KFTC Issues Advance Notice of Proposed Guidelines for Consulting Franchisees on Modifying Transaction Terms for Mandatory Purchase Items

On September 12, 2024, the Korea Fair Trade Commission (“KFTC”) issued an advance notice on a new set of Guidelines for Consultation on Modifying Transaction Terms for Mandatory Purchase Items in Franchise Agreements (“Proposed Guidelines”). Mandatory purchase items refer to products specified by franchisors that franchisees are obligated to purchase from the franchisor or from a designated third party, as part of their ongoing contractual requirements. The Proposed Guidelines provide specific guidance on how a franchisor should engage with franchisees when changing transaction terms in a manner that may negatively impact them. Following the collection of feedback from stakeholders and relevant government agencies during the public comment period, which ends on October 2, the KFTC intends to finalize and implement the Proposed Guidelines after a regulatory review and securing the necessary support.

The Proposed Guidelines were prepared as a response to the amendment (effective December 5, 2023) to the Enforcement Decree to the Fair Franchise Transactions Act (“FFTA”) requiring franchisors to consult with franchisees prior to making unfavorable modifications to transaction terms. It is essential for franchisors to engage in good faith consultations with franchises when considering such modifications. Failure to do so may be regarded by the KFTC as a form of restrictive trade practice prohibited under the FFTA, and may result in sanctions. Franchisors are thus encouraged to prioritize compliance and maintain transparent communication with their franchisees.

Key details of the Proposed Guidelines are as follows:

Types of Unfavorable Modifications Requiring Consultation

The Proposed Guidelines specify seven types of modifications to transaction terms regarding mandatory purchase items that are considered unfavorable to franchisees. In principle, consultation is required when making any of the following unfavorable modifications, even if other favorable modifications are being implemented simultaneously.

(1)	Modifications that newly require franchisees to purchase certain items from the franchisor or from a third party that they were previously not required to do so

(2)	Modifications that raise the supply price of mandatory purchase items (excluding automatic price increases based on the supply price calculation method already specified in the franchise agreement)

(3)	Modifications to the supply price calculation method for mandatory purchase items that disadvantage franchisees

(4)	Modifications that decrease the quantity, volume, size, weight, etc., of mandatory purchase items

(5)	Modifications that lower the quality of mandatory purchase items

(6)	Modifications that reduce the number of designated suppliers from whom franchisees can purchase mandatory purchase items

(7)	Modifications that charge additional expenses for mandatory purchase items, or unfavorably change transaction terms regarding product returns or payment methods

The Consultation Process

Under the Proposed Guidelines, (i) prior to the commencement of consultation, franchisors are required to notify their franchisees, with sufficient advance notice, of the details of the unfavorable modifications, including the reasons and grounds for such modifications, as well as the period, location, and method of the consultation. Considering that consultation involves multiple franchisees, (ii) the Proposed Guidelines allow both face-to-face and non-face-to-face consultation methods, but require franchisors to ensure that the chosen consultation method allows franchisees to comfortably express their opinions freely. In addition, if a franchisee requests the franchisor to provide materials or verify facts during the consultation process, the Proposed Guidelines require the franchisor to respond to the request and explain its stance and rationale regarding the franchisee’s views. The Proposed Guidelines also (c) require the franchisor, after completion of the consultation process, to provide all franchisees a detailed report on the outcome of the consultation.

While, in principle, consultation should occur prior to any modifications, the Proposed Guidelines also allow consultation to take place after the modifications are made if prior consultation proves challenging due to justifiable reasons, such as significant risk of disclosing trade secrets. Further, while consultation should, in principle, involve all franchisees, the franchisor may instead consult with a representative franchisee association, provided that at least 70% of all franchisees consent to this approach.

3.	Unacceptable Forms of Consultation The Proposed Guidelines also provide examples of modifications based on unacceptable forms of consultation.

Form	Examples
Modifications without any consultation	Specifying in the franchise agreement that “based on the business situation and the franchisor’s discretion, the transaction terms regarding mandatory purchase items and their prices may change in the future through a notification of such change,” and only notifying franchisees when modifying the transaction terms without conducting a separate consultation process.
Modifications based on incomplete consultation process or consultation with an insufficient number of franchisees	Conducting consultation at a regular workshop without informing the franchisees in advance that the franchisor intends to modify the transaction terms and consult franchisees on this matter during the workshop. Excluding certain franchisees from the consultation process even though there is no justifiable reason for their exclusion.
Modifications carried out after consultation process is conducted merely as a formality, lacking real substance	Holding an information session on the modification with little notice regarding the date, time and venue, effectively limiting participation in the session. Coercing or persuading franchisees to agree with the franchisor during consultations by implying that disagreement may lead to disadvantages (e.g., contract termination, denial of contract renewal).
Modification that deviate from the results of the consultation	Raising the supply price of an item by 6% when the agreement was to raise the supply price by 5%.

[Korean Version]

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