Enforcement of Sales Promotions by Franchisors under Korean Franchise Law

Can an international franchisor force a local Korean franchise to cut the prices of a product via a sales event?

This issue was addressed by the Korean Supreme Court in 2003Du7484. In this Supreme Court of Korea case, a franchisor, among other things, mandated via the franchise agreement for a franchisee to hold sales events. The franchise agreement did not specify the specific details of the sales events. The franchisor elected to utilize the clause in the franchise agreement to force the franchisee to initiate a sales event – the franchisee refused and, thus, the commencement of the dispute.

The Supreme Court opined that:

“A franchise business means a continuous business relationship in which a franchisor allows franchisees to use its own trademarks, service marks, trade names, signs, or any other business marks in selling goods (including raw materials and auxiliary materials) or services in conformity with certain quality standards or business methods, and supports, trains, and controls its franchisees in regards to their management, business activities. etc., and in which franchisees pay franchise fees to their franchisor in return for the use of business marks and the support and training provided for their management, business activities, etc.

A franchise business is a mutual dependent way of business between a franchisor and its franchisees. A franchise business has a common interest such as a protection of franchisees’ individual interest based on faith and a development a whole franchise system including franchisees.

A sales promotion event is for the development of a franchisee by promoting sales of a franchisee and thus franchise profit . . . while, also, increasing a franchisor’s profit by selling goods including raw materials and auxiliary materials to franchisees.

So both a franchisor and franchisee may receive a benefit from a sales promotion. If the expenses are shared reasonably between a franchisor and franchisees for a sales promotion event in a franchise agreement, even if a franchisor did not have a prior consultation with a franchisee in implementing a sales promotion event, that article does not conform to a clause which is unreasonably unfavorable to customers provided in the ACT ON THE REGULATION OF TERMS AND CONDITIONS Article 6 Paragraph 2 item 1.”

The Act on the Regulation of Terms and Conditions of Korea Article 6 (2)(1) notes that: “Any of the following clauses in terms and conditions shall be presumed to be unfair: (1) A clause which is unreasonably unfavorable to customers.”

The Franchise Law of Korea mandates, numerous, like obligations on franchisors including:

“Article 5 (Obligations of Franchisers)

Each franchiser shall observe the following obligations:

1. Devising business plans for the success of franchise business;

2. Continuing efforts for the quality management of commodities or services and the development of sales techniques;

3. Providing franchisees with facilities for their stores and supplying them with commodities or services at reasonable prices and costs;

4. Providing franchisees and their employees with education and training;

5. Rendering constant advice and assistance to franchisees with respect to their management and business activities;

6. Refraining from establishing any direct retail store within the business territory of a franchisee or establishing a franchise store of any type of business similar to that of a franchisee; and

7. Making efforts to settle any dispute arising in connection with a franchisee through dialog or negotiations.

The Franchise Law of Korea, also, imposes general obligations on franchisees including the following:

Article 6 (Obligations of Franchisees)

Each franchisee shall observe the following obligations:

1. Making efforts to maintain the integrity of franchise business and the reputation of the franchiser;

2. Maintaining inventory at a proper level to meet the supply plan of the franchiser and consumer demand, and displaying commodities for that purpose;

3. Meeting appropriate quality standards that the franchiser requires for commodities or services;

4. Using commodities or services provided by the franchiser if it is impossible to purchase commodities or services that meet the quality standards under subparagraph 3;

5. Meeting appropriate standards that the franchiser requires with respect to facilities and the exterior of the place of business or means of transport;

6. Consulting in advance with the franchiser when the franchisee changes commodities, services or business activities that he/she has handled;

7. Maintaining and providing data necessary to establish strategies for the integrated management and sales activities of the franchiser, such as accounting books related to the purchase and sale of commodities or services;

8. Allowing executives, employees, and other agents of the franchiser to enter the franchisee’s place of business for inspecting and recording the current status of business of the franchisee or data under subparagraph 7;

9. Refraining from relocating the place of business or transferring the franchise license to any third party without the consent of the franchiser;

10. Refraining from engaging in the same type of business as that of the franchiser during the term of a franchise agreement;

11. Refraining from divulging business know how or trade secrets of the franchiser;

12. Notifying the franchiser of any infringement of business marks and providing appropriate cooperation as necessary for preventing infringement where a third party’s infringement of business marks is discovered.

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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