SOUTH KOREA Law and Practice Contributed by: Hongki Kim, Hwijin (HJ) Choi, Kee Won Shin and Jennifer Yein Kwon, Bae, Kim & Lee LLC
ness as the franchisor during the term of the fran - chise agreement. Therefore, non-compete clauses that restrict the franchisee from operating a compet - ing business during the contract period are permit - ted under Korean law and are commonly included in franchise agreements. Non-Compete Clause After Termination The Franchise Act does not explicitly regulate non- compete clauses that apply after the termination of the franchise agreement. However, the KFTC reviews such clauses to determine whether they constitute an “unfair contract term” under Article 12 (1)3 of the Franchise Act. In assessing whether a post-termination non-com - pete clause is unfair, the KFTC considers the harm to the franchisee and prevailing industry practices. For example, in a recent decision, the KFTC found that imposing a two-year post-termination non-compete obligation was an unfair contract term as it exceeded what is typically observed in comparable franchise relationships (KFTC Decision No 2025-024, dated 18 February 2025). The KFTC reasoned as follows. • Non-compete obligations may be justified to the extent necessary to protect the franchisor’s pro - prietary know-how or trade secrets. However, if the restriction is excessive, it could unduly limit the franchisee’s ability to conduct business and serve as a means to exclude competitors. As such, these clauses must be interpreted and applied strictly. • The Franchise Act itself limits non-compete obliga - tions to the duration of the franchise agreement. • The KFTC also took into account industry prac - tices, noting that a two-year post-termination restriction deviated from what is typically observed in comparable franchise relationships. Accordingly, the permissibility of a one-year post- termination non-compete clause should be assessed in light of prevailing industry practices in the market in which the franchisor operates. In Korea, many industries (such as restaurant franchises) commonly use one-year post-termination non-compete clauses. The KFTC has not taken specific action against such clauses to date, and Korean courts have upheld their validity. Therefore, a one-year post-termination non-
compete clause is generally unlikely to be considered a violation of the Franchise Act. 6.3 Requiring Franchisees to Purchase Specific Goods and Services Overview: Regulations on Mandatory Items A franchisor may require a franchisee to purchase certain products or services exclusively from the franchisor or from designated suppliers (“mandatory items”). However, such requirements are subject to specific regulations under the Franchise Act. The relevant regulations include: • the requirement to disclose details of the manda - tory items in both the franchise agreement and the disclosure document; and • prohibition on unfairly restricting the franchisee’s choice of suppliers, which constitutes an unfair trade practice. The franchisor must specify in the franchise agree - ment the types of mandatory items and the method - ologies used to determine the supply price of each item (Article 11 (2) of the Franchise Act). In addition, the franchisor must include the following in the fran - chise disclosure document (Franchise Act Article 2 (10); Enforcement Decree, Annex 1): • a list of mandatory items; • the upper and lower limits of the supply price for key mandatory items during the preceding busi - ness year; • information on any difference between the sup - ply price of the mandatory items and a reasonable wholesale price; and • information on any economic benefits (such as sales incentives and rebates) the franchisor or its affiliates obtain in connection with the supply of mandatory items. Prohibition on Unfairly Restricting the Franchisee’s Choice of Suppliers Disclosure Requirement in the Franchise Agreement and Disclosure Document The franchisor must ensure that the requirement to purchase mandatory items does not constitute an unfair restriction on the franchisee’s choice of suppli -
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