SOUTH KOREA Law and Practice Contributed by: Hongki Kim, Hwijin (HJ) Choi, Kee Won Shin and Jennifer Yein Kwon, Bae, Kim & Lee LLC
Protection of the franchisee’s business territory As discussed in 6.2 Exclusive Territories and Com- peting Businesses , during the term of a franchise agreement, the franchisor may not, without justifiable cause, operate a directly operated store or establish another franchise of the same line of business within the franchisee’s designated business territory (Fran - chise Act Article 12-4 (3)). Accordingly, the franchisor’s offline sales channels are restricted to protect the fran - chisee’s territory. Disclosure of the franchisor’s online and offline sales activities If the franchisor operates through specific sales chan - nels such as online platforms, this must be disclosed in the franchise disclosure document. Specifically, the franchisor must disclose (i) the proportion of annual domestic sales accounted for by online versus offline sales; (ii) the proportion of products sold exclusively online or offline; and (iii) whether the franchisor sells goods or services identical or similar to those of fran - chisees through online, home shopping or telemarket - ing channels (Franchise Act Article 2 (10); Enforce - ment Decree, Annex 1). Consultation with franchisees and franchisee associations Franchisees may request consultation with the fran - chisor, and the franchisor is obligated to participate under the principle of good faith (Franchise Act Article 4). Franchisees may also form franchisee associations, which may request consultation with the franchisor concerning transaction terms, including changes to the franchise agreement. In such cases, the franchisor must respond in good faith to such requests (Fran - chise Act Article 14-2), though it is not legally required to reach agreement. Franchisees or franchisee associations may request consultations with the franchisor regarding matters related to the franchisor’s use of specific sales chan - nels. In this regard, the “Standard Franchise Agree - ment (for Retail and Other Sales Businesses)” pub - lished by the KFTC provides that franchisees, either individually or through their associations, may request consultations with the franchisor on issues such as whether and to what extent the franchisor engages in online sales, including the types of products sold, the
ers. The Franchise Act sets out the following condi - tions under which a requirement to purchase manda - tory items will not be considered an unfair restriction (Article 12 (1)(2)): • the mandatory item must be objectively essential for the operation of the franchise business; • it must be objectively recognised that, without dealing with the specific suppliers designated by the franchisor, it would be difficult to protect the franchisor’s trade mark rights and maintain the uniformity of goods or services; • the franchisor must disclose details of the manda - tory items in advance in the disclosure document and incorporate them into the franchise agreement; and • where the franchisor changes the details of the mandatory items (eg, specifications, price, quantity, quality or suppliers) in a manner disadvantageous to the franchisee, the franchisor must first consult with the franchisee. 6.4 Channel Reservation Restrictions on the Franchisee’s Use of Sales Channels Restricting a franchisee’s use of sales channels may be considered “unreasonable restriction on the fran - chisee’s business activities” and prohibited as an unfair trade practice. However, the Franchise Act provides that such restrictions will not be regarded as unlawful if both of the following conditions are satisfied (Franchise Act Article 12 (1)2; Enforcement Decree, Annex 2): • it is objectively necessary to protect the fran - chisor’s trade mark rights or to maintain uniformity in goods or services, and this cannot reasonably be achieved without restricting the franchisee’s business activities; and • the franchisor discloses the restriction in the franchise disclosure document and enters into the agreement with the franchisee on that basis. Franchisor’s Ability to Operate in the Same Sales Channels as Franchisees The Franchise Act permits franchisors to operate directly, but such activity is subject to certain limita - tions.
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