Franchise Update: Navigating the Latest Amendments to the Fair Franchising Transactions Act and Mandatory Purchase Items

The Korea Fair Trade Commission (“KFTC”) issued an advance notice regarding the proposed amendment to the Enforcement Decree to the Fair Franchising Transactions Act (“FFTA”). This announcement comes after the KFTC’s initial statement made in September, 2023 to enhance the system concerning the mandatory purchase items. The public comment period for the proposed amendment to the FFTA Enforcement Decree was set to end on January 15, 2024. In addition, the KFTC announced that the National Assembly passed a related amendment to the FFTA during its plenary session on December 8, 2023.

Notably, the amended FFTA mandates franchisors to specify a detailed list of mandatory purchase items and the methods used to determine their prices in the franchise agreements. Additionally, the proposed amendment to the FFTA Enforcement Decree requires franchisors to specify a consultation process with franchisees prior to modifying transaction terms concerning mandatory purchase items (e.g., expanding the scope of mandatory purchase items or changes to the pricing methods for those items).

Key details of the amended FFTA and the proposed amendment to the FFTA Enforcement Decree are as follows.

Amendment to the FFTA

The types of mandatory purchase items and the methods used to determine the supply price of each item have been added to the list of information that must be specified in franchise agreements

The amended FFTA expands the required details in franchise agreements to include, in cases where the franchisor requires its franchisees to purchase certain products or services from specified entities, the types of products and services subject to mandatory purchase and the method for determining the price of each product and service.

The amended FFTA will take effect six months from the date of promulgation and will apply to all franchise agreements that are newly entered into or renewed after the effective date, as well as to all existing franchise agreements at that time. Therefore, existing franchise agreements will have to be updated with the necessary changes. A six-month grace period will be granted from the effective date for this purpose.

Proposed Amendment to the FFTA Enforcement Decree (Public Comment Period: Until January 15, 2024)

A process for making changes to the terms of mandatory purchase items has been added to the list of information that must be specified in franchise agreements

The proposed amendment to the FFTA Enforcement Decree adds to the list of information that must be specified in franchise agreements a process for the franchisors to consult with their franchisees prior to making changes to transaction terms related to mandatory purchase items. This would entail including specified procedures in the franchise agreement for consultation on the addition of mandatory purchase items or adjustments in the way prices for individual supplies are determined.

The proposed amendment will impact all franchise agreements that were entered into prior to the effective date. These agreements will need to be updated with the necessary changes within a six-month grace period following the effective date.

Established legal grounds for sanctioning franchisors who modify transactional terms related to mandatory purchase items to the detriment of franchisees

The proposed amendment to the FFTA Enforcement Decree introduces a change aimed at addressing challenges with the current FFTA, which bans restrictive trade practices. This change stipulates that franchisors can be exempt from these restrictive trade practices, such as discretionary adjustments to the list of mandatory purchase items or price increases, if they demonstrate that they have engaged in good faith discussions with franchisees prior to modifying the terms of transactions that dictate mandatory purchase items. The amendment thus empowers the KFTC to penalize franchisors who fail to consult with their franchisees beforehand.

Consequently, upon implementation of the proposed amendment, the KFTC is expected to impose corrective orders and levy administrative fines against franchisors that expand their list of mandatory purchase items, or raise associated prices, in a unilateral and unfair manner.

Introduced a system that allows the relevant courts to suspend trial proceedings for dispute mediation cases

The proposed amendment to the FFTA Enforcement Decree also makes necessary updates (e.g., notification procedures) regarding the new system introduced in June (through the June amendment of the FFTA) for allowing the relevant court to suspend trial proceedings until mediation is completed in cases where the parties involved in a dispute separately file for mediation and trial.

Following the collection of comments from stakeholders throughout the public comment period, the KFTC intends to finalize and implement the proposed changes to the FFTA Enforcement Decree, which is anticipated to occur in the first half of 2024.

Considerations

Upon the finalization of the amended FFTA and the proposed amendment to the FFTA Enforcement Decree, franchisors will be required to specify in their franchise agreements the types of mandatory purchase items along with the methodologies employed for determining the supply price of each item. Furthermore, any existing contracts must be amended accordingly to reflect the new requirements. Additionally, franchisors will be obligated to consult with franchisees adhering to established procedures prior to implementing any changes to transactional terms related to mandatory purchase items that may adversely impact the franchisees.

In particular, franchisors that require franchisees to purchase certain products or services from the franchisor or other designated vendors should review whether their franchise agreements clearly list the types of mandatory purchase items and explain how the prices are determined for each item, as required under the amended FFTA. If the current agreements are not clear on this, it is advisable to determine how such information could be specified effectively.

In anticipation of the forthcoming amendment to the FFTA Enforcement Decree, it is incumbent upon franchisors to initiate a comprehensive review to determine the suitable protocol for engaging in consultations with franchisees. This pertains specifically to modifications that impact the pricing of mandatory purchase items or the associated transaction conditions. The objective is to incorporate an official procedure within the franchise agreements to comply with the requirements upon the enactment of the proposed amendment.

[Korean Version]

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