Korea has seen its share of unscrupulous local franchisors. Issues
with local franchisors has led to Korea adopting one of the most
franchisee-friendly franchise laws in Asia.
The first
comprehensive franchise act in Korea was passed in 2002. This act was
substantially amended in 2007 and some revisions were made in 2010.
The Act on Fairness in Franchise Transactions may be found on the website of the Korean Legislative Research Institute.
The translation is far from perfect and without a reading of the
Presidential Decree to the Act, the reading of the Act may be a
fruitless endeavor.
The major requirements regarding
franchise disclosure statements, fees, termination and non-renewal are
noted in the Presidential Implementation Decree to the Act on Fairness
in Franchise Transactions. The Decree, to my knowledge, has not been,
officially, translated.
Major Changes to the Korean Franchise Act of 2002 (2008 & 2010):
Comprehensive Franchise Disclosure Statement is required to be filed
with the Korean Fair Trade Commission (KFCC). The KFCC, normally,
takes two months to review the filing. Don't market your franchise in
Korea before going through this procedure. The specific details
required to be noted in the disclosure statement has been detailed in a
Model Franchise Disclosure Statement that was drafted by the Korea Fair
Trade Commission. Your international franchise disclosure statement
will not be adequate for Korea.
Implementation of a 14-day "cooling-off" period. No money can be
taken or agreements signed with a franchisee until 14-days of receipt of
the Franchise Disclosure Statement. This means the Franchise
Disclosure Statement that has been approved by the KFCC, not, your
international disclosure statement.
Prohibition of operating in competition with a franchisee by franchisor.
Set aside of a portion of franchise fee in trust.
Non-renewal, only, based on "just-cause." Termination, only, based on "just cause," with an opportunity to remedy.
The Korean Franchise Law has been criticized for being too
protective of franchisees (difficulty to terminate non-complying
franchisees), thus, leading major international franchisors to only
enter the market through a joint venture with a local conglomerate.
We
have found that many of our clients have had issues, also, with local
conglomerates and some have had few issues with SME franchisees. Big
doesn't mean better. The key is a detailed localized Franchise
Disclosure Statement, due diligence, a good localized franchise package
and on-the-ground experts assisting.
Please be aware
that the KFCC has aggressively audited local and foreign franchisees and
has not been shy in fining and filing lawsuits against franchisors that
are not in compliance with Korea's franchise law.
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info@ipglegal.com
Sean Hayes may be contacted at: SeanHayes@ipglegal.com. Sean is co-chair of the Korea Practice Team and Entertainment Law Team at IPG Legal.
Sean is the first non-Korean attorney to have worked for the Korean court system (Constitutional Court of Korea) and one of the first non-Koreans to be a regular member of a Korean law faculty.