KFTC probes firms’ failure to provide cancellation notice

[Photo by Yonhap]

The Korea Fair Trade Commission (KFTC) conducted on-site investigations into the country’s leading e-commerce platforms Naver Corp. and Coupang Inc. for allegedly failing to give consumers sufficient notice for cancelling their subscriptions before the end of the contract period. The question now is whether the investigations will lead to sanctions for these platforms.

According to industry sources on Tuesday, the KFTC sent investigators to Naver and Coupang headquarters on the same day to secure materials related to their cancellation terms.

The KFTC is investigating the two companies for allegedly failing to properly notify subscribers of cancellation-related matters while operating their subscription services. They allegedly made it difficult to cancel their subscription services or failed to inform subscribers that they could cancel their subscriptions. Naver and Coupang operate subscription services called ‘Naver Plus Membership’ and ‘Wow Membership’ respectively.

There are two types of contract cancellation: early cancellation and general cancellation. Early cancellation results in immediate termination of the contract upon application, with the amount paid refunded excluding the period of use. General cancellation refers to terminating the service after using it until the end of the contract period.

The KFTC recently began investigating similar allegations across the platform industry. It previously conducted on-site inspections of movie and broadcast program streaming platforms Netflix, Wavve, and Watcha, as well as music streaming service providers such as Bugs and Spotify. It also imposed a fine of 98 million won ($72,090) on music service platform Melon for similar allegations in January 2024.

In a separate development, controversy is brewing over the possibility that Coupang Chairman Kim Bom-suk is once again expected to be excluded from the same individual designation targeted at conglomerate leaders due to an exception clause in the Fair Trade Act that allows corporations, rather than natural persons, to be designated as the same individual.

The KFTC said on Tuesday that the Cabinet passed an amendment to the Enforcement Decree of the Fair Trade Act, which includes criteria for determining the same individual when designating a conglomerate group.

The same individual refers to a corporation or natural person that substantially controls a business group. The business group system was introduced in 1987 to establish the criteria for determining the scope of business groups and those targeted by regulation within large companies.

Companies controlled by the same individual are included in one business group and subject to supervision and oversight, and the KFTC has considered a natural person with significant control to be the same individual regardless of how it is perceived by the business group.

The controversy began in 2021 when Coupang was included in the list of business groups. The KFTC has traditionally designated corporations as the same individuals when foreign nationals are their chairmen to minimize trade frictions.

Until 2023, the same individual for Coupang was Coupang Inc. and not Kim, as he is a U.S. citizen. But following criticism that the KFTC’s move was reverse discrimination against other Korean business groups as Coupang conducts business activities targeting Korean consumers, the KFTC clarified the criteria for designation in the Fair Trade Act to allow the same individual designation without distinguishing between Korean and foreign nationals beginning in 2024.

However, Kim is expected to continue to avoid being designated as the same individual with the introduction of the exception clause. According to the regulations, a corporation can be considered the same individual if the same individual, whether a natural person or a corporation, has the same business scope; if the natural person controlling the business group does not invest in Korean subsidiaries outside its headquarters; if the natural person‘s relatives do not invest in or participate in the management of Korean subsidiaries; and if there is no debt guarantee or financial transaction between the natural person or relatives and Korean subsidiaries.

Kim has no stakes in subsidiaries other than Coupang Inc., the business group’s headquarters. The Coupang Inc. shares held by Kim’s sibling also fall outside the prohibition against investment in Korean subsidiaries as the company is listed in the United States. Kim, who is the de facto leader of Coupang, is therefore not subject to the same scrutiny and regulation as other Korean companies.

There are also concerns about potential loopholes in regulations on profit-taking within business groups, as the regulations apply only when the same individual is a natural person. Under the Fair Trade Act, there is no obligation for the chairman to submit investment or financial transaction data related to themselves or their relatives, even if they effectively control the business group.

All this is leading to calls that the same individual designation system, which has been in place for 37 years, must now be abolished considering the current situation.

The Korea Chamber of Commerce and Industry called for system improvements in a proposal submitted to the government in 2023 asserting that the current system of imposing sanctions based solely on the size of the company only exists in Korea.

“The meaning of the same individual‘s control has changed significantly due to the dilution of owner shares via inheritance, changes in the concept of family, and the emergence of governance structures unrelated to kinship,” the chamber said.