CONTENTS
- 1. Korea Fair Trade Commission Franchise Business Transactions | Explanation of the Concept of Franchise Business Transactions
- - Points to Note When Conducting Franchise Transactions before the Fair Trade Commission
- 2. Franchise Transactions before the Fair Trade Commission | Role of the Fair Trade Commission and Regulatory Basis
- - Principal Regulations
- - Levels of Punishment for Violation of the Fair Transactions in Franchise Business Act
- 3. Franchise Transactions before the Fair Trade Commission | Legal Risks a Franchisor Must Note
- - Practical Response Strategies for the Franchisor
- - Practical Checklist for the Franchisor
- 4. Franchise Transactions before the Fair Trade Commission | Systems for Protecting Franchisees
- - Practical Response Strategies for the Franchisee
- - Practical Checklist for the Franchisee
1. Korea Fair Trade Commission Franchise Business Transactions | Explanation of the Concept of Franchise Business Transactions
Korea Fair Trade Commission franchise business transactions are a contractual transaction relationship entered into between the head office, referred to as the franchisor, and the agency, referred to as the franchisee.
Franchise business transactions are what is commonly called the franchise business; they are a contractual relationship in which the franchisor provides the franchisee with various business operation systems that it owns, such as trademarks, business marks, management know-how, and marketing strategies.
The franchisee is an independent business entity, but it follows the head office's brand, interior design, menu, training, advertising, and the like to a certain extent, and in return provides monetary compensation such as a franchise fee.
Because this process is far closer, longer-term, and structurally more dependent than an ordinary goods-purchase relationship, there is considerable room for various legal problems to arise, such as contractual unfairness, information asymmetry, and excessive demands by the head office.
Therefore, in order to maintain a fair market, it is strongly regulated by a separate statute.
Points to Note When Conducting Franchise Transactions before the Fair Trade Commission
If an unfair trade practice is confirmed in the course of franchise transactions before the Fair Trade Commission, it becomes subject to a report to the Fair Trade Commission.
For franchise transactions before the Fair Trade Commission, a continuing transactional relationship between the two parties must be maintained; if only the services necessary to start the business are provided and there is no separate support, control, or training with respect to subsequent operations, it cannot be regarded as a franchise transaction.
In addition, payment of the franchise fee must be carried out properly and the provisions on refund of the franchise fee must be precisely stipulated, and therefore legal advisory from a specialist attorney on the review, performance, and conclusion of agreements relating to franchise transactions before the Fair Trade Commission is necessary.
It is also necessary to obtain advisory relating to the prevention of legal disputes that may arise in the future in order to eliminate legal risks in advance.
The franchisor, as the head office, must provide a certain level of support and training to the franchisees with whom it has concluded franchise transaction agreements, and the franchisees must pay franchise fees in return for that support and training.
A violation may lead to an investigation by the Fair Trade Commission, and in serious cases criminal punishment may be imposed.
If an unfair trade practice such as this, or any other violation of the Monopoly Regulation and Fair Trade Act, arises in a transactional relationship, please consult with a fair trade attorney regarding how to respond.
2. Franchise Transactions before the Fair Trade Commission | Role of the Fair Trade Commission and Regulatory Basis
Pursuant to the 「Fair Transactions in Franchise Business Act」, the Fair Trade Commission performs the function of preventing and correcting unfair trade practices, disclosure violations, forced advertising, wrongful termination, and similar conduct that may arise in franchise transactions.
The Fair Trade Commission requires a franchisor to provide a registered information disclosure document when recruiting new franchisees, and where this obligation is violated it may impose a range of sanctions, including criminal punishment, administrative fines, penalty surcharges, and corrective orders.
It also contributes to protecting the rights and interests of franchisees and to fostering a sound franchise ecosystem through measures such as establishing dispute mediation councils, distributing standard franchise agreements, monitoring the market, conducting ex officio investigations and on-site inspections, and operating damage report centers.
Principal Regulations
The principal regulations enforced by the Fair Trade Commission apply broadly, from before the conclusion of a franchise agreement through to after its termination, and in particular impose legal obligations with respect to the following matters.
1. Obligation to register and provide an information disclosure document
This is intended to resolve the problem of information asymmetry and to ensure that the prospective franchisee can make a reasoned decision.
Recruiting franchisees without registration, or where the registered contents differ from the facts, may be subject to administrative fines and criminal punishment.
2. Prohibition on providing false projected earnings
If such a violation is confirmed, the franchisee may rescind the agreement or claim damages.
3. Restrictions on the refund of franchise fees and on termination
Accordingly, the Fair Trade Commission recommends that grounds for termination, refund conditions, and similar matters be clearly stated.
4. Obligation to give notice of changes to transaction terms
A violation will be subject to sanctions by the Fair Trade Commission.
5. Prohibition on coercing unfair transactions
In practice, this is the type of conduct that most frequently gives rise to disputes.
