprise designated by Article 2, (3) of the Construction Business Act and is the prime contractor in the "154KV Dalsuh Transformer Substation Construction Project" that subcontracted Samwha Facilities(Ltd.) for facilities construction(hereinafter referred to as the "subcontracted construction") according to the provision in Subparagraph 4 of Article 2, (2) of the Act on Fair Transactions in Subcontracting. Samwha Facilities(Ltd.) was subcontracted by the enterprise for the construction project and is the supplying enterprise according to the provision in Subparagraph 3 of Article 2, (3) of the same Act.

  2. In subcontracting construction to Samwha and making subcontract payments, the enterprise A has not paid Samwha until this day of review, well in excess of the 60-day limit after hand over of the facilities (hereinafter referred to as "the legal payment date"), for the contract. Nor has it paid any interest on the principle.

 

II. Summary of the Ruling

  1. Article 13, (1) of the Subcontracting Act states the original enterprise must pay its subcontractor within the shortest possible period before the legal payment date, and in cases of making payments after the legal payment date has passed, Article 13, (5) of the same Act calls for the payment of interest according to the Decree on the Ceiling Interest Rate Stipulated under Article 1, (1) of the Interest Limitation Act (Presidential Decree No. 11280, Provision on highest interest rate in Article 1, (1) of the Act defines the rate as an annual 25.0%) for the deferred payment.

  2. The enterprise has not paid Samwha Facilities the subcontract payment of 185,823,000 won for the received facilities through the day of this review, and the annual 25.0% interest for the deferred period from the day after the legal payment date to the date of the actual deferred payment. This is deemed an unfair subcontracting transaction.

 

III. Application of the Act

The action of the enterprise in 2. is a violation of Article 13, (1) and (5) of the Subcontracting Act, and therefore the FTC applies Article 25, (1) of the same Act to decide on the following judgment.

<Judgment>

The enterprise must make payments without delay to its subcontractor Samwha for its work in the "154KV Dalsuh Transformer Substation Project" and also the interest accrued on the principle (from March 2, 1995, the day following the legal payment date, to the payment day) at a 25.0% annual interest rate.

 

2. Unfair subcontract transaction action of A

(FTC Resolution No. 95-263)

 

I. Summary of the facts

  1. The enterprise is a manufacturer and seller of synthetic resins for foodwrapping. In subcontracting Kim Soo Hyun(Daewon Industries) to manufacture rubber gloves bearing its trademark, it is the original enterprise according to Subparagraph 2 of Article 2, (2) of the Subcontracting Act. Kim Soo Hyun(Daewon Industries) is an enterprise in rubber products manufacture and the subcontractor in this case according to Subparagraph 2 of Article 2, (3) of the same Act.

  2. The enterprise engaged in the following action from December 1994 to February 1995 in subcontracting the manufacture of rubber gloves to Kim.

  1. The enterprise received a total of 12,400 pairs of rubber gloves for the contract given on December 3, 1994 --4,000 pairs of rubber gloves shipment on December 26, 1994, and 8,400 pairs on January 27, 1995-- and supplied them to its buyers. When 12,200 pairs were returned for quality defects, it returned the 12,000 pairs to Kim on January 19, 1995 and February 28, 1995.

  2. In paying Kim for the subcontract work, the enterprise paid part of the amount in promissory notes within sixty days of receiving the supply (hereinafter referred to as "the legal payment date"). Although the due dates of the promissory notes passed the legal payment date, the enterprise did not pay the cost of discounting the promissory notes for the period between the day after the legal payment date and the maturity date for the promissory notes.

 

II. Summary of the Ruling

  1. On the fact in 2. a.

In shipments of supplies from subcontractors in manufacturing subcontracts, it would be appropriate for the original enterprise to conduct product tests within ten days of receiving the supplies according to fair and objective criteria and methods agreed upon with the subcontractor, and notify the subcontractor of the test results as well as returning defective products. However, in this case the original enterprise shipped all of the subcontracted products to its buyers without testing, which places the responsibility after shipment to the buyers on the enterprise. The products in question that were returned were originally supplied to buyers before being returned to the enterprise which sent them back to Kim. Therefore, even if there were defective products at the time of shipment to the buyers, the subcontractor may not be liable for everything since defects may have occurred during the distribution process. Taking all this into consideration, the enterprise is liable for the return of supplies stated in 2. a. which was not a fair action of returning products. Therefore, the action by the enterprise in 2. a. is an action of an unfair return of product that violates the provision in Article 10, (1) of the Subcontracting Act, and an unfair subcontract transaction action.

  1. On the facts in 2. a.

The provision in Article 13, (4) of the Subcontracting Act states that in cases where the original enterprise pays its subcontractor before the legal payment date with promissory notes that are due after the legal payment date, the original enterprise should pay the discount costs (discount rate : annual 12.5%) to the subcontractor for the exceeding period following the legal payment date stated in Article 13, (1) of the same Act. The enterprise paid its subcontractor Kim for his services within the legal payment date, but the due dates of the promissory notes were after the legal payment date. The enterprise's action of failing to pay Kim the discount costs on the promissory notes for the period from the date of calculation to the maturity date (see Appendix 3.) is deemed an unfair subcontracting transaction action.

 

III. Application of the Act

The action of the enterprise in 2. a. is a violation of the provision in Article 10, (1) of the Subcontracting Act. The action in 2. b. is a violation of the provision in Article 13, (4) of the same Act. Therefore, the provision in Article 25, (1) of the same Act is applied to decide on the following judgment.

<Judgment>

  1. The enterprise must accept without delay the 12,000 pairs of rubber gloves that it unfairly returned to Kim Soo Hyun (Daewon Industries), and make the payment for the subcontract to Kim immediately.

  2. The enterprise must pay the discount costs on the promissory notes for the period between the date of calculation to due date that it failed to pay Kim without delay, since the due dates of the promissory notes were in excess of the sixty days following product shipment.