Overview

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.

Key Provisions

Subjects of Application of the Franchise Act

Franchiser

A business entity that grants franchisees a license to run a franchise store

Franchisee

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. ①Where 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. ②Where 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;

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.

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. ① Providing information different from fact or exaggerated information;
  2. 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. ①unreasonably suspending or refusing the supply of commodities or services or business assistance to a franchisee;
2. ②imposing 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.

Policies

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. ①Where a disputing party files a lawsuit;
  2. ②Where the applicant withdraws the application for mediation;
  3. ③Where the applicant fails to supplement the application for dispute mediation within the deadline without just cause.
• Dispute mediation proceedings are as follows
  

  1. • Application for mediation submitted by party to a dispute
     • Request for mediation made by the KFTC
  2. Franchise Business Transaction Dispute Mediation Council
  3. Fact·finding Inspection, Mediation (60 days)
  4. • Mediation of Dispute completed
       • Reach a Voluntary Agreement
       • Accepted the Council's Settlement Proposal
       1. Mediation Procedure Teminated
     • Mediation of Dispute failed
       • Failure to Mediate the Dispute after 60 days
       • The Council's Recommendation or Settlement Proposal Not Accepted
       1. • Filing a Report in Person:The Council gives guidance on how to file a report with the KFTC
          • Filing a Report by the Council
     • Termination of the Mediation Procedure
       • Application Filed by a Person Irrelevant to the Dispute
       • Application Filed for a Matter Irrelevant to the Act

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Sanctions for Violation of the Franchise Act

Administrative Sanctions

Corrective Measures

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.

Penalty Surcharges

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

Criminal Sanctions

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).