CONTENTS
- 1. Franchise Litigation | Concept and Significance
- - Definition and Key Elements of a Franchise
- - Examples of Franchises
- - Advantages and Disadvantages of Franchising
- 2. Franchise Litigation | Types
- - Disputes over Franchise Agreement Termination
- - Litigation over Failure to Provide or False Entry in the Disclosure Document
- - Disputes Related to Infringement of the Business Territory
- - Shifting of Promotional Costs and Unfair Coercion to Purchase
- 3. Franchise Litigation | Legal Procedures
- - Practical Issues in Franchising
- - Response Strategies for Businesses
1. Franchise Litigation | Concept and Significance
Franchise litigation goes beyond a mere claim for breach of contract or monetary damages; it is a legal proceeding that contests the very core structure of the franchise business itself, including the rights and obligations between the franchisor and the franchisee, the operation of the system, and brand uniformity.
In particular, because brand image and the trust between the head office and its franchisees are central to a franchise, a single lawsuit may deal a serious blow to the entire brand.
Moreover, because the franchise business is a field governed by special legislation such as the "Act on Fair Transactions in Franchise Business (Fair Transactions in Franchise Business Act)," its significance is all the greater in that it may extend beyond the realm of ordinary civil matters to investigations by the Fair Trade Commission, administrative dispositions, and even criminal punishment.
Because franchise litigation is a risk that affects the overall operation of a business, it is highly important for both franchisors and franchisees to understand the legal structure in advance and to put preventive measures in place.
Definition and Key Elements of a Franchise
▶Definition of a franchise
▶Key elements of a franchise
Right to use business marks: permission to use intellectual property rights such as the brand name and BI
Support system: training, manuals, advertising, supply of goods, and the like
Operational control: the head office manages part of the franchisee's manner of operation
Examples of Franchises
| Business type | Characteristics |
| Restaurants | Provision of standardized menus, recipes, uniforms, and the like |
| Cafés | Brand trust and uniformity of coffee beans and design |
| Academies | Provision of educational curricula and an instructor training system |
| Convenience stores | Operation centered on logistics systems and supply chains |
| Fitness/beauty | Standardization of equipment/service manuals, linked with head-office marketing |
Advantages and Disadvantages of Franchising
Category | Item | Description |
|---|---|---|
Advantages | Use of brand power | The franchisee can attract customers more easily on the basis of the trust and recognition of a well-known brand |
A proven business model | Because the franchisee can follow the operating system established by the head office as it is, the risk of starting a business is low | |
Training and operational support | Stable store operation is possible through continuous training, manuals, and know-how provided by the head office | |
Cost savings through joint purchasing | Purchasing costs can be reduced by receiving materials and goods supplied through the head office's bulk purchasing | |
Integrated marketing effect | Through nationwide head-office advertising, the franchisee can also indirectly enjoy a promotional effect | |
Disadvantages | Limited autonomy | There is little freedom over operational matters such as the menu, prices, and interior design, and the franchisee must follow the head office's standards |
Burden of franchise fees and royalties | In addition to the initial franchise fee, ongoing costs such as royalties or shared advertising contributions arise | |
Chain effect of head-office risk | If the head office's reputation declines or management problems arise, the franchisee also suffers damage to the brand image | |
Competition due to excessive store openings | An excessive number of stores within the same area raises concerns over internal competition and declining sales | |
Possibility of an unfair contract structure | Due to contract terms centered on the head office, the franchisee may suffer disadvantages, and there is room for legal disputes |
2. Franchise Litigation | Types
Franchise litigation may be brought in a variety of forms.
Representative types include litigation over whether the Fair Transactions in Franchise Business Act has been violated, litigation concerning violations of the franchise agreement and claims for damages related thereto, litigation related to unfair termination of the agreement, and litigation related to claims for the return of franchise fees.
Because the litigation in which disputes become most intense is litigation involving money, it is advisable to obtain the advice of a specialized attorney throughout the process of calculating the amount of compensation.
In conducting franchise litigation, the process of securing objective evidence to support one's own assertions is important.
▶Where civil litigation proceeds
Where the franchisor seeks to unfairly terminate the franchise agreement
Where the franchisee unfairly demands the return of franchise fees
▶Where criminal litigation proceeds
Where the franchisee commits defamation against the franchisor
Where the operation of a competing franchise business is interfered with
Below, we will examine the main types of litigation and actual cases.
Disputes over Franchise Agreement Termination
One of the most frequently occurring types is a dispute relating to termination of the franchise agreement.
In many cases, the franchisor gives notice of unilateral termination on the ground of breach of the agreement, but the franchisee asserts that there is no legitimate ground for termination and seeks damages.
Litigation over Failure to Provide or False Entry in the Disclosure Document
Providing a disclosure document before concluding a franchise agreement is a statutory obligation.
However, it sometimes happens that some franchisors omit this or make false entries, thereby infringing the franchisee's right to make an informed choice.
Disputes Related to Infringement of the Business Territory
Where a franchisor violates a provision protecting a franchisee's trade area and opens a new store nearby, the existing franchisee frequently claims damages against the head office on the ground of ‘infringement of the business territory.’
Shifting of Promotional Costs and Unfair Coercion to Purchase
A frequent source of disputes is the franchisor's carrying out nationwide promotions or advertising and unilaterally charging the costs to franchisees, or compelling them to purchase certain products in quantities exceeding a set amount.
3. Franchise Litigation | Legal Procedures
Franchise-related disputes generally follow civil litigation procedures, ordinarily proceeding in the following order: ① sending a certified content-certified mail or warning letter → ② attempting conciliation or arbitration → ③ filing a complaint → ④ pleading dates → ⑤ pronouncement of judgment → ⑥ execution or appeal.
Depending on the matter, however, a report to the Fair Trade Commission → investigation and a penalty surcharge disposition, or conciliation proceedings before the Franchise Business Dispute Mediation Council may also proceed in parallel.
In particular, because violations of the Fair Transactions in Franchise Business Act may be subject to administrative sanctions and criminal punishment concurrently with civil litigation, it is important to design the procedure strategically at an early stage.
Practical Issues in Franchising
▶Non-compliance with the standard franchise agreement
For example, an agreement that unilaterally stipulates grounds for termination against the franchisee or that fails to provide for the head office's grounds of attributable cause is plainly an unfair provision, and it may operate to the head office's disadvantage in any future legal dispute.
▶Infringement of the franchisee's independence
▶Reliability of sales information and trade-area analysis materials
In particular, a statement directed at prospective founders such as ‘guaranteed monthly sales of 10 million won without fail’ is regarded as false advertising under the law and carries very heavy liability.
Response Strategies for Businesses
① Thoroughly carry out review and standardization of the agreement
In particular, before concluding a new franchise agreement, preliminary education should be provided and the materials explaining the agreement should be retained in writing, so that they may be used as supporting evidence in the event of a subsequent dispute.
② Systematize the accuracy and periodic review of the disclosure document
Because any discrepancy with the content registered in the Fair Trade Commission's electronic disclosure system may become subject to reporting, the introduction of an internal audit process is required.
③ Establish an education framework for dispute prevention
In particular, by raising the level of understanding of matters such as ‘protection of the business territory,’ ‘requirements for termination of the agreement,’ and ‘sharing of advertising costs,’ the likelihood of disputes should be forestalled in advance.
④ Give priority to the conciliation system when a dispute arises
Conciliation has no coercive force, but where a settlement is reached, legal effect is conferred upon it, and it allows for a more prompt and flexible response than litigation.
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