Supreme Court Overturns Korea Appraisal Association's Win Against Fair Trade Commission... "Must Examine Competition Restriction of Document-Based Advisory Ban"

Supreme Court, Seocho-dong, Seoul.

[Asia Economy Reporter Choi Seok-jin, Legal Affairs Specialist] The Supreme Court has ruled that the Korean Association of Real Estate Appraisers' (the Association) complete prohibition of document-based desk appraisals by its members may constitute a type of unfair concerted practice prohibited for business associations, specifically 'restriction of service transactions,' and thus requires examination of its competition-restricting effects.

Desk appraisal is a practical term referring to the process where clients such as financial institutions inquire about approximate estimated values of land or other properties before requesting a formal appraisal.

Generally, it is used as a means to quickly decide on loan approvals and to reduce unnecessary costs of formal appraisals. Typically, when an appraisal firm receives a desk appraisal request, its general staff estimates and informs an approximate value based on brief information about the property without conducting an on-site investigation, referencing past appraisal cases and recent transaction records in the vicinity.

Depending on the delivery method, desk appraisals are divided into oral desk appraisals, conveyed verbally, and document-based desk appraisals, delivered through written materials containing brief property information and estimated values.

Previously, the lower court ruled that even if the Association had completely banned document-based desk appraisals, oral desk appraisals as an alternative service existed; therefore, it did not constitute an unfair concerted practice under the Fair Trade Act from the outset.

However, the Supreme Court overturned the lower court's decision, stating that under Article 19(1)(3) of the Fair Trade Act (hereinafter the same) at the time of the incident, the prohibited 'restriction of service transactions' includes acts that partially or entirely restrict the provision or purchase of services, and it is unnecessary to consider whether substitute services exist in the relevant transaction field.

According to the legal community on the 26th, the Supreme Court's First Division (Presiding Justice Oh Kyung-mi) overturned the lower court's ruling that had favored the plaintiff in the lawsuit filed by the Association against the Fair Trade Commission (FTC) seeking cancellation of corrective orders and surcharge payment orders, and remanded the case to the Seoul High Court.

The court stated, "The lower court erred in its application of the legal principles concerning the scope of Article 19(1)(3) of the Fair Trade Act, which affected the judgment."

In May 25, 2012, the Association held an extraordinary board meeting and resolved an agenda titled 'Change in Desk Appraisal Method,' which completely banned document-based desk appraisals by its members and allowed only oral desk appraisals.

Accordingly, from June 7 of the same year, providing document-based desk appraisals to all appraisal clients was prohibited, and only oral desk appraisals providing estimated prices within a 30% range of the expected value were permitted.

Specifically, the following were prohibited: ▲ desk appraisals printable for bank storage ▲ all document-based desk appraisals regardless of paid or unpaid status ▲ sending desk appraisals via email ▲ sending desk appraisals via fax ▲ sending estimations via text messages or image files that can be printed later ▲ sending desk appraisals by mail ▲ notifying unit price, area, and amount over the phone as in previous desk appraisals. Only providing estimated values within a certain range (approximately 30%) verbally, such as "It could be around 1 billion to 1.3 billion KRW," was allowed.

Subsequently, on May 29, 2012, the Association notified its members of the resolution and amended disciplinary regulations to ensure the effectiveness of the resolution, establishing penalties for members who conducted prohibited document-based desk appraisals.

The FTC judged that these measures by the Association violated Article 26(1)(1) of the Fair Trade Act (Prohibited Acts by Business Associations), constituting unfair concerted practices prohibited for business associations, and on October 28, 2019, issued corrective orders, notification orders, publication orders, and surcharge payment orders against the Association.

The FTC's specific orders against the Association were: ▲ to immediately cease acts that unfairly restrict competition in the desk appraisal service market by unilaterally banning document-based desk appraisals and forcing compliance (corrective order); ▲ within 30 days of receiving the corrective order, notify members via email using the wording provided by the FTC that the Association violated the Fair Trade Act (notification order); ▲ within 30 days, publish the fact of violation on the homepage for nine days using the FTC's wording (publication order); ▲ and pay a surcharge of 500 million KRW within 60 days.

The Association then filed a lawsuit seeking cancellation of these various FTC orders.

Unlike other general cases, appeals against FTC dispositions are handled through a two-tier system, with the Seoul High Court having exclusive jurisdiction.

In the lower court trial at the Seoul High Court, the issue of 'market definition' was first raised.

The FTC argued that the relevant market should be defined as the 'document-based desk appraisal market,' distinguishing desk appraisals from formal appraisals, and further differentiating document-based desk appraisals from oral desk appraisals due to differences in fee structures and reliability of results.

