Consent from Franchisees Required Before Advertising and Promotional Events

Fair Trade Commission Announces Legislative Notice for 'Franchise Business Act Amendment'

Introduction of Franchisee Business Association Reporting System
Mandatory Operation of Directly Managed Stores by Franchise Headquarters

[Sejong=Asia Economy Reporter Joo Sang-don] The government is promoting the introduction of a prior consent system for advertising and promotional activities as a measure to enhance the bargaining power of franchisees who have a lower transactional status. This means that the franchise headquarters must obtain the consent of franchisees before conducting advertising or promotional events.

The Fair Trade Commission (FTC) announced on the 23rd that it has prepared a revision bill to the "Act on the Fair Transactions in Franchise Business" containing these provisions and will open it for legislative notice from the 28th until November 9.

According to the FTC's 2019 written survey of franchisees, 37.2% of franchise owners responded that "the franchise headquarters unilaterally notify advertising and promotional events without prior consent from the franchisees."

Accordingly, the FTC decided to mandate that franchise headquarters must obtain consent from a certain percentage or more of franchisees in advance if they intend to conduct advertising or promotional events at the expense of franchisees. The specific percentage will be finalized when the enforcement decree is enacted, considering market realities and industry opinions.

However, to prevent promotional events from being canceled due to the objections of a minority, separate promotional events involving only franchisees who agree to the event will be allowed. Additionally, in cases where advertising or promotional events are funded in advance through a fund and conducted using that resource, the prior consent system will be exempted, considering that the cost burden level has already been determined through a bilateral written contract.

A "Franchisee Business Association Reporting System" will also be introduced so that franchisee business associations can verify their representativeness through an official reporting procedure. The current law allows franchisee business associations to request negotiations on transaction conditions with the franchise headquarters, but there is no procedure to verify the qualifications of such associations, leading to cases where franchise headquarters refuse to negotiate by questioning the association's representativeness. The FTC expects that allowing franchisee business associations to confirm through a reporting procedure that a certain percentage or more of franchisees have joined will greatly facilitate smooth negotiations with the franchise headquarters.

At the same time, mandatory operation standards for directly managed stores by franchise headquarters will be established. If the franchise headquarters have no experience operating directly managed stores for more than one year, registration of the disclosure document can be refused, and experience in operating directly managed stores (operation period, sales, etc.) will be added to the disclosure document items. This means that franchise headquarters can recruit franchisees only after first operating directly managed stores and acquiring know-how. In this case, stores operated by executives of the franchise headquarters will also be recognized as directly managed stores, and exceptions to the law will be allowed in cases where direct management is unnecessary, such as franchising businesses with separate licenses.

The revision bill also imposes the obligation to register disclosure documents and deposit franchise fees on small-scale franchise headquarters with total franchise fees under 1 million KRW over six months and annual headquarters sales under 50 million KRW. In such cases, prospective franchisees dealing with small-scale franchise headquarters can also receive disclosure documents, and by depositing franchise fees in financial institutions, safety measures to guarantee franchise fees can be established.

Furthermore, for six types of violations where illegality can be judged solely by verifying simple factual matters, such as the obligation to provide written estimated sales and the obligation to keep franchise contracts, local governments will be empowered to impose fines.

An FTC official said, "If this revision bill passes, it will strengthen the bargaining power of franchisees who are in a disadvantaged position in transactions and enhance the soundness of franchise headquarters, thereby reinforcing a fair trading foundation in the franchise sector. We plan to actively collect stakeholders' opinions and prepare reasonable revision bills in the future."