KFTC Amends Model Franchise Agreements for 13 Industries

On January 6, 2023, the Korea Fair Trade Commission (the “KFTC”) announced the amended model franchise agreements for 13 industries.¹ The amended model agreements add new provisions to (i) mitigate conflicts of interest between franchisees regarding food delivery app sales, and (ii) reflect recent amendments to the Fair Franchise Transactions Act (the “FFTA”) and its Enforcement Decree requiring franchisors to obtain consent from their franchisees (or execute separate agreements) before launching advertising or promotional events for which the franchisees are to bear or share costs.

While use of the model agreements is not mandatory, the KFTC has strongly encouraged their adoption and use as they reflect the KFTC’s deemed best practices. In particular, for franchisors that have signed fair trade agreements (as prescribed by the KFTC) with their franchisees, the KFTC awards points for adopting model agreements, and based on the evaluation results, provides benefits such as exemption from ex officio investigations. As such, we recommend that companies take into consideration the terms of the amended model agreements when entering new franchise agreements, or in amending/renewing existing agreements with franchisees.

Provisions to Mitigate Conflicts of Interest Between Franchisees Regarding Food Delivery App Sales (Four food service industries)

Noting the recent rise in disputes between franchisees regarding food delivery app sales (e.g., due to overlapping delivery app sales areas), the KFTC added three new provisions to its model franchise agreements for chicken restaurants, pizza restaurants, coffee shop and other restaurant industries. The provisions are designed, in particular, to mitigate conflicts of interest between franchisees. We recommend that companies take into consideration these provisions to prevent or mediate related disputes between franchisees.

Provision	Details
Provision on a franchisee’s delivery app sales area	The franchisee, when using delivery apps, should set the location of its offline store as the center of its delivery app sales area, and make efforts to avoid causing unfair harm to other franchisees.
Provision on mediating disputes over delivery app sales areas	The franchisor should make efforts to help reasonably resolve disputes that arise between franchisees over delivery app sales.
Provision on issuing coupons for delivery app sales	If the franchisee decides to issue coupons, for which it will solely bear the costs, such coupons should clearly state that they can only be used at the store of issuance, and specify the store’s name.

Provisions Reflecting Recent Amendments to the FFTA and its Enforcement Decree Regarding Advertising or Promotional Events (all 13 industries)

Under the amended FFTA, which took effect in July 2022, franchisors are required to obtain consent from their franchisees (or execute a separate agreements for that purpose) before launching advertising or promotional events for which the franchisees are to bear or share in the cost. As the model franchise agreements for the 13 industries were amended to reflect the relevant changes in the FFTA and its Enforcement Decree, we recommend that companies take into consideration the following provisions before launching advertising or promotional events.

Provision	Details
Provision on obtaining franchisees’ prior consent for advertising or promotional events	The franchisor should obtain consent from at least 50% of its franchisees for advertisements, and at least 70% of its franchisees for promotional events, and such consent should be obtained using a method that would allow the franchisor to check the time of consent (e.g., in writing, through an information and telecommunication network, point of sale (POS) system). For promotional events, even if it fails to obtain consents from at least 70% of its franchisees, the franchisor may launch a promotional event with only those franchisees that agreed to bear or share in the cost.
Provision on details of the advertising or promotional event that franchisees need to be informed of when seeking their consent	The franchisor should obtain the franchisee’s prior consent on the name and period of the proposed event, the percentage of related expenses to be borne by each side, and the ceiling amount of costs that may be borne by the franchisee.
Provision on executing separate agreements for advertising or promotional events	The franchisor may launch advertising or promotional events in accordance with a separate, prior agreement executed with the franchisees. Such agreement must be executed in addition to the franchise agreement, and must specify the name and period of the proposed event, the percentage of related expenses to be borne by each side, and the ceiling amount of costs that may be borne by the franchisee.
Provision on percentage of expenses for advertising or promotional events to be borne by each side	The percentage of related expenses to be borne by each side for an advertising or promotional event should be determined either by obtaining the franchisee’s consent, or in accordance with a separate agreement that was executed for such purpose.

¹Four food service industries (chicken restaurant, pizza restaurant, coffee shop, other restaurant), five service industries (education, hairdressing, automotive repair, dry cleaning, other services), four wholesale/retail industries (convenience store, cosmetics, health supplements, other wholesale/retail).

[Korean Version]

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