| 1. Improve Quality of Information Provided to Prospective Franchisees |
| Current provision |
- Currently, franchisors provide prospective franchisees a Disclosure Statement and Sales Projection containing information about the franchise business. However, the forms do not ask for sufficient information that would enable prospective franchisees to make reasonable/well-informed decisions on whether to open a store under the particular franchise brand.
1. Without knowing the average operation period of a company’s franchise stores it is difficult to assess the soundness of the franchise business, the brand’s reputation in the market, or the degree of stability in operating a franchise store. However, the current Sales Projection form only requires that the franchisor provide the status of store openings and closures.
2. The support a franchisor offers for the stable operation of its franchise stores is important, especially considering how changes in the store’s surrounding area, etc., could lead to a (sudden) decline in sales. However, the current Sales Projection form does not require the franchisor to provide such information.
3. While the current Sales Projection form requires that the franchisor provide the sales of nearby franchise stores, it does not specifically ask for the distribution of competing brand’s franchise stores in the area, even though it may likely have a significant impact on the store’s sales.
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| Post-amendment |
- The proposed amendment adds (i) the average franchise store operation period (as of the end of the preceding business year) and (ii) the conditions and amount of the support, if any, the franchisor offers for the stable operation of its franchise stores as information required to be included in the Disclosure Statement.
- The proposed amendment additionally requires (iii) the number and locations of franchise stores of competing brands in the relevant business territory to be provided as supporting materials to the Sales Projection.
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| 2. Simplify Grounds for Immediate Termination of Franchise Agreements |
| Current provision |
- In principle, any franchisor that hopes to terminate a franchise agreement is required to first give the franchisee a chance to make the necessary corrections. However, the franchise agreement may be terminated immediately (i.e., without giving the chance to make corrections) if there are grounds to do so as specified under Article 14 of the Enforcement Decree to the FFTA.
- Many have criticized that some of the permissible grounds for immediate termination are too abstract and unclear, and thereby enable franchisors to immediately terminate contracts based on an arbitrary interpretation of the law.
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| Post-amendment |
- The proposed amendment deletes the following grounds for immediate termination that are abstract or overlap with other existing grounds, and require franchisors to go through the standard termination process when such grounds exist.
1. Damaging the reputation/credibility of the franchisor, and leaking trade secrets or important information of the franchisor, will be deleted for being too abstract. Instead, in either case immediate termination will be possible once such conduct/violation is confirmed by court, under the updated grounds of receiving administrative sanctions for violating the law.
2. Failure to make necessary corrections upon receipt of administrative sanctions within the deadline, and causing damage to public health or safety that requires urgent attention/response, will be deleted for reasons of overlap with receiving administrative sanctions from competent authorities.
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| 3. Specify Criteria for Assessing Unfair Refusal to Renew Franchise Agreements |
| Current provision |
- Franchisees have the right to request that their contract be renewed during the first ten years (under Article 13 of the Enforcement Decree to the FFTA), and accordingly franchise agreements have been usually renewed for ten years, unless there is a special reason not to.
- However, once the ten-year period ends, certain franchisors have refused to renew the contracts with no special reason, leading to disputes with the franchisees.
- While unfair refusal to renew a franchise agreement is prohibited regardless of the franchise period, the current Enforcement Decree does not specify the criteria for assessing/determining the fairness of a refusal to renew.
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| Post-amendment |
- The proposed amendment divides unfair refusals to renew into the three following types, and specifies the criteria for determining whether a specific refusal falls under each type.
1. Refusal to renew for the purpose of opening a directly-operated store: unfairness is recognized when the franchisor refuses, without justifiable reason, for the purpose of furthering its interests by changing the franchise store into a directly-operated store.
2. Refusal to renew as discrimination against a particular franchisee: unfairness is recognized when the franchisor refuses as a means to fulfill an unfair objective against a particular franchisee, such as to prevent the franchisee from engaging in union activity.
3. Refusal to renew without ensuring enough time to earn back interior design costs: unfairness is recognized when the franchisor makes the franchisee remodel the store’s interior, and later refuses to renew the contract without ensuring enough time for the franchisee to earn back the interior design costs.
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| 4. Ease Burden of Cancellation Penalty When Closing a Franchise Store Due to Poor Sales |
| Current provision |
- Disputes between franchisors and franchisees have continued due to the discrepancy between the projected sales provided by the franchisor to persuade the prospective franchisee to open a store, and the actual sales. Further, as the business conditions of franchise stores have continued to deteriorate in the increasingly crowded industry, cancellation penalties for the early closing of a franchise store (before the agreement term ends) are expected to increase in frequency and amount.
- Under these circumstances, any franchisee that decides to close its store (before the agreement term ends) due to poor sales has to shoulder the additional burden of any cancellation penalty.
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| Post-amendment |
- The proposed amendment adds the act of imposing a penalty (on the franchisee) for closing the franchise store due to poor sales as a type of unfair imposition of the duty to compensate for damages.
1. Unfairness is recognized when the cancellation penalty is imposed despite the fact that actual average sales during the first year since opening are lower than what the franchisor had said was the lowest expected sales amount in the Sales Projection.
2. This excludes cases where the franchisee is responsible for a decline in sales, by breach of contract, non-compliance with management policies, etc.
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