U.S. Franchise Law: Covenants Against Competition in Franchise Agreements

I just got my hands on the ABA’s book entitled Covenants Against Competition in Franchise Agreements edited by Michael R. Gray and Natalma M. McKnew. We work with a number of Korean and Chinese franchisors and I found the book an excellent tool for the tailoring of our franchise agreements to the specific States.  The book, also, has decent chapters for Mexico and Canada. The book aforementioned along with the Franchise Law Compliance Manual and the FTC Franchise Rule are must for all Franchise Law professionals. These books can be bought via the American Bar Association website at: www.ShopABA.org.  Highly recommended Books.  The three books will set you back around USD 400 if you are a member of the ABA Forum on Franchise Law.  Take a look.

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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

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Damages for Material Omissions in Franchise Disclosure Documents in South Korea

In April of 2015, the Supreme Court of Korea ruled that under Article 4; Article (9)(1); and Article 41(1) of the prior version of the Fair Transactions in Franchise Business Act (“Franchise Act”) damages may be obtained, from a franchisor, for all material omissions (Supreme Court 2014 DA 84824,84831, April 9, 2015) within Korean Franchise Disclosure Documents. Monetary damages may be obtained under Article 37(2) of the Franchise Act of Korea and Article 56(1) of the Monopoly Regulation and Fair Trade Act of Korea for “material omissions” within Franchise Disclosure Documents and other document presented to prospective franchisees. The damages may include the cost of build-out, rental, franchise fees and even, in some cases, lost opportunity costs.  Additional, in some cases fines may be imposed, franchises can be de-registered and criminal charges may be brought against employees and management. The Fair Trade Commission may, additionally, impose a fine, even if

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Korean FTC Criminal Referral Guidelines: Monopoly & Franchise Korean Law Updates

The Fair Trade Commission of Korea (“Korean FTC” or “KFTC”) amended the Korean FTC’s Criminal Referral Guidelines (“Amended Guidelines”) to motivate more active and aggressive enforcement of Korea’s Franchise, Monopoly and other related laws.  We have seen a much more active enforcement of Korean law by the Korean FTC and expect more criminal referrals. The Amended KFTC’s Criminal Referral Guidelines places a very low threshold for referring a case for a criminal prosecution of employees and companies.  The Amended Guidelines are effective since April 9, 2018. Prior to the present amendment, the prior Guidelines emphasized on, mainly, making criminal referral against key management and company representatives that were alleged to have taken in part in “high level” violations.  The Amended Guidelines places a bulls eye also non-management employees and lowers the threshold for referring a case for prosecution. The Guidelines notes that adjudicating officers shall look, mainly, to: (a) the

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Privity of Contract in Franchise Agreements in Korea: Korean Franchise Law Updates

Normally, in Korea, a contract/agreement cannot confer rights nor impose obligations upon a person who is no a party to the contract/agreement.  One interesting case, in franchise law, applied this principle to the benefit of the franchisor and the detriment to a supplier.  A Supplier delivered food through a Distributor to a Franchisee based on a franchisee requirement iterated in a franchise agreement with a franchisor.  The case brings to light, also, the potential liability of franchisors for acts of Korean franchisees.  The dispute occurred, of course, since the Supplier was not paid for an outstanding order, since the Franchisee was insolvent.  The Franchisor (deep pocket) was not insolvent and, thus, the only available option for collection was via the Franchisor.  One caveat is that the Franchisor was paid a commission by the Supplier/Distributor for sales to the Franchisee and as noted above, the Franchisee was mandated to use this specific Supplier.  Thus, the

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Termination of a Franchise Agreement in Korea: Korean Franchise Law Basics

The Fair Franchising Transactions Act of Korea (“Franchise Act”) and its Enforcement/Presidential Decree, the Commercial Law of Korea and the Korea Franchise Promotion Act are the main bodies of law regulating the relationship between franchisors and franchisees in Korea.  The law is enforced by the Korea Fair Trade Commission and the Korean courts. Franchise Termination in Korea Korea’s Franchise Act, facially, limits the power of the franchisor to terminate a franchise.  The Franchise Act notes that: “Article 14 of the Franchise Act of Korea(1) Any franchisor that intends to terminate a franchise agreement shall clearly note the franchisee’s breach of the agreement during a grace period of not less than two months and shall give written notice at least twice that it will terminate the agreement unless such breach is corrected during the given period: Provided, that the foregoing shall not apply to cases specified by Presidential Decree…(2) The termination of

