On November 15, 2018, the Korea Fair Trade Commission (the ”KFTC”) imposed corrective orders and an administrative fine against indoor golf simulation company Golfzon for engaging in unfair trade practices (i.e., primarily “discriminatory conduct” and prospectively also “refusal to deal”) by supplying an exclusive product called “Twovision” only to its franchisees, but not to its other non-franchise service providers. The KFTC also made criminal referral against Golfzon to the Prosecutors’ Office (the “PO”). The KFTC took more than two years of investigation and three full commission hearings to reach its conclusion. Golfzon appealed the case to the Seoul High Court, which, upon a year of due deliberation, issued a decision reversing all of the KFTC’s sanctions on October 12, 2019. This decision was later confirmed by the Supreme Court on February 27, 2020. The criminal referrals, which led to a year-long investigation, also resulted in the PO finding no violation, and the case was closed on December 10, 2019.
Golfzon, which is a franchisor pursuant to the Fairness in Franchise Transactions Act (the “FFTA”), had been supplying Twovision only to its franchisees as a means to protect their sales territory, etc., and had not made the product available to its non-franchise service providers. Should the court ultimately conclude that such conduct was illegal, Golfzon could not maintain its current business model and distribution policy.
As there had been no precedent addressing the question of whether a franchisor doing business with both franchisees and non-franchisees should be able to supply a certain product only to its franchisees, this case invited new arguments from both legal and factual perspectives. Representing Golfzon throughout the administrative litigation and criminal investigation process, Kim & Chang presented the following arguments:
- Golfzon was conducting its franchise business legally in accordance with the relevant laws, and as a franchisor, was required to protect the sales territory of its franchisees. Accordingly, Golfzon was merely carrying out its duty as a franchisor by deciding to supply the product to its service providers that were franchisees.
- From a legal principle perspective, discriminatory conduct or refusal to deal is considered unfair if it targets a specific service provider, but as Golfzon made the product equally unavailable to all service providers that did not sign a franchise agreement with Golfzon, there was no specific target of such conduct.
- For the KFTC’s primary argument of discriminatory conduct to hold true, Golfzon would already have to be engaged in an existing business transaction with the non-franchisees regarding Twovision. However, as Golfzon had never engaged in a business transaction with the non-franchisees regarding Twovision, the KFTC’s argument could not stand.
- In addition, an in-depth economic analysis of changes in the market situation since Twovision was first released, comparing the characteristics of the franchisees’ products (Twovision) and non-franchisees products (Vision, etc.) showed that the conduct was neither particularly discriminatory nor unfair.
The Seoul High Court accepted most of Golfzon’s arguments, and concluded that its conduct constituted neither “discriminatory conduct” nor “refusal to deal.” Confirming the Seoul High Court’s decision, the Supreme Court denied the KFTC’s appeal. The PO in reviewing a criminal referral made by the KFTC, also acquitted the company for similar reasons. Kim & Chang managed to persuade the Courts and the PO that exclusive provision of a certain product to franchisees is not illegal based on (i) an analysis of the legal principles concerning discriminatory conduct and refusal to deal, (ii) Golfzon’s duties as a franchisor under the FFTA and the franchise agreements in relation to the conduct in question, and (iii) in-depth understanding of the landscape of the screen golf market.