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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Digital Forensic Reviews at the Korean Fair Trade Commission

The Fair Trade Commission of Korea (“KFTC”) implemented in April 2018 rules governing the review of digital evidence in investigations of businesses at the KFTC.  The rules are entitled the Regulations on Collection, Analysis and Management of Digital Evidence (“Digital Forensic Evidence Review Rules”).  The rules have changed the manner of executing investigations at the KFTC in cases where the KFTC perceives a need for a detailed forensic audit. As of 2017, the KFTC has engaged in digital investigations via a division named the “Digital Investigation and Analysis Division.”  This Division hired technical computer staff that is assisting in investigations.  This Digital Investigation and Analysis Division has engaged in aggressive gathering of forensic evidence from companies. The key aspect of the Regulations on Collection, Analysis and Management of Digital Evidence is to put in place procedures for the handling, storage, collection, security, disposal and processing of digital evidence in order to increase

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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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Barriers to Trade in the Korean Franchising Industry

The Office of the United States Trade Representative issues an annual report that details issues that concern the ability of United States companies to do business abroad.  One interesting component of the this report, that may concern some international franchise systems in Korea, is addressed in the report.  The 2018 National Trade Estimate Report on Foreign Trade Barriers notes under Korean Franchising that: “U.S. stakeholders have raised concerns for several years about the activities of the National Commission on Corporate Partnership, now renamed the Korea Commission on Corporate Partnership (KCCP), which imposed restrictions on the expansion of some U.S.-owned restaurant franchises and opened proceedings looking into numerous other sectors as well. The KCCP is a partially government-funded organization, created by Korea’s National Assembly with a mandate to mediate complaints of unfair or unequal competition between large and small businesses. The KCCP’s mission, according to its government appointed chairperson, is to level 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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Korean Franchisors’ Obligations in Korea to File Annual Report to Korean FTC

Korea’s Franchise Law imposes an obligation to report to the Fair Trade Commission of Korea, yearly, specific information relating to your franchise business worldwide.  A franchisor’s disclosure document may be de-registered or a fine may be imposed if this Yearly Franchise Report is not accepted by the Korean Fair Trade Commission within 120 days of the closing of the year. The Yearly Franchise Report, in Korea, is intended to notify franchisees and prospective franchisees of changes in the operations of the franchisor.   Don’t forget – file the update yearly. Other articles on Franchise Law that may be of interest: Enforcement of Sales Promotions by Franchisors in Korea Distribution Agreements in Korea: Crawl before you Walk Dispute Resolution Clauses in Franchise, Joint Venture, Partnership Agreements in Korea Korean Franchising Law Basics: Korea’s Act on Fairness in Franchise Transactions Covenants Against Competition in Franchise Agreement [ABTM id=1137] (c) Sean Hayes – SJ

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English-speaking Korean lawyers and International Lawyers at International Law Firm in Korea discussing issues of Korean Law

IPG Legal is a leading client-focused international law firm with offices in Korea that is, often, selected over the ubiquitous Korean Law Firms when success is essential and success depends on nuanced street-smart advice, proactive  and unconflicted representation. Our attorneys are, intentionally. different from the crowd.  From our retired judge partners to our junior associates, we are all trained with an intense focus on client success, lawyer proactivity, and to understand the nexus between your commercial and legal needs. Our attorneys shall never push to you useless memos, non-nuanced legal advice or get you into litigation without an honest assessment of the merits and shortcomings of the matter. We are  – intentionally different from the crowd.  Globally Experienced – Locally Connected.  We are IPG.  Korean Legal Practices Korean Antitrust, Competition & FTC Arbitration, Int’l & Domestic Korean Civil Litigation Korean Criminal Defense Korean Corporate Law & Compliance Korean Employment, Labor &

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Franchising in South Korea: Practical Law’s Franchising Global Guide Korean Chapter by IPG Legal

This Global Guide Q&A on South Korean Franchise Law provides an overview of the main practical issues concerning Korean franchising, including current market activity; regulation of franchising in Korea; contractual issues relating to franchising agreements in Korea (including pre-contract disclosure requirements, formalities, parties’ rights and obligations, fees and payments, term of agreement and renewal, termination, and choice of law and jurisdiction); Korean Operations Manual; liability issues; intellectual property; real estate; competition law; employment issues; dispute resolution; exchange control and withholding; and proposals for reform in Korea. Korean Franchising Guide by Thomson Reuters This Korean Q&A is part of the Franchising Global Guide.  The full chapter can be found at: South Franchising Chapter: Franchising Global Guide. The Korean Chapter was answered by: Sean C Hayes, SangJong Kook and Jeongha Lee of SJ Law Firm, Int’l Practice Group (IPG Legal). The Korean Law Blog contains numerous articles on Korean Franchise Law and Franchise

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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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Searching Trademark & Service Marks in Korea: Register your Trademarks/Service Marks Prior to Doing Business in Korea

Prior to marketing products, services or a business in Korea do a thorough search for like trademarks/service marks in Korea, then, have your trademarks/service marks registered in Korea – if you don’t want the added cost of litigating a matter at a Korean court.  If you have patents, don’t forget to, also, register your patents and other intellectual property. Your U.S. and E.U. trademark, service mark and patent filings are not enough. These “international filings” only gives you a grace period to file outside of these jurisdictions.  The Korea Intellectual Property Organization has a website, in English, that has a decent search system.  Regrettably, not all of the information on the site is in English.  This search is not the end of the matter.  You should, obviously, also hire a professional to assist. Upon filing, also, make sure you develop at strategy to protect your Intellectual Property.  Your strategy should,

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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 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 filing

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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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Weekly Korean Legal News From International Law Firm – IPG Legal for the Week of July 28, 2014

Weekly Korean Legal News From International Law Firm – IPG Legal for the Week of July 28, 2014Korean Legal News Reported by the Media on the Week of July 28, 2014 IMC may blacklist Korean builders over collusion Prosecutors continue probe into ferry owner’s driver Foreign workers upset by severance pay formula Restructuring urgent for big Korean companies Relocation of USFK Headquarters to Go Ahead Most Recent Posts from the Korean Law Blog This slot is reserved for the new article Korean Franchise Law Basics for Franchisors “Samsung’s First Family Struggles to Keep Grip on Company” Report by Bloomberg Debt Collection in Korea: Foreign Creditor vs. Bankrupt Korea Debtor Opportunities in Korea’s Growing Tuning & Performance Modification Industry for Foreign Companies ___ 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

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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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