10/18/2012

Korean Franchise Law Basics: Korea's Act on Fairness in Franchise Transactions

Korea has seen its share of unscrupulous local franchisors.  Issues with local franchisors has led to Korea adopting one of the most franchisee-friendly franchise laws in Asia.

The first comprehensive franchise act in Korea was passed in 2002.  This act was substantially amended in 2007 and some revisions were made in 2010.

The Act on Fairness in Franchise Transactions may be found on the website of the Korean Legislative Research Institute. The translation is far from perfect and without a reading of the Presidential Decree to the Act, the reading of the Act may be a fruitless endeavor.

The major requirements regarding franchise disclosure statements, fees, termination and non-renewal are noted in the Presidential Implementation Decree to the Act on Fairness in Franchise Transactions.  The Decree, to my knowledge, has not been, officially, translated.

Major Changes to the Korean Franchise Act of 2002 (2008 & 2010):
  • Comprehensive Franchise Disclosure Statement is required to be filed with the Korean Fair Trade Commission (KFCC).  The KFCC, normally, takes two months to review the filing.  Don't market your franchise in Korea before going through this procedure.  The specific details required to be noted in the disclosure statement has been detailed in a Model Franchise Disclosure Statement that was drafted by the Korea Fair Trade Commission.  Your international franchise disclosure statement will not be adequate for Korea.
  • Implementation of a 14-day "cooling-off" period.  No money can be taken or agreements signed with a franchisee until 14-days of receipt of the Franchise Disclosure Statement.  This means the Franchise Disclosure Statement that has been approved by the KFCC, not, your international disclosure statement. 
  • Prohibition of operating in competition with a franchisee by franchisor.
  • Set aside of a portion of franchise fee in trust.
  • Non-renewal, only, based on "just-cause."  Termination, only, based on "just cause," with an opportunity to remedy.
The Korean Franchise Law has been criticized for being too projective of franchisees (difficulty to terminate non-complying franchisees), thus, leading major international franchisors to only enter the market through a joint venture with a local conglomerate.

We have found that many of our clients have had issues, also, with local conglomerates and some have had few issues with SME franchisees.  Big doesn't mean better. The key is a detailed localized Franchise Disclosure Statement, due diligence, a good localized franchise package and on-the-ground experts assisting.

Please be aware that the KFCC has aggressively audited local and foreign franchisees and has not been shy in fining and filing lawsuits against franchisors that are not in compliance with Korea's franchise law.

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Sean Hayes, IPG's Co-Chair of the Korea Practice Team, may be contacted at: SeanHayes@ipglegal.com.

IPG is engaged in franchise projects for franchisors and franchisees throughout Asia and North America.  IPG has worked with Asian franchisors expanding into the West and Western franchisors expanding into Asia.  Sean Hayes is the only non-Korean to have worked for the Korean court system as a government attorney.  He has lived in Korea for over a decade.