Skip Navigation

New KFTC Guidelines for Assessing Unfair Business Practices in the Franchise Industry Take Effect


On March 25, the Korea Fair Trade Commission (the “KFTC”) issued a new set of Guidelines for Assessing Unfair Business Practices in the Franchise Industry (the “Guidelines”). The Guidelines, which took effect immediately on March 25, are the first such guidelines created for franchise transactions. The Guidelines (i) make clear that overseas franchisors that directly enter into franchise agreements with Korean franchisees are also subject to the Fair Franchise Transactions Act (“FFTA”), (ii) provide general standards for reviewing illegality of unfair trade practices in the franchise industry, and (iii) provide specific examples of each type of FFTA violation. Most notably, the Guidelines provide specific examples of prohibited mandatory purchase items (i.e., items designated by franchisors that are required, as an ongoing obligation, to be purchased by franchisees from the franchisor or from a third party) for different types of franchise industries.
Key details of the Guidelines are as follows:



Scope of Application

  • A detailed definition is provided for each element of the franchise business model to clearly distinguish it from similar business models (e.g., distributorship, licensing).

  • Overseas franchisors that directly enter into franchise agreements with Korean franchisees are also subject to the Guidelines.


General Standards for Review of Illegality

Illegality in general

  • The assessment of whether a franchisor’s conduct is considered to undermine fair trade should be based primarily on the unfairness of the details of the underlying transaction (i.e., whether the franchisor restricts franchisees’ free decision-making or imposes disadvantages). However, when necessary, the assessment should also consider whether the conduct restricts competition or whether it involves unfair means of competition.

  • In principle, the assessment of the legality of a conduct should be based on its effects, while other subjective factors (e.g., intent, objective) are considered as circumstantial evidence.

Other issues

  • The assessment of whether a franchisor violated its duty to obtain franchisees’ consent for advertising or promotional campaigns should be based on whether such consent was obtained or whether a contract was signed to that effect.

  • The assessment of whether a franchisor interfered in the activities of a franchisee association should be based on the causation between franchisees’ participation in such association and any disadvantages imposed by the franchisor. Alternatively, consideration should be given to whether franchise agreements are conditional upon franchisees’ non-participation in such associations.



Examples of Various Types of FFTA Violations

Refusal to deal
(Article 12 (1) 1 of the FFTA)

  • Refusing to renew a franchise agreement for reasons that the franchisee failed to comply with the franchise operation guidelines with a franchisee who complained about the increased price of supplied ingredients.

  • Repeatedly, and without a justifiable reason, demanding that franchisees make improvements to their restaurants, and terminating their franchise agreements for failure to comply with such demands.

Restrictive trade practices
(Article 12 (1) 2 of the FFTA)

  • Forcing franchisees to purchase non-essential products from either the franchisor or a specified third party, which are not deemed vital for the operation of the franchise business:

General industrial products that are not directly related to brand consistency or uniformity of key products.

Facilities and equipment that are not directly related to brand consistency or uniformity of key products.

Services that are not directly related to brand consistency or uniformity of key products.

  • Examples of prohibited mandatory purchase items for specific franchise industries:

Gimbab restaurant franchises: general industrial products (e.g., disinfectants, kitchen detergents, equipment cleaners, hygiene products, cleaning products, soup bowls, face masks) and supplementary materials (e.g., steamed dumpling paper).

Fast food franchises: facilities and equipment (e.g., single-seat chairs, tables, bar stools, cash registers, computer equipment).

Coffee shop franchises: furniture items (e.g., wicker chairs/sofas, terrace chairs, smoking room chairs).

Chicken restaurant franchises: services (e.g., pest control), supplementary materials (e.g., napkins, plastic bottles, bamboo forks) and cooking utensils (e.g., scissors, knives, cutting boards, ladles, baskets, scales, timers, seasoning containers, food thermometers).

Abuse of superior bargaining position
(Article 12 (1) 3 of the FFTA)

  • Making franchisees accept mobile gift vouchers without their prior consent, and forcing them to bear all associated expenses (e.g., processing fees).

  • Forcing, without justifiable reason, franchisees to partially bear costs for discount events that the franchisor had initially agreed to bear.

  • Delaying payment to franchisees for sales made with mobile gift vouchers beyond the previously agreed-upon settlement period without a justifiable reason (e.g., delay in settlement by the voucher issuer).

Imposition of unfair obligation to compensate for damages
(Article 12 (1) 5 of the FFTA)

  • Imposing, without consideration of the remaining contract term, an excessive cancellation penalty for a franchisee’s discretionary early termination of the franchise agreement in comparison to the actual losses incurred.

  • Specifying in the franchise agreement that the franchisee is responsible for any consumer harm caused by a defective product that was not manufactured by the franchisor, even if the product was supplied by the franchisor, and regardless of to whom the harm is attributable.

Other unfair trade practices
(Article 12 (1) 6 of the FFTA)

  • Pressuring franchisees of a competitor, with which the franchisor is involved in a management dispute and has obtained trademarks, to enter into franchise agreements with the franchisor instead by threatening civil and criminal actions if they persist in using said trademarks.

Unfair demand for store renovation
(Article 12-2 of the FFTA)

  • Compelling franchisees to undergo store remodeling using new interior designs and concepts regardless of the unique circumstances of each store (e.g., deteriorating building conditions) by forcing them to sign a letter of commitment to do so.

  • Forcing franchisees to upgrade their stores as a prerequisite for allowing them to transfer their business, even though the stores were only opened for two years and therefore were not objectively in need of refurbishment, nor were they lacking in terms of hygiene or safety.

Unfair restriction of business hours
(Article 12-3 of the FFTA)

  • Denying a franchisee’s request to reduce its store operating hours, despite clear and objective evidence that the franchisee would not generate sufficient sales to cover the operational expenses (e.g., employee wages) due to a lack of late-night foot traffic.

Holding advertising or promotional activities without franchisees’ prior consent
(Article 12-6 (1) of the FFTA)

  • Holding a television advertising campaign even though less than 50% of the franchisees agreed, and charging all franchisees with the expenses.

  • Issuing mobile gift vouchers for promotional purposes without first signing agreements with franchisees or obtaining their consent.

  • Signing agreements with franchisees for handing mobile gift vouchers without specifying the ratio for sharing the costs between the franchisor and franchisees.


[Korean Version]