On May 31, 2022, the Cabinet passed a proposed amendment to the Enforcement Decree to the Fairness in Franchise Transactions Act ("FFTA") which, among other things, sets the minimum rate of consent that franchisors are required to obtain from their franchisees in order to launch a cost-sharing advertising or promotional campaign with franchisees.  The proposed amendment, referenced as a key initiative of the Korea Fair Trade Commission ("KFTC") in its enforcement plan for the year, will take effect on July 5, 2022, at the same time as the related amendment to the FFTA.

Based on the amendments to the FFTA and its Enforcement Decree, franchisors will have to execute a separate contract with their franchisees, or separately obtain their consent, before launching advertising or promotional campaigns for which the franchisees are expected to share in the costs.  The amended Enforcement Decree establishes further regulations on this new requirement, and we provide the key details of these changes below.

Minimum Rate of Consent Required for Launching Advertising or Promotional Campaigns and Acceptable Forms of Consent

The amended FFTA will now require franchisors to obtain consent from their franchisees before launching advertising or promotional campaigns for which the franchisees are expected to share in the costs, and refers to the Enforcement Decree for the minimum rate and acceptable forms of consent.  In addition, for promotional campaigns, the franchisor may only ask those franchisees that agreed to share in the costs to participate.

The amended Enforcement Decree specifies that franchisors are required to obtain consents from at least 50% of its franchisees for advertisements, and from at least 70% of its franchisees for promotional campaigns.

The amended Enforcement Decree also specifies that such consent should be obtained in a form that allows for the verification of the time of consent.  This includes (i) in writing, (ii) registered mail, (iii) email, or through (iv) an online website, (v) mobile application, or (vi) POS (point of sale) system.

Separate Agreement Required for Advertising or Promotional Campaigns

The amended FFTA also allows franchisors to launch advertising or promotional campaigns in accordance with an advance agreement executed with the franchisees.

The amended Enforcement Decree provides that such agreements for advertising or promotional campaigns must be executed as a separate contract, rather than as part of a franchise agreement.

In addition, the amended Enforcement Decree also expressly requires that such agreements reflect (i) the name and period of the proposed campaign, (ii) the percentage of related expenses to be borne by each side, and (iii) the ceiling amount of costs to be borne by the franchisee.

Criteria for Administrative Fines

The amended FFTA provides that the KFTC may impose administrative fines of up to KRW 10 million against any franchisor that fails to inform its franchisees of the detailed expenses incurred from an advertising or promotional campaign or if the franchisor denies a franchisee's request to review such information.

The administrative fine will be set at KRW 5 million for the first violation, KRW 7 million for the second violation and KRW 10 million for the third or subsequent violation.

In light of these changes, companies operating franchise networks in Korea are advised to inspect their current practices regarding advertising and promotional campaigns, and make improvements where necessary.  In particular, the new requirement could lead to various issues relating to applicability of the scope of advertisements and promotional campaigns, and extent of details that need to be included in the relevant agreements.

[Korean version]