On July 2, 2013, amendments (“Amendments”) to the Fair Transactions in Franchise Business Act (hereinafter the “Franchise Act”) were passed by the plenary session of the Korean National Assembly. The key provisions in such Amendments are (i) prohibition of unreasonable infringement of business areas and (ii) prohibition on the imposition of unreasonable business hours. The Amendments greatly strengthen regulation of unfair trade practices which had previously been controversial in franchise business transactions.
Key Contents of Amendments
Regulation of Unfair Trade Practices
Prohibition of Unreasonable Infringement of Business Area (Article 12-4 of the Amendments)
- Prohibition of compulsory contractual specification of the franchisee’s business area at the time of executing the franchise agreement with the franchisor.
- Prohibition on the franchisor or its subsidiary company establishing direct retail stores or other franchisees in the same line of business as the franchisee in the same business area.
Franchisor’s Duty to Bear Costs and Prohibition of Coercion to Engage in Unreasonable Store Improvements (Article 12-2 of the Amendments)
- Prohibition on coercion to engage in improvements, such as relocation, extension of the store or improvements to the setting without justifiable grounds.
- If improvements to the store setting are carried out due to the demand of the franchisor, the franchisor is obligated to bear up to forty percent of the total costs required for such improvements.
- Prohibition on Imposition of Unreasonable Business Hours (Article 12-3 of the Amendments)
- Prohibition of Unreasonable Infringement of Business Area (Article 12-4 of the Amendments)
The following acts are prescribed as the prohibited act of “imposition of unfair business hours” by a franchisor:
- An act of refusing to grant permission to a franchisee’s request to reduce business hours when business losses are incurred for a certain time period since the revenue from late night business hours is poor in comparison to the operating expenses for such hours.
- An act of refusing to grant permission to a franchisee’s request to reduce business hours within the minimum range due to unavoidable reasons such as the franchisee contracting a disease and/or receiving treatment for a disease.
- Prohibition of Imposing Heavy Cancellation Fees (Article 12(1) of the Amendments)
Prevention of Damages to the Franchisee By Providing Accurate and Sufficient Information
- Prohibition of providing false or exaggerated information to franchisees and prospective franchisees; increase in the ceiling of the penalty imposed to KRW 300 million for violations of the regulation prohibiting false or exaggerated information (Articles 9(1) and 41(1) of the Amendments).
- Requirement to provide the scope of anticipated sales and the basis of such calculation in writing (Articles 9(5) through 9(7) of the Amendments).
- Other amendments to the Franchise Act are as follows: (i) expanding matters which are indicated on the information disclosure form of the franchisor; (ii) addition of grounds for cancelation of information disclosure form registration; and (iii) alteration to methods of providing the information disclosure form (Articles 2(10), 6(4), and 7(1) of the Amendments).
Protection of Rights and Interests of Franchisees and Promotion of Mutual Growth
- Franchisees are permitted to organize a franchisee association and a franchisee association using the same business mark may collectively hold a discussion regarding changes in transacting conditions with the franchisor (Article 14-2 of the Amendments).
- Other amendments to the Franchise Act are as follows: (i) the term for requesting a refund of the franchise fee is extended from two months to four months (Article 10(1) of the Amendments); (ii) implementation of a mutual growth agreement system and written investigations on actual conditions (Article 15-4 of the Amendments); (iii) revision of the administrative surcharge provision (Article 35 of the Amendments); and (iv) grant of the right to request criminal referral to the Chairman of the Board of Audit and the Administrator of the Small and Medium Business Administration (Articles 44(4) and 44(5) of the Amendments).
- Effective Date and Interim Measures of Amendments
The Amendments become effective six months after the official announcement. However, Article12-4 (prohibition on unreasonable infringement of business areas) becomes effective one year after its official announcement. The registration of information disclosure form (Article 2, Paragraph 10 of the Amendments) and the establishment of business areas (Article 12-4(1) of the Amendments) are provided with interim measures.
Anticipated Effects of Amendments
Based on the Amendments, a systematic mechanism for strengthening the rights of franchisees’ rights has been established and it is anticipated that the monitoring of unfair trade practices will be augmented. In this connection, it is necessary for the companies that are engaged in the franchise business to pay particular attention to the Amendments.