SOUTH KOREA Law and Practice Contributed by: Hongki Kim, Hwijin (HJ) Choi, Kee Won Shin and Jennifer Yein Kwon, Bae, Kim & Lee LLC
6. Restrictions on Competition in Franchise Agree- ments and 7. Choice of Governing Law ). Its stated purpose is to ensure the mutually complementary and balanced development of franchisers and franchisees on an equal footing, rather than to safeguard competi - tion in the relevant market (Article 1 of the Franchise Act). Accordingly, the restrictions commonly found in fran - chise agreements, such as exclusive territories, non- competes and mandatory purchase obligations, are regulated under the Franchise Act primarily to protect the interests of franchisees (see 6.2 Exclusive Terri- tories and Competing Businesses and 6.3 Requiring Franchisees to Purchase Specific Goods and Ser - vices ). For matters falling within the scope of the Franchise Act, the following provisions of the Monopoly Regula - tion and Fair Trade Act (South Korea’s principal com - petition law) do not apply: Article 45 (1) subparagraphs 1 (unreasonable refusal to deal), 4 (unfair inducement of customers), 6 (abuse of superior bargaining posi - tion) and 7 (exclusive dealing and territorial or cus - tomer restrictions), and Article 46 (resale price main - tenance). 6.2 Exclusive Territories and Competing Businesses Exclusive Territory Under Article 12-4 (3) of the Franchise Act, the fran - chisor may not, without justifiable cause, operate a directly operated store or establish a franchise of its own or its affiliate within the franchisee’s designated business territory in the same line of business. A busi - ness will be considered the same where it is reasona - bly recognised as such in light of the consumer base’s regional and demographic scope, the items handled, and the form and method of business. Accordingly, exclusive territories are permitted in franchise agree - ments, and the franchisor is expected to guarantee the franchisee’s territorial rights as stipulated in the agreement. Non-Compete Clause During the Term of the Franchise Agreement Under Article 6 (10) of the Franchise Act, franchisees are prohibited from engaging in the same line of busi -
• an application for the franchisee’s bankruptcy is filed or compulsory workout procedures are initi - ated against the franchisee; • bills or checks issued by the franchisee are dishon - oured for reasons such as payment default; • the franchisee is no longer able to operate the fran - chise due to a natural disaster, significant personal reasons or other circumstances; • the franchisee receives administrative sanctions or court judgments for violations of laws or regula - tions related to franchise operations, which causes significant harm to the franchisor’s reputation or credibility and creates a serious obstacle to the franchise business (including corrective orders, penalty surcharges, administrative fines or busi - ness suspension orders); • the franchisee receives an administrative sanction that prevents correction of a violation (eg, revo - cation of qualifications, licences or permits, or a business suspension order exceeding 15 days) due to a violation of laws or regulations related to franchise operations – provided that this does not apply where a penalty surcharge or administrative fine is imposed instead of such sanction; • the franchisee repeats the same violation within one year (including the previous contract period in the case of renewal) after correcting the issue at the franchisor’s request, despite having been noti - fied by the franchisor that such repetition will result in termination without the opportunity to cure; • the franchisee receives a criminal penalty for an act related to franchise operations; • the franchisee operates the franchise in a man - ner that poses an imminent threat to public health, making it impractical to wait for corrective action by authorities; and • the franchisee suspends business for seven con - secutive days or more without justifiable cause. 6. Restrictions on Competition in Franchise Agreements 6.1 Treatment of Competition Restrictions in Franchise Agreements The Franchise Act regulates a broad range of matters concerning franchise transactions (see 2. Franchise Disclosure , 5. Duration, Renewal and Termination ,
114 CHAMBERS.COM
Powered by FlippingBook