Purpose of the Fair Transactions in Franchise Business Act
The purpose of the Fair Transactions in Franchise Business Act (“the Franchise Act”) is to contribute to the promotion of the welfare of consumers and the sound growth of the national economy by establishing a fair trading order for franchise business and by ensuring the mutually complementary and balanced growth of franchisers and franchisees on an equal footing (first enforced in Nov. 11. 2002).
Definition of Franchise Business
Franchise Business means a ① continuous business relationship in which ② a franchiser allows its franchisees to use its own trade marks, service marks, trade names, signs, or any other business marks ③ in selling goods or services in compliance with certain quality standards or business methods, ④ and supports, trains, and controls its franchisees in regards to their management, business activities. etc., ⑤ and in which franchisees pay franchise fees to their franchiser in return for the use of business marks and the support and training provided for their management, business activities, etc.
Subjects of Application of the Franchise Act
A business entity that grants franchisees a license to run a franchise store
A business entity that holds a license granted by a franchiser to run a franchise store in relation to a certain franchise business
Matters to be taken into Account when Applying the Franchise Act
Exclusion from Application
- The Act does not apply to where the total franchise fee does not exceed a certain amount and where annual sales of a franchiser are less than a certain size:
- ① Where the total franchise fee that a franchisee pays to a franchiser during the period of up to six months from the date of the initial payment of the franchise fee does not exceed one million won;
- ② Where annual sales of a franchiser are less than 50 million won (in the case of a franchiser-operated store, 200 million won): Provided, the number of franchisees which have entered into a contract with a franchiser shall be less than five;
* However, some provisions, such as those regarding the prohibition on providing false or exaggerated information shall
apply to all franchising trade.
Key Provisions of the Franchise Act
Registration of Information Disclosure Statements
- Each franchiser shall register an information disclosure statement to be provided to prospective franchisees with the KFTC. Where a franchiser intends to alter matters included in an information disclosure statement, it shall register an alteration of included matters with the KFTC.
Deposit of Franchise Fees
- Each franchiser shall require its franchisees to deposit franchise fees in a depository and the franchiser does not get the franchise deposit in an immediate manner.
* the foregoing shall not apply where a franchiser enters into an indemnity insurance contract, etc.
Provision of Information Disclosure Statements
- Each franchiser shall provide its prospective franchisees with an information disclosure statement which was registered and a document stating the current status of neighboring franchisees. Unless 14 days have passed from the date the franchiser provides the aforementioned information, the franchiser can not enter into a franchise agreement with a prospective franchisee.
Prohibition on Providing False or Exaggerated Information
- No franchiser shall engage in the following acts when it provides prospective franchisees or franchisees with information:
- ① Providing information different from fact or exaggerated information;
- ② Providing information by suppressing or minimizing any fact that has significant influence on the conclusion or maintenance of a contract.
- A franchiser shall provide its prospective franchisees or franchisees information about the expected future profits.
Prohibition on Unfair Trade Practices
- No franchiser shall engage in, or cause any other business entity to engage in:
- ① unreasonably suspending or refusing the supply of commodities or services or business assistance to a franchisee;
- ② imposing unfair restraints or limitations on the prices of commodities or services that a franchisee handles, or on customers, business territory, or business activities of a franchisee; putting a franchisee at an unfair disadvantage by abusing its position in transactions; and unreasonably imposing obligations to compensate for damage on a franchisee.
Prohibition of Unfair Pressure to Improve Store Environment
- No franchiser shall compel a franchisee to improve the store environment without just cause. Except for particular cases, a franchiser shall bear an amount of money equivalent to either 20% or 40% of costs incurred in improving the store environment of a franchisee.
Prohibition of Unfair Restrictions on Business Hours
- No franchiser shall perform an unfair act of restricting business hours of a franchisee in the light of normal transaction practices.
Prohibition of Unfair Violation of Sales Areas
- A franchiser shall designate a sales area for a franchisee and mention such sales area in a franchise agreement when it enters into the franchise agreement with the franchisee.
- No franchiser shall open a direct retail store or a franchise store of the same type of business as that of a franchisee within the sales area for the franchisee during the period of franchise agreement without just cause.
Renewal of Franchise Agreement
- Upon request by a franchisee to renew the franchise agreement, no franchiser shall reject such request without just cause.
The Rights of Franchisees Association
- Franchisees may form a franchisees association and may request a franchiser to hold consultations on the conditions of trade, such as an alteration of the franchise agreement.
Franchise Business Transaction Dispute Mediation Council
The Franchise Business Transaction Dispute Mediation Council is established in the Korea Fair Trade Mediation Agency, Seoul-si, Gyeonggi-do, Incheon-si, and Busan-si.
Where the mediation is successfully concluded, the mediation shall have the same effect as a judicial reconciliation. In such cases, no further administrative measures are taken.
The Process of the Dispute Mediation of Franchise Business Transactions
Dispute mediation proceedings are normally completed in 60 days, however it could take more than 60 days depending on the additional fact checking required.
The dispute mediation proceedings are terminated in the following cases:
- ① Where a disputing party files a lawsuit;
- ② Where the applicant withdraws the application for mediation;
- ③ Where the applicant fails to supplement the application for dispute mediation within the deadline without just cause.
Dispute mediation proceedings are as follows:
Sanctions for Violation of the Franchise Act
- The KFTC may order a franchiser that violates the Franchise Act to discontinue violations, report plans or actions necessary for correcting violations, or take other measures necessary for correcting violations.
- The KFTC may impose a penalty surcharge on a franchiser that violates the Franchise Act to the extent not exceeding an amount of money calculated by multiplying the sales by 2/100:
* Where a franchiser that has committed such violation has no sales or it is difficult to calculate its sales, the KFTC may impose a penalty surcharge to the extent not exceeding 500 million won.
Any person who provides false or exaggerated information or deceptive information, shall be punished by imprisonment with labor for not more than five years or by a fine not exceeding 300 million won (Article 41 of the Franchise Act).