The FTC claimed that the Association's measures completely blocked transactions of document-based desk appraisal services in the document-based desk appraisal market, depriving consumers of choice and restricting competition among members, thus justifying the FTC's orders as competition-restricting.

Conversely, the Association argued that desk appraisals cannot be considered independent or separately useful from formal appraisals, so the relevant market should be defined as the 'real estate appraisal market,' including both desk appraisals and formal appraisals.

Even if not considering the entire appraisal market, the Association emphasized that document-based and oral desk appraisals have the same function and utility and high substitutability in supply and demand, so at minimum, the entire 'desk appraisal market' should be regarded as the relevant market.

The court sided with the Association.

The court stated, "Desk appraisals are distinct services separate from formal appraisals, so it is difficult to consider both as belonging to a single relevant product (service) market," but "it is reasonable to consider document-based and oral desk appraisals as belonging to the same relevant product (service) market."

Furthermore, the court explained, "The 'restriction of service transactions' under Article 19(1)(3) of the Fair Trade Act refers to acts by concerted parties that completely restrict service transactions in the relevant market within the scope they set, directly affecting the supply volume of services. Cases where only certain transaction methods or types of services are restricted, and where substitute services can still be supplied within the scope set by the concerted parties, are excluded."

It added, "In this case, the act may be seen as restricting only a specific method or type of service transaction, namely document-based desk appraisals, within the desk appraisal market, but it is difficult to view it as completely restricting service transactions in the desk appraisal market," and ruled to cancel all FTC orders: corrective, notification, publication, and surcharge payment orders.

By defining the relevant market as the entire desk appraisal market rather than narrowly as the document-based desk appraisal market, the court concluded that since oral desk appraisals exist as substitutes even if document-based desk appraisals are banned, it is difficult to see this as unfairly restricting service transactions among businesses.

Meanwhile, during the trial, the FTC also argued, as a preliminary claim, that the Association violated Article 26(1)(1) of the Fair Trade Act by engaging in unfair concerted practices under Article 19(1)(9) (interference with other businesses' activities), in addition to the original claim under Article 19(1)(3) concerning restriction of service transactions.

However, the court rejected this, stating that the basic facts of the two grounds for disposition were not identical, and thus additional grounds not originally part of the FTC's disposition could not be introduced during the trial.

The Supreme Court's judgment differed.

The court stated, "To fall under the prohibited act type of 'restriction of service transactions' under Article 19(1)(3) of the Fair Trade Act, it is sufficient that the act partially or entirely restricts the provision or purchase of services, and it is not necessary to consider whether substitute services exist in the relevant transaction field when determining the application of this provision."

It continued, "The plaintiff's act in this case, prohibiting members from providing document-based desk appraisals, falls under the act type of 'restriction of service transactions' as defined in Article 26(1)(1) and Article 19(1)(3) of the Fair Trade Act."

The court pointed out, "Therefore, the lower court should have examined whether the act unfairly restricts competition in the relevant desk appraisal market, assuming it falls under the act type of Article 26(1)(1) and Article 19(1)(3), and judged its illegality accordingly. However, the lower court immediately ruled the disposition illegal on the grounds that the act did not fall under the act type of Article 26(1)(1) and Article 19(1)(3), which was erroneous."

In other words, assuming the act falls under the prohibited unfair concerted practice type of 'restriction of service transactions' for business associations, the court should have assessed whether there was competition restriction and whether the FTC's measures were appropriate. The lower court's view that the act did not even fall under Article 19(1)(3) due to the existence of oral desk appraisals as substitutes was incorrect.

Finally, the court stated, "The lower court erred in its application of the legal principles concerning the scope of Article 19(1)(3), which affected the judgment," and ruled that the grounds for appeal pointing this out were valid, thus remanding the case.

*Reference provisions (These are the provisions of the Fair Trade Act before amendment, applied at the time of the incident, not the current law)

Article 26 (Prohibited Acts by Business Associations) ① Business associations shall not engage in any of the following acts:

1. Acts that unfairly restrict competition by unfair concerted practices as defined in Article 19(1)

Article 19 (Prohibition of Unfair Concerted Practices) ① Business operators shall not agree by contract, agreement, resolution, or any other method to engage in any of the following acts that unfairly restrict competition jointly with other business operators (hereinafter referred to as "unfair concerted practices") or cause others to do so:

1. Acts to fix, maintain, or change prices

2. Acts to determine transaction conditions of goods or services, or payment conditions thereof

3. Acts to restrict production, shipment, transportation, or transactions of goods, or to restrict transactions of services

This content was produced with the assistance of AI translation services.