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A “Franchise” Defined under Korean Law: Franchise Law Basics

Korea Franchise Law  Korea has a very broad definition for a “franchise.”  The definition of a franchise is noted in Korea’s Franchise Act and has been fairly consistently applied by the courts and Korea’s Fair Trade Commission.   Korea’s Franchise Act defines a franchise as: “a continuous business relationship in which the franchisor allows the franchisee to sell goods or services under certain quality standards and business method using its trademarks, service marks, trade name, signs and other business marks (“Business Marks”) and supports, educates and controls the franchisee with regard to relevant management and operating activities, and in which the franchisee must pay franchise fees to the franchisor in return for the use of the Business Marks and the support and education concerning the management and operating activities.”  This broad definition of a Korean franchise leads to most relationships where a company owning Business Mark maintains a degree of

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Will McDonald’s Korea Franchise in Korea?

In early April this year, chief executive and president of McDonald’s, Steve Easterbrook, announced that the company was seeking a “strategic partner” in Korea, as part of the company’s implementation of a “global turnaround strategy.”  A report on the announcement can be found at: McDonald’s seeks strategic partner in Korea. At the time, the company did not elaborate as to what exactly was meant by “strategic partner” though McDonald’s did say that the company was “open to all possibilities” including a master franchise or joint ventures with local enterprises.  The company commented that of the 119 countries in which McDonald’s operates, 60 percent are executing various forms of strategic management structures including franchises or joint ventures.  For the duration of its almost 30 years in Korea, McDonald’s Korea has been managed directly by headquarters in the United States. A few days after the initial report, it was reported in the

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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

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A Franchisor may be Unable to Prosecute a Franchisee for Embezzlement in Korea

Article 355 of Korea’s Criminal Act defines embezzlement as: “a person who, having the custody of another’s property, embezzles or refuses to return the property shall be punished by imprisonment for not more than five years or a fine not exceeding fifteen million won.” In a landmark case in Korea’s Franchise Jurisprudence, the Supreme Court ruled a franchisee may not be held criminally liable for embezzlement for “arbitrary spending of funds” and not paying franchise fees under the franchise agreement, since the Supreme Court deemed that the funds are not funds held, in short, in trust for the franchisor and the franchisor did not maintain a PNL (partnership-like) relationship with the franchisee. Franchisors in Korea, must, carefully monitor the financial situation of franchisees.  Often when franchises fail in Korea, the franchise fees are of the last priority.  Korea has pre-litigation measures that may be utilized to assist in guaranteeing franchise

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Registration of a Korean Franchise Disclosure Document under Korea’s Revised Franchise Law

We are happy to report that we have, recently, succeeded in registering the disclosure document of a franchise in Korea. Our client, a leading U.S. franchise, came to us hoping to take advantage of Korea’s dynamic franchise market.  We have an active franchise and distribution law practice team lead by a retired Korean court judge and little ole me. When Korea’s franchise law was amended in 2014, there were many uncertainties about how the Fair Trade Commission of Korea would react to new applicants and how some standard clauses we utilize in most master franchise agreements in Korea will be considered by the FTC.   Our recent Korean franchise filing is one of the first foreign companies to have registered a master license agreement in Korea.  We are happy to announce that the process was no more burdensome than the process under the former franchise law and the time from

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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

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Credit Rating Agencies in Korea: Due Diligence of Your Supplier, Franchisee, Joint Venture Partner & Distributors

Korea has established four credit rating agencies.  The four agencies are: National Information & Credit Evaluation (NICE); Korea Investor Services (KIS); Korea Ratings (KR); and Seoul Credit Rating & Information (SCRI). Some reports provided by these rating agencies are provided in English.  However, many of the English reports are not complete.  Thus, it is advisable to make sure if you have an English version of a report that it is same as the Korean version of the report. Additionally, it is best to have someone with knowledge of the Korean business climate review the reports, since some clues to issues are unique to Korea. Some companies are required to have a credit rating performed by a Korean rating agency.  If a company wishes to issue asset-based securities and unsecured bonds the company, in Korea, will need to apply for a credit rating via one of the Korean credit rating agencies.

