KFTC Issues Guidelines on Changing Terms of Franchise Agreements Related to Mandatory Purchase Items

On November 28, 2024, the Korea Fair Trade Commission (“KFTC”) enacted and promulgated the “Public Notice on Guidelines for Consulting Franchisees on Modifying Transaction Terms for Mandatory Purchase Items” (“Guidelines”) to set out specific guidelines for consultation on transaction terms between franchisors and franchisees regarding mandatory purchase items.

In June 2024, the Enforcement Decree to the “Fair Franchise Transactions Act” (“Franchise Act”) had been amended to introduce an obligation on franchisors to consult with franchisees prior to making any unfavorable changes to the terms of franchise agreements related to mandatory purchase items. The new Guidelines set out detailed procedures and protocols for implementing the changes envisaged in the amended Enforcement Decree. Both the amended Enforcement Decree and the Guidelines will go into effect on December 5, 2024.

The Guidelines specify the types of modifications that will be deemed “unfavorable” to franchisees and provide detailed guidance on acceptable forms of consultation. Failure to comply with the new requirements may be viewed by the KFTC as a form of restrictive trade practice prohibited under the Franchise Act, and may result in sanctions.

We summarize below the key details of the Guidelines.

Types of Unfavorable Modifications Requiring Consultation Under the Guidelines

The Guidelines specify the following six types of modifications that will be considered unfavorable to franchisees. Franchisors are required to consult with their franchisees before making any of the following unfavorable modifications, even if they will be implemented along with other favorable modifications.

Modifications that require franchisees to purchase certain items from the franchisor or from a third party that they were previously not required to purchase.
Modifications that raise the supply price of mandatory purchase items (except price increases applied automatically pursuant to the terms of the franchise agreement).
Modification to the terms of the franchise agreement concerning the calculation of supply prices of mandatory purchase items in a way that is unfavorable to the franchisee.
Modifications that lower the quality of mandatory purchase items.
Modifications that reduce the number of designated suppliers from whom franchisees can purchase mandatory purchase items.
Modifications that charge additional expenses for mandatory purchase items, or unfavorably change transaction terms regarding product returns or payment methods.

2.	Consultation Process The Guidelines stipulate that all of the franchisors must comply with the following procedural requirements to meet the requirement to “consult” with franchisees:

The franchisor must notify the franchisee of the specific details of the unfavorable modifications, including the reasons and grounds for such modifications, and the period, location, and method of the consultation.
The method of consultation can be either in-person or virtual; however, the franchisor must ensure that the chosen consultation method allows the franchisee to easily and freely express opinions. In particular, if the franchisee requests the franchisor to provide supporting materials or verify relevant facts, the franchisor must respond in good faith.
After completion of the consultation process, the franchisor must provide the franchisee a detailed report on the outcome of the consultation, which must include certain items of information stipulated in the Guidelines.

3.	Unacceptable Forms of Consultation Finally, the Guidelines also provide examples of unacceptable forms of consultations.

Modifications Based on Unacceptable Forms of Consultation (Examples)

Form	Examples
Modifications without any consultation	Specifying in the franchise agreement that the franchisor may modify the terms related to mandatory purchase items or their prices by notifying the franchisees of such change without engaging in separate consultations.
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. 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 short notice regarding the date, time, and venue, effectively limiting participation in the session. Failure to provide sufficient information on the details, reasons, and grounds for the modifications. Prohibiting franchisees from freely expressing their opinions and effectively coercing the franchisees to agree with the change.
Modifications 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%. Raising the supply price of an item without changing the rating on the item when the agreement was to raise the supply price due to the improved rating of the item.

The KFTC will be recognizing a grace period until January 31, 2025 to allow sufficient time for franchisors to make the necessary changes to come into compliance with the new requirements.

In addition to the above, effective December 5, 2024, the amended Enforcement Decree to the Franchise Act further requires the detailed procedures for engaging in consultations with franchisees to be stipulated in the franchise agreements. Therefore, franchisors are advised to review their agreements and related templates to make sure that they include the necessary details.

[Korean Version]

Share

Professionals

Professionals