SOUTH KOREA Law and Practice Contributed by: Hongki Kim, Hwijin (HJ) Choi, Kee Won Shin and Jennifer Yein Kwon, Bae, Kim & Lee LLC
2. Franchise Disclosure 2.1 Mandatory Disclosure General Principles
1.3 Definition of a Franchise Agreement Under Korean law, a “franchise business” is legally defined as a business relationship that includes all of the following elements: • the franchisee is granted the right to use the fran - chisor’s trade marks (including trade marks, service marks, trade names, signs or any other marks); • the franchisor allows the franchisee to sell products or services (including raw and auxiliary materials) in accordance with prescribed quality standards or business methods, while also providing training and operational support; • the franchisee provides consideration to the fran - chisor in the form of a franchise fee, covering both the right to use the trade marks and the training/ support received in connection with business operations; and • the parties enter into a continuous business rela - tionship. In practice, whether a business relationship qualifies as a “franchise” is determined primarily by the exist - ence of a franchise fee. The concept of a franchise fee is interpreted broadly and may include virtually any payment made by the franchisee to the franchisor, such as: • membership fees, initial joining fees, training fees or contract fees paid in consideration for the right to use trade marks or for operational support and training; • payments serving as security for the franchisee’s obligations, including the cost of goods supplied by the franchisor or compensation for damages; • upfront payments required as a condition for the grant of franchise rights, such as the cost of fixtures, equipment or goods provided by the franchisor, or rent for premises payable to the franchisor; • periodic or irregular payments to the franchisor for the use of trade marks, training, support or other benefits conferred under the franchise agreement; and • any other payments made by a prospective or existing franchisee to acquire or maintain the right to operate the franchise business.
Under Article 7 of the Franchise Act, a franchisor is required to provide a franchise disclosure document to a prospective franchisee. A disclosure document that has been duly registered (or amended and re- registered, where applicable) with the Korea Fair Trade Commission (KFTC) or the competent metropolitan/ provincial government authority (eg, the mayor of a special metropolitan city, the mayor of a metropolitan city or the provincial governor) should be provided. The Franchise Act requires disclosure to be made in accordance with methods prescribed by the Enforce - ment Decree of the Franchise Act, such as certified mail or other objectively verifiable means, to confirm the timing of disclosure. Although the Franchise Act does not explicitly mandate translation, in practice the KFTC requires that the franchise disclosure document be submitted in Korean in the registration process. Information Required in the Franchise Disclosure Document Under Article 2 of the Franchise Act and its Enforce - ment Decree, the franchise disclosure document must include, among other things: • general information on the franchisor (corporate details, history and financial statements); • current state of the franchise business, including the number of stores, closures and average sales; • record of legal violations by the franchisor or its executives; • obligations imposed on the franchisee; • conditions or restrictions on business activities (eg, mandatory purchases, business territory); • procedures and timelines for commencing busi - ness operations; • details of support, education and training to be provided by the franchisor; and • the status of stores directly operated by the fran - chisor. Under Article 9 (1) of the Franchise Act, a franchisor is prohibited from engaging in the following conduct in relation to the franchise disclosure document:
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