The amended Enforcement Decree of the Fair Franchise Transactions Act (the “FFTA”) that regulates the percentage of franchisees from which the franchisor is required to obtain consent for advertising and promotional campaigns and the procedures for obtaining such consent became effective on July 5, 2022, together with the amended FFTA.

In its annual plans for 2022, the Korea Fair Trade Commission (the “KFTC”) announced its plan to amend the Enforcement Decree of the FFTA to set forth the specific percentage of franchisees that a franchisor is required to obtain prior consent from when the franchisor launches advertising and promotional campaigns for which the franchisee bears the cost.

In this regard, under the amended FFTA and the Enforcement Decree thereof, a franchisor, before engaging in the advertising and promotional campaigns described above, is required to enter into a separate agreement with each franchisee or obtain individual consent from a certain percentage of the franchisees.  The key amendments to the Enforcement Decree are as follows.
 

1.   The Percentage of Franchisees and the Method by Which the Franchiser is Required to Obtain Prior Consent

The amended FFTA requires a franchisor to obtain consent from at least a certain percentage of its franchisees in order to hold advertising and promotional events at the franchisee’s expense, while leaving the specific percentage and the method of obtaining consent to be stipulated in the Enforcement Decree.  In turn, the amended Enforcement Decree sets such percentage at 50% or more for advertisements and 70% or more for promotional events.  In addition, in the case of a promotional event, only the franchisees who have agreed to bear the cost of the promotional event can be subject to such a promotional event.

In addition, the method by which a franchisor obtains consent from a franchisee is required to be one where the timing of the consent can be verified, such as through (i) documents, (ii) contents-certified mail, (iii) e-mail, (iv) Internet webpage, (v) application, and (vi) point-of-sale system (POS).

2.   Format of Agreements on Advertising and Promotional Events and Matters to be Included

Under the amended FFTA, a franchisor may also run advertising or promotional campaigns if the franchisor has entered into a separate agreement with the franchisees in advance regarding advertising or promotional campaigns.  In this regard, the amended Enforcement Decree stipulates that such agreement for advertising and promotional campaigns should be a separate agreement from the underlying franchise agreement.

In addition, the agreements for the advertisements and promotional campaigns should include all of the following: (i) the name of the advertisement or promotional event and its duration; (ii) the franchisee’s share of the expense; and (iii) the maximum expense to be borne by the franchisee.

3.   New Standards for Imposing Administrative Fines

The amended FFTA imposes an obligation on a franchisor to both notify its franchisees of the details of any advertisements or promotional campaigns that the franchisees pay for, and to allow the franchisees to access such details upon their request.  If the franchisor fails to notify any of the franchisees of the expenditure details of the advertising and promotional campaigns or fails to comply with the franchisee’s request for access, the franchisor may be subject to a fine of up to KRW 10 million.

In this regard, the amended Enforcement Decree further specified the administrative fine to be imposed at KRW 5 million for the first violation, KRW 7 million for the second violation, and KRW 10 million for the third or more violations.

With the enforcement of the amended FFTA and its Enforcement Decree, it is advisable for franchisors to check their existing practices related to advertising and promotional campaigns and improve the relevant procedures.  We anticipate that various issues related to the interpretation of the law could arise, including how broadly the amended FFTA would apply and how specific the agreements for the advertising and promotional campaigns to be executed with the franchisees should be.