Levels of Punishment for Violation of the Fair Transactions in Franchise Business Act
Where a franchisor violates the Fair Transactions in Franchise Business Act or similar laws in the course of franchise transactions before the Fair Trade Commission, the following levels of punishment may be imposed.
| Conduct | Level of Punishment |
| Where a franchisor provides false or exaggerated information | Imprisonment for not more than 5 years or a fine of not more than KRW 300 million |
| Where a franchisor causes disadvantage to a franchisee | Imprisonment for not more than 3 years or a fine of not more than KRW 100 million |
| Where a franchisor directly receives escrowed franchise fees from a franchisee Where a franchisor receives franchise fees in violation of the obligation to provide an information disclosure document | Imprisonment for not more than 2 years or a fine of not more than KRW 50 million |
| Where a person lends or borrows a franchise transaction registration certificate, or arranges such conduct | Imprisonment for not more than 1 year or a fine of not more than KRW 10 million |
| Where a person requests payment of escrowed franchise fees by false or other wrongful means | A fine of not more than an amount equivalent to twice the escrowed franchise fees |
3. Franchise Transactions before the Fair Trade Commission | Legal Risks a Franchisor Must Note
A franchisor bears various legal obligations both before and after concluding an agreement, and if it neglects them it may face serious sanctions and damage to its corporate image.
The principal risks are as follows.
▶Omission of, or false entries in, the information disclosure document
: Where the information disclosure document is omitted or contains false information, the franchisor is subject to criminal punishment and a corrective order.
This may also serve as grounds for invalidating the franchise agreement.
Presence of unfair clauses in the agreement
: If the agreement contains termination clauses unfavorable to the franchisee, unilateral price increases, non-compete clauses, or the like, it may be found to be an unfair contract.
▶Refusal of termination and refund
: If, upon termination of the agreement, franchise fees, training fees, and the like are not refunded without justifiable grounds, civil litigation and a report to the Fair Trade Commission may follow.
▶Forced advertising and cost-shifting
: Even advertising for the overall brand image may become problematic if there was no prior agreement on the method of cost allocation or on whether participation is mandatory.
▶Disputes over the right to use trademarks, designs, and interior fittings
: Legal conflicts may arise over a franchisee's continued use of brand assets and over harm to the brand upon discontinuance of use.
Practical Response Strategies for the Franchisor
▶Periodic renewal of the information disclosure document and maintenance of its registration with the Fair Trade Commission
→ The information disclosure document must be renewed at least once a year, and any change must be reflected immediately, so as to reduce the scope for illegality.
▶Structuring the agreement on the basis of the standard agreement
→ Even where a company uses its own agreement, it should actively incorporate the contents of the standard agreement to remove unfair elements and strengthen its legal defenses should a dispute arise in the future.
▶Prior briefing sessions for prospective franchisees and retention of written records
→ By providing sufficient explanation and a question-and-answer session before the agreement and retaining the related documents, it is possible to evidence performance of the information-provision obligation.
▶Setting out operating manuals and training materials in writing
→ For consistency of brand operations and quality control, it is recommended that the materials provided to franchisees be set out in manuals and that periodic training be conducted.
Practical Checklist for the Franchisor
Check Item | Checked |
|---|---|
Whether the information disclosure document has been registered and periodically renewed | [ ] |
Truthfulness of projected sales and earnings information and internal review records | [ ] |
Confirmation of the fairness of termination and penalty conditions | [ ] |
Clarification of the allocation and obligation of promotional and advertising costs | [ ] |
Whether the conditions for use of brand assets (trademarks, designs, etc.) are specified | [ ] |
Establishment of post-operation manuals, an inspection system, and a dispute-response framework | [ ] |
4. Franchise Transactions before the Fair Trade Commission | Systems for Protecting Franchisees
The government has put in place various protective mechanisms to safeguard the rights and interests of franchisees.
The principal such systems are as follows.
▶Operation of the Franchise Business Dispute Mediation Council
: This is a means of resolving disputes more swiftly and inexpensively than civil litigation.
Mediation is available for matters such as a franchisor's unilateral termination or its failure to refund franchise fees.
▶Introduction of a standard franchise agreement
: The standard agreement presented by the Fair Trade Commission designs the rights and obligations of franchisor and franchisee in a balanced manner and is effective in preventing legal disputes.
▶Legal support services
: Legal consultation and guidance on remedy procedures can be obtained through bodies such as the Korea Federation of Micro Enterprise and the Korea Federation of SMEs.
Practical Response Strategies for the Franchisee
▶Securing the capacity to analyze the information disclosure document
→ In order to interpret accurately the revenue structure, investment costs, contract terms, and the like, prior training or expert advisory is recommended.
▶Reviewing the agreement and requesting consultation
→ One should compare the agreement against the standard agreement to check for unfair clauses and, where necessary, request pre-contract amendment negotiations.
▶Checking for forced advertising and forced purchasing
→ One should review whether advertising costs, logistics costs, mandatory purchase items, and the like are clearly specified in the agreement.
Practical Checklist for the Franchisee
Check Item | Confirmed |
|---|---|
Confirmation of receipt of the information disclosure document and of its registration number | [ ] |
Review of key items in the information disclosure document, such as projected earnings, the franchisor's financial condition, and the number of franchisees | [ ] |
Confirmation of whether the franchise agreement was delivered in writing and registered with the Fair Trade Commission | [ ] |
Review of the clarity of initial investment items in the agreement, such as franchise fees, training fees, and interior costs | [ ] |
Review of ongoing cost items such as royalties, advertising costs, and logistics costs, and of how they are calculated | [ ] |
Check for forced-transaction clauses such as the allocation of advertising and promotional costs and mandatory purchase items | [ ] |
Confirmation of the specificity and fairness of termination conditions and penalty provisions | [ ] |
Review of the scope and term of competition-restricting clauses (operating territory, restrictions on similar brands, etc.) | [ ] |
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