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Korean Franchise Law Basics for Franchisors

Over the next week couple of weeks we will be posting articles on the updated Korean Franchise Law.  The articles will be listed below.  The articles will address the major issues facing franchisors in the Korean market. If you have any topics that interest you or will interest other readers – please advise.  Articles on the Basics of Korean Franchise Law: Distribution Agreements in Korea: Crawl before you Walk Korean Small Business Partnerships/Joint Ventures: Pubs, Distributors, Exporters, Boutiques, Franchises and Basic Manufacturing etc. 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 ___Sean Hayes may be contacted at: [email protected] 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

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Korean Small Business Partnerships/Joint Ventures: Pubs, Distributors, Exporters, Boutiques, Franchises and Basic Manufacturing etc.

Starting a small business in Korea can be enjoyable and profitable if you get the business on the right track from the start.  Too often we see those with “limited funds” (we all have limited funds -even multinationals have limited funds) choosing to forgo having the deals structured by a professional and just downloading a “partnership” agreement off the internet.  Do not be what my father likes to call President Obama – a knucklehead.  I have learned from my 13 years working in Korea (Can’t believe I have been here for 13 years), that this choice, normally, ends in either a failed business or a person contacting me with a case that, now, requires our litigation services.   I even saw cases end up in the prosecutor’s office.  The amount of money that it costs to have a professional draft these agreements, must, be considered part of the cost of

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Dispute Resolution Clauses in Franchise, Joint Venture, Partnership Agreements in Korea

It is essential for all joint venture, franchise, shareholder and like agreements, in Korea, to include dispute resolution clauses. These clauses are fundamental to establish, amongst other things, the: prevailing language of the agreement; forum to resolve the dispute; process of resolving the dispute; damages and costs for breaching the agreement; enforceability of a judgment against a party to the agreement; and flexibility of mediation and arbitration rules. To often I see shareholder, joint venture, franchise and partnership disputes going badly because of poorly drafted agreements.  Some of these agreements are drafted by lawyers with, seemingly, little experience in litigation and arbitration in Korea and, thus, little sense of the manner in which these business relationships go awry.   One of these critical flaws in these Korean agreements is the lack of consideration of dispute resolution and the simple plugging into agreements standard dispute resolution clauses. Please see our other

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American Bar Association Forum on Franchising 2013: International Franchise Law and Korea

This American Bar Association Forum on Franchising 2013 will be held from October 16-18, 2013 at the Rosen Shingle Creek Resort in Orlando, Florida.  The resort is a few miles from Disney World and the resort is surrounded by great golf courses.  The Forum, as always, will handle American and International issues related to franchising.  This year the Forum will, also, have a workshop covering the basics of franchise law for newcomers to franchise law.  The Annual Meeting of the Forum on Franchising is a must for all international franchise professionals and is a great tool for those interested in entering this dynamic area of law.  For more information on the ABA’s Forum on Franchising please visit: www.americanbar.org/groups/franchising.html Articles on Korean Franchise Law that may be of interest: Korean Franchise Law Basics: Korea’s Act on Fairness in Franchise Transactions Distribution Agreements are your Friends in Korea Covenants Against Competition in

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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

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Distribution Agreements in Korea: Crawl before you Walk

Prior to going into any relationship with a distributor/agent in Korea, please read my post entitled: Finding a Korean Distributor: The Top 10 Things to Know Before Going to Bed with a Distributor in Korea. Please read that post in combination with this post, prior to engaging a distributor in Korea. We see too many Korean distribution and agency agreements that are mere spun U.S. or European agreements.  Please have your Korean distribution agreement and all agreements you have in Korea drafted by an experienced and proactive attorney that has on-the-ground experience in Korea.  We see too many issues that could have been easily resolved by a carefully drafted agreement and a little due diligence. Issues to consider for your Korean Distribution Agreement: Will your distributor in Korea be your agent?  If the Korean distributor is an agent, generally, you will, only, be paying your agent in Korea a commission and you

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Distribution Agreement in Korea: Factors to Always Keep in Mind

Prior to going into any relationship with a distributor/agent in Korea, please read my post entitled: Finding a Korean Distributor: The Top 10 Things to Know Before Going to Bed with a Distributor in Korea. Please read that post in combination with this post, prior to engaging a distributor. We see too many distribution agreements that are mere spun U.S. distribution or agent agreements. Please have your distribution agreement and all agreements you have in Korea drafted by an experienced and proactive attorney that has on-the-ground experience in Korea. We see too many issues that could have been easily resolved by a carefully drafted agreement and a little due diligence. Issues to consider for your Korean Distribution Agreement: Will your distributor in Korea be your agent? If the distributor is an agent, generally, you will, only, be paying your agent a commission and you will be directly invoicing the client.

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