September 21, 2021

Volume XI, Number 264

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September 20, 2021

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Legislatures Can Free App Developers from Platform Providers’ Mandates to Use Their In-App Purchasing Systems Without Violating WTO Principles

Internet platform providers rely upon developers of applications to populate their application stores.  Some platform providers mandate app developers to use the platform’s in-app purchasing system as a condition to sell the apps on the platform.  There have also been commission charges as high as 30% imposed on digital goods or services sold through their stores.  The temptation to use their enormous leverage to gain further economic advantage is understandable, but governments, not to mention app developers, have taken an increasingly dim view of this behavior.  A number of countries are considering legislation to prohibit such mandates by Internet platform providers.  A leading example is the Republic of Korea, where its legislature has just voted to enact such a prohibition.

Fearing this might become a global trend, the leading Internet platform providers have lobbied against the Korean bill, which is not surprising.  What is surprising (at least to us international trade lawyers) is that they claim that this type of legislation violates the national treatment rules in the General Agreement on Trade in Services (“GATS”) of the World Trade Organization (the “WTO”).   And, in the case of Korea, they claim that the bill violates the national treatment provisions in the Korea-US Free Trade Agreement (the “KORUS”).

A review of the WTO GATS and KORUS demonstrates readily that the Korean bill is not in violation of the WTO GATS or KORUS.

GATS Article XVI Market Access

Article XVI of GATS provides that in sectors where market access commitments are undertaken, a member cannot limit market access by imposing limits on the number of service suppliers or service operations.

The Korean legislation does not violate GATS Article XVI because it does not restrict, but rather promotes, market access.  It prohibits app market operators from compelling use of their in-app purchase system or unreasonably delaying approval of a developer’s app to be distributed through the operator’s OS platform.  By prohibiting such behavior, the legislation encourages greater access to the Korean market by U.S. and other non-Korean app developers, while app market operators continue to have full access to the Korean market. Further, the legislation does not impose any limits on the number of service suppliers or service operations in Korea. To the contrary, the legislation promotes the access of more app developers and purchasing systems to the Korean market and does so without reducing or discouraging the number of app market operators accessing the Korean market.

GATS Article XVII National Treatment

Article XVII requires each WTO member to accord services and service suppliers of any other WTO member treatment that is no less favorable than it accords to its own. Under the case law of WTO Dispute Settlement Panels, in order to establish that a challenged measure is inconsistent with Article XVII of the GATS, the complaining member must demonstrate four elements: (i) the member being challenged assumed national treatment commitments in the relevant sector and mode of supply in its GATS Schedule; (ii) the measure in question ‘affects the supply of services’ in the relevant sector and mode; (iii) the relevant services and service suppliers are ‘like’; and (iv) the measure fails to accord to services and service suppliers of any other member ‘treatment no less favorable’ than that accorded by the responding member to its own like services and service suppliers.

The Korean legislation manifestly does not violate GATS Article XVII because it treats all app market operators, Korean and non-Korean, in an identical manner.   It does not allow Korean app market operators to engage in any conduct that it prohibits for non-Korean app market operators.  To the contrary, all “like” app market operators are treated in precisely the same manner.  The same is true of treatment of app developers and purchasing systems.  The bill makes absolutely no distinction between Korean and non-Korean app developers and purchasing systems.  The legislation, in fact, promotes the objectives of the GATS.

KORUS FTA

Article 15.3

To the extent that app market operators are viewed as offering a digital product, the pertinent Article of KORUS would be Article 15.3.  It  provides that a party (in this case Korea) may not accord less favorable treatment to digital products of the other party (the United States) than it accords to its own. The Chief U.S. Negotiator for the KORUS stated that both delegations recognized the principles on access to and use of the Internet support the parties’ shared goal of maintaining an open and competitive environment for electronic commerce-related activities.

The legislation does not accord any less favorable treatment to digital products of U.S. app market operator than it does to the digital products of Korean operators.  The legislation, in fact, makes no distinction whatsoever on the basis of whether digital products are of Korean or U.S. origin.

Article 12.2

To the extent that app market operators are viewed as offering a digital service, the pertinent Article of KORUS is Article 12.2(1).  It provides for national treatment in terms substantially the same as GATS Article XVII.  For the very same reasons that the legislation does not violate GATS Article XVII, it does not violate KORUS Article 12.2(1):  That is, the legislation makes no distinction whatsoever in the treatment of Korean and non-Korean app market operators.

Article 12.4

Article 12.4 of KORUS prohibits market access restrictions that limit the number of service suppliers, the value of service transactions, the number of service operations, or the number of persons employed in a service sector or by a service supplier.  The Korean legislation imposes no such restrictions.  To the contrary, it provides additional market access to app developers and purchasing systems and it does so without limiting the number or volume of app market operators.  The legislation therefore advances the market access objectives of KORUS.

Article 15.2(2)

KORUS Article 15.5(2) states: “The Parties recognize the importance of cooperation between their respective national consumer protection agencies on activities related to cross-border electronic commerce in order to enhance consumer welfare.”  It is perfectly evident that the legislation is aimed at protecting consumer choice by preventing app market operators from compelling app developers to adopt only their purchasing systems, or by delaying approval of their apps if they fail to adopt them.

Article 15.7(d)

Finally, KORUS Article 15.7(d) provides: “To support the development and growth of electronic commerce, each Party recognizes that consumers in its territory should be able to . . . have the benefit of competition among network providers, application and service providers, and content providers.”   The legislation directly advances this express KORUS objective by promoting freer choice of app developers and purchasing systems, and by reducing the abusive practices of app market operators that might seek to wield their market power to restrain competition.

Conclusion

Platform providers have raised claims of national treatment violations of GATS and KORUS in an effort to try to stop the Korean legislation.  We should probably expect more of this as other countries around the world take action on this issue.  As international trade lawyers, however, we doubt very much that legislatures, governments, or WTO and KORUS disputes panels will take such claims seriously. The legislative bodies which take up legislation like the one in Korea should evaluate them free of any concern that they could run afoul of WTO rules.

 

Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 243
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About this Author

Curtis Dombek, Attorney, Lawyer, Governmental Contracts, Sheppard Mullin Law Firm
Partner

Curt Dombek is a partner in the Government Contracts, Investigations & International Trade Practice Group. Curt divides his time between the firm's Brussels and Los Angeles offices.

Areas of Practice

Mr. Dombek has practiced since 1983 in the field of international trade. He advises clients on the full range of international regulatory issues, including civilian and military export controls, trade sanctions and blocking orders, Customs matters, the Foreign Corrupt Practices Act, the USA Patriot Act, Free Trade Agreements, CFIUS reviews of foreign...

213-617-5595
Hwan Kim, Corporate Attorney, Sheppard Mullin Law Firm
Partner

Hwan Kim is a partner in the Corporate Practice Group and the International Investment Arbitration Team in the firm's Washington, D.C. office and Seoul office.

His areas of practice are in working with public and private companies. He works with shareholders, and deals with company-international dispute claims. Power generation, construction, and petrochemical companies, are among the many clients Mr. Hwan works with. He does multinational work as well, as he works out of the firm's Seoul, Korea offices. He conducts business with the United...

202-747-1949
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