On December 7, 2018, the National Assembly passed two amendment bills, namely amendments to the Fairness in Franchise Transactions Act (“FFTA”) and the Fair Distribution Transactions Act (“FDTA”).  These amendments, which will take effect six months from the date of the promulgation following a presidential approval, seek to facilitate a more effective resolution of franchise disputes, and introduce a new scheme for suppliers and distributors to execute fair trade agreements.

Details:

1. Stricter criteria for exemption from corrective measures will be applied, thereby granting exemption only upon completion of performance of the terms and conditions of a settlement to a franchise dispute

The FFTA amendment overhauls the current Korea Fair Trade Commission (“KFTC”) mediation system for franchisors and franchisees.  The current system allows the KFTC to exempt disputing franchisors and franchisees from corrective measures for violation of the FFTA upon settlement of the dispute, and to introduce a higher bar for such exemptions.  

Under the amended FFTA, the KFTC would grant an exemption only upon full performance of the terms and conditions of a settlement.  Accordingly, franchisors and franchisees, which had undergone KFTC mediation for a dispute and agreed to a settlement, would be required to submit a settlement implementation report to the KFTC.  The KFTC would need to confirm completed performance of the terms and conditions of the settlement before the KFTC may exempt such parties from corrective measures for violation of the FFTA.  

This means that, going forward, when parties to a franchise dispute decide to undergo KFTC mediation and reach a settlement, they should proceed with greater caution in performing the terms of the settlement, as the KFTC may nonetheless impose corrective measures upon non-performance.

The FFTA amendment also introduces a certain statute of limitations for imposition of sanctions, eases the conditions under which the KFTC may initiate an investigation, and simplifies potential outcomes from KFTC mediation of a dispute.  

Key aspects of the amendments:

2. A new scheme for suppliers and distributors to execute fair trade agreements under the FDTA

The FDTA amendment encourages suppliers and distributors to execute agreements that provide for mutual cooperation and compliance with applicable laws, and allows the KFTC to provide incentives to suppliers and distributors to be compliant with the terms of such agreements (Article 12-2 of the FDTA Amendment Bill).  

A similar fair trade agreement scheme already exists in the FFTA and the Large-Scale Distribution Transactions Act (“LDTA”), under which companies evaluated as “outstanding” or higher in their implementation of the fair trade agreement are granted certain privileges (e.g., exemption from ex officio investigations).  

Likewise, as similar benefits are expected to be offered under the amended FDTA, companies are encouraged to assess and anticipate the potential impact of the new scheme and consider how to make appropriate use of it.

Significance:

In November 2018, the KFTC appointed Byung-Hee Ko (former head of Cartel Investigation Bureau of the KFTC) as the Distribution Policy Officer (a newly created Director-General level position under the Business Trade Policy Bureau of the KFTC) to head three new divisions responsible for the enforcement of the FFTA, LDTA and FDTA (namely, Franchise Transaction Division, Large-Scale Distribution Transaction Division and Distribution Transaction Division).  

As this is expected to result in increased KFTC investigations and enforcements of franchise and supplier-distributor arrangements, companies are recommended to review their franchise and/or supplier-distributor arrangements for compliance with applicable laws, and to establish or update systems for internal compliance.