Injunctions Against your Former Franchisee for Competing Against your New Franchisee: Korean Franchise Law/Injunction Basics

Under the Fair Franchise Transactions Act of Korea (“Franchise Act”), a franchisee has the right, under Korean Law, to request the renewal of a Korean franchise agreement after ten years of successful operation of a franchise. The Korean Franchise Act Article 13 (2) stipulates that:

“A franchisee’s right to request the renewal of the franchise agreement may be exercised only when the total period of the franchise agreement, including its initial period, does not exceed ten years.”

We wrote about termination of a franchise in other articles including: Termination of a Franchise in Korea.

Courts in Korea are becoming increasingly apprehensive to enforce injunctions against operating of competing businesses filed by franchisors against franchisees. The situation, often, occurs where a franchise is terminated and the franchisee operates a like business in the same location as the prior franchise. Of course, all professionally drafted franchise agreements in Korea will have a prohibition against operating a competitive business during the operating of the franchise and during a period of time after termination of the franchise agreement.

The Korean Courts, however, are very reluctant to enforce these clauses as evidenced by a case handed down a few years ago at the Seoul Central District Court. The Court opined that if any fault in failure of the franchise or termination of the franchise agreement is attributable to the franchisor, enforcement of a covenant not to compete will be interpreted as a clause that is against public policy and, thus, invalid.

The solution to this issue is, often, proactive measures pre-termination of the franchise agreement.