Franchise issues in Korea

News has emerged that famous franchise CEOs in the food service industry were severely criticized during an inspection conducted by the National Assembly. Abuse of power and unfair contracts in the franchise sector have been continuously pointed out as chronic issues. At this juncture, a better understanding on franchises and the Fair Trade Commission is needed. We will examine the related issue with Jeong Yeon-jae, attorney at law.

Q. How did franchises become a widely used business model?

Entrepreneurs who continuously develop new management methods or distribution techniques presents legal challenges. In this context, one of the transaction methods is franchising, which has been a distribution business method utilized extensively since the 1960s in the United States and is considered a basic commercial act under Korea's Commercial Act. Franchising allows even those without business experience to start a business with a small amount of capital, providing economic benefits to all parties involved, and its use is expanding in our country as well as in advanced nations.

The franchise agreement, which forms the basis of franchise business transactions, goes beyond a simple licensing agreement that allows the franchisee to use the franchisor's trade name, trademark and service marks. It sets up a relationship that includes guidance, advice, education and control over the franchisee's operations. In other words, through the franchise agreement, the franchisor not only permits the franchisee to operate under its well-known trade identity but also provides the franchisee with services such as business training, advertising and promotional support, sophisticated data processing like a nationwide networking system, and systems for inventory management and financial control, sometimes even offering the benefits of bulk purchasing.

Q. What are the recent issues regarding the Fair Transactions in Franchise Business Act?

On Sept. 22, the Korea Fair Trade Commission announced an improvement plan for the franchise business mandatory items system. The enhancement measures include: adding provisions related to mandatory items in franchise agreements, requiring consultation with franchisees when changing the trading conditions of mandatory items, and establishing criteria for determining mandatory items.

Q. What are the mandatory items?

"Mandatory items" refer to items that the franchisor forces the franchisee to trade with either the franchisor itself or a designated business operator, which include interior decorations, equipment/supplies, goods/raw materials, etc.

Q. How will the Fair Trade Commission plan to strengthen regulations?

Under the Fair Transactions in Franchise Business Act, it appears there will be additions to the mandatory entry items in franchise contracts including mandatory items and the calculation method of supply prices. And as a subsequent measure, there will be added regulations to inspect whether the related provisions on mandatory items are faithfully included in the contract.

In the Enforcement Decree of the Fair Transactions in Franchise Business Act, it will be mandatory to consult with franchisees when changing, expanding, or altering mandatory items to the franchisees' disadvantage, and if violated, provisions will be introduced that allow for fines and other penalties.

Finally, in the Public Notification of the Fair Trade Commission, substantive and procedural requirements related to mandatory items will be added. Substantive requirements include whether it is essential to management, whether it is necessary to maintain uniformity, and whether the purchase is essentially enforced, while procedural requirements include whether the change in trading conditions is unfavorable to the franchisee and whether the consultation was conducted in bad faith.

Q. What are the precautionary measures?

As the food service industry in particular has a high designation rate of mandatory items, the Fair Trade Commission announced that it will continuously monitor the designation status of mandatory items focused on the food service industry and will actively take measures upon detecting any violations.

The Fair Trade Commission has stated that it plans to push for subsequent actions such as amendments to the enforcement decrees and the establishment of public notices within the year, and also plans to conduct continuous inspections on the designation status of mandatory items in the food service industry.

In April, the government initiated the development of a big data analysis system designed to collect and identify information on unfair practices online, analyzing over 10 million internet records. This move aims to minimize blind spots in on-site supervision and enhance operational supervision. It can be interpreted that there is a national focus on unfair franchise practices. Additionally, it is important for the parties involved to remember the importance of a more proactive response and utilization of legal assistance.

Law firm Law-Win’s international litigation advisory team has been established to effectively resolve domestic and international legal disputes without language barriers, working by competent attorneys specialized in various practical areas such as criminal law, civil law, bankruptcy, etc and 49 interpreters of 14 languages (Sri Lankan, English, Thai, Arabic, Russian, French, Mongolian, Chinese, Myanmar, Japanese, Khmer, German, Vietnamese, and Uzbek. -- Ed.