Korea

• Author: Jae Hoon Kim - Brendon Carr
• Pages: 292-317

292 International Franchise Sales Laws

Korea

I. What Is a Franchise?

A. Scope of Law

“Franchise” is defined under Article 2 of the Act on Fairness in Franchise Transac-

tions (AFFT) as:

[A] continuous business relationship in which the Franchisor allows its Fran-

chisees to sell goods (including raw and auxiliary materials) or services

under certain quality standards or operating methods using its trademarks,

service marks, trade name, signs and other business marks (“Business

Marks”), and supports, educates and controls its Franchisees with respect to

relevant management and operating activities, and in which the Franchisees

pay Franchise Fees to their Franchisor as consideration for the use of the

Business Marks and the support and education concerning the management

and operating activities.

“Franchise Fees” are defined in the AFFT to include (1) consideration that the

Franchisee pays to the Franchisor in consideration for franchise management rights

such as the permission to use the business marks or the support and education for its

operating activities, such as application fees, membership fees, franchise fees, edu-

cation and training fees, or down payment, etc.; (2) consideration that the Franchi-

see pays to the Franchisor to secure payment for goods supplied by the Franchisor

or compensation for damages; (3) consideration that the Franchisee pays to the

Franchisor as price for fixtures, equipment, or goods supplied by the Franchisor for

purposes of commencing the Franchise at the time of the granting of franchise man-

agement rights; (4) consideration, prescribed in the Presidential Decree of the AFFT

(Presidential Decree) that the Franchisee pays to the Franchisor on a regular or

irregular basis in consideration for the support and education related to the use of

business marks approved under its agreement with the Franchisor, operating activi-

ties, and other matters; and (5) all other considerations that the prospective Franchi-

see or the Franchisee pays to the Franchisor for purposes of acquiring or maintaining

franchise management rights. The Presidential Decree adds to this list (1) consider-

ation paid by the Franchisee to the Franchisor on a regular or a non-regular basis at

a fixed amount or at a specific ratio of sales and/or operating profits to cover trade-

mark use fees, lease fees, advertisement dues, guidance and training fees, sign rent-

als, and guarantee money for business territory; and (2) money exceeding a

reasonable wholesale price out of the money paid by the Franchisee to the Franchisor

Korea 293

on a regular or a non-regular basis to cover the price of goods, raw materials, aux-

iliary materials, fixtures, equipment, and other materials supplied by the Franchisor

to the Franchisee for business or real estate rentals. No limitation on franchise fees

is provided for in the AFFT.

B. Applicability to a Master Franchise

The AFFT neither specifically addresses the concept of a Master Franchise nor dis-

tinguishes a Master Franchise from any other form of Franchise with respect to the

obligations that it imposes on the Franchisor. The AFFT will apply and govern the

relationship between the Franchisor and the Master Franchisee as long as the rela-

tionship falls within the definition of a Franchise under the AFFT, even if the Master

Franchisee—the Korean party—is a sophisticated party and irrespective of whether

the Korean party is designated as the sole Franchisee for the entire country or whether

the parties desire to exempt their relationship from the franchise regulation. More-

over, a Master Franchisee may be deemed to be a Franchisor, and therefore, would

be subject to the AFFT’s requirements, under Article 7(1) of the AFFT, to register

and deliver a Disclosure Document to the prospective Sub-franchisees. The required

content of the Disclosure Document is described in Section V.

C. Exemptions

Article 3 of the AFFT provides that the AFFT will not be applicable (e.g., no re-

quired delivery of Disclosure Document to a prospective Franchisee), if the total

Franchise Fees paid by the Franchisee to the Franchisor for a six-month period

beginning from the date of initial payment of Franchise Fees does not exceed an

amount of KRW 1 million or if the annual sales of Franchisor is less than KRW 50

million. The amount KRW 1 million and 50 million are prescribed by the Presiden-

tial Decree.

D. Discretion of Regulatory Authorities

The Korea Fair Trade Commission (KFTC) regulates franchising in Korea. The

KFTC has a franchise-related department and has the authority to impose admin-

istrative measures on those who engage in unfair trade practices. In this regard,

the KFTC has the discretion to determine the fairness or reasonableness of the

conduct of the Franchisor and levy penalties and/or issue corrective orders against

those violators depending on the severity of the unfair nature of the conduct.

However, the violator may seek a district court’s judicial review of the KFTC’s

findings.

E. Jurisdiction

Although the provisions of the AFFT are not clear, the AFFT seems to presume that

at least one party is a resident of Korea, including legal entities that have not yet