[The Two Faces of McDonald's]③ '10-Year Franchise Contract' Shackles... Unable to Stop 'Contract Abuse'

Adidas Franchise Contract Termination Issue Raised at National Audit
Fair Trade Commission Demands Investigation for Violation of Franchise Business Act
McDonald's Franchise Contract Rejection Due to '10-Year Rule' Clause

Last month, at the National Assembly's National Policy Audit of the Fair Trade Commission by the Political Affairs Committee, Adidas Korea CEO Kwak Geun-yeop appeared with an interpreter, sparking controversy. CEO Kwak was selected as a witness for the National Assembly Political Affairs Committee's audit for the second consecutive year. Unlike last year, when he responded in Korean, this time he used fluent English through an interpreter, drawing criticism from lawmakers of both ruling and opposition parties.

In January 2022, Adidas Korea restructured its business focusing on online and directly operated stores and notified 108 Adidas agency owners of contract termination. The agency owners reported this to the Fair Trade Commission, but the FTC twice issued a 'non-initiation of review' decision, stating that Adidas contracts were agency contracts, not franchise contracts, and thus did not violate the Franchise Business Act, which guarantees a 10-year franchise contract.

At last year's audit, CEO Kwak, summoned to the hearing, responded to lawmakers' requests to "consider the unique characteristics of the Korean market" by saying, "I will look into it." However, this year, he answered questions from the Political Affairs Committee in English, which was criticized as a tactic to evade resolving the Adidas issue. At that time, FTC Chairman Han Ki-jung responded, "We will comprehensively review and thoroughly examine the facts."

However, even if Adidas agency owners are subject to the Franchise Business Act, long-term contracts exceeding 10 years may not be possible due to the headquarters' business restructuring policy.

On October 21, Shin Jang-sik, a member of the National Assembly from the Jokuk Innovation Party, questioned Kwak Geun-yeop, CEO of Adidas