Changes to Korea’s Franchise Law May Lead to an Increased Potential for Criminal Sanctions: Franchise Law Basics

The Fair Transactions in Franchise Business Act of Korea was amended on August 13, 2013 and became effective on August 14, 2014.  The, facial, reason for the change in the Act is noted in an announcement by the Korean government on the reason for the amendment.  The facial reason for the amendment shows the rationale for imposing criminal sanctions for acts that don’t constitute “crimes.”

Korean Government’s Stated Reason for the Amendment:

“Recently, there is a rapid and growing tendency to engage in franchising because of the growth of the retired population, an unemployment crisis and the easiness in establishing a franchise business.  But damage from franchisers by providing false or exaggerated information, unfair restrictions on business hours, imposing excessive penalties, frequently compelling improvement to stores and other unfair transaction is increasing. Therefore, to provide a franchisee or a prospective franchisee with accurate and adequate information; to prevent new types of unfair transactions such as compelling store improvements, unfair restrictions on business hours, unfair violation of sales areas; and to improve and supplement imperfections in the current system, the Fair Transactions in Franchise Business Act was amended.”

The new Franchise Act notes that even if the Fair Trade Commission determines that the gravity of an offense does not raise to the level of being a crime, the Chairperson of the Board of Audit & Inspection of Korea or the Administrator of the Small & Medium-Sized Business Administration may request the Fair Trade Commission to file a criminal charge even though the FTC does not believe that the actions of the franchisor equals a crime if the act leads to a significant loss to the franchisees or may cause a “social ripple effect.”

We suspect that this will lead, in many cases, in the FTC succumbing to the pressure from these other government agencies and filing criminal charges against franchisors for acts that are less than criminal.

If you have a franchise in Korea, please do a compliance audit with a proactive attorney that is specialized in franchise law in Korea and internationally.

Other articles that may be of interest:

  • Distribution Agreements in Korea: Crawl before you Walk
  • Dispute Resolution Clauses in Franchise, Joint Venture, Partnership Agreements in Korea
  • Business Opportunities in Korea for Entertainment Companies
  • Korean Franchise Law Basics: Korea’s Act on Fairness in Franchise Transactions
  • Covenants Against Competition in Franchise Agreements

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    Sean Hayes may be contacted at: SeanHayes@ipglegal.com.

    Sean Hayes is co-chair of the Korea Practice Team at IPG Legal.

     He is the first non-Korean attorney to have worked for the Korean court system (Constitutional Court of Korea) and one of the first non-Koreans to be a regular member of a Korean law faculty. Sean is ranked, for Korea, as one of only two non-Korean lawyers as a Top Attorney by AsiaLaw. 

    Sean’s profile may be found at: Sean C. Hayes

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