A franchise, in general, in the Republic of Korea (“Korea”) is a continuous business relationship under which a Franchisor allows a franchisee to use its business marks (trademarks, service marks) to sell goods or services in accordance with certain quality standards, business methods, training and control requirements in exchange for the payment of a franchise fee (Fair Transactions in Franchise Business Act (“Franchise Act”). The Korean Fair Trade Commission and the Courts of Korea have broadly interpreted the definition to the benefit of the franchisee.
The majority of the disputes concerning the definition of a franchise related to the degree of control over the franchisee and if the franchisee is more akin to a license agreement than a franchise. In all but the most exception of cases in which you are proposing a system that needs to be followed by a licensee/franchisee – it is best to comply with the disclosure and other requirements under Korea’s Franchise Law.
Main Korean Franchise Laws
Once deemed a franchise the major laws that govern the relationship between a franchisor and a franchisee are The Fair Transactions in Franchise Business Act (“Franchise Act”) and the Fair Transactions in Large Franchises and Retail Business (“LFBA”). Whereas the general provisions of the Monopoly Regulation and Fair Trade Act (MRFTA), Commercial Act, and Civil Act, additionally, regulate the franchise relationship and other business relationships in Korea. The Franchise Act, LFBA, and MRFTA have detailed and comprehensive enforcement decrees and a substantial body of case law interpreting these statutory laws and enforcement decrees.
Pre-Sale Disclosure Requirement Under Korea’s Franchise Act
Franchises, in Korea, must register a disclosure document with Korean Fair Trade Commission (“KFTC”) in the Korean language in a format proposed by the KFTC. All franchisees must be provided with the disclosure document, including, sub-franchisees and master franchisees 14 days (7 days if you hire a lawyer or licensed franchise professional) prior to execution of the franchise agreement. The KFTC recommends the use of a standard form disclosure document created by the KFTC. The Related Documents necessary to be provided to the prospective franchisee along with a Disclosure Document includes a document noting the location of stores in proximity to the store proposed by the franchisor and a sales projection document.
Disclosure requirements are perpetual and are required to be updated annually. IPG Legal recommends the use of the standard form disclosure document proposed by the KFTC to assist in preventing delay.
If a franchisor fails to register a franchise, in Korea, administrative fines may be imposed; the franchise agreement may be deemed null and void; the franchisor may be required to refund fees paid; and/or criminal and civil sanctions may be imposed. For an article on registering a franchise agreement in Korea please see: Korean Franchise Disclosure Requirements
New Requirements under Korea’s Franchise Law Prior to Approval of Disclosure Document
A recent revision to the Korean Franchise Act requires that a franchisor have, at least, one-year experience operating a directly owned store locally or abroad prior to offering to franchise in Korea. Thus, this requirement needs to be met before approval of the registration of a franchise disclosure document and approval of the franchisor to franchise in Korea. Limited exceptions apply based on particular unique circumstances, but few exceptions exist for traditional F&B franchisees.
For an article we wrote in a Thomson Reuters publication on franchise law, please see: Franchise Law. To schedule a call with a franchise lawyer in Korea: Please Schedule a Call with a Korean Franchise Lawyer for more information on Korean Franchise Law, please see our Korean Franchise Law Archives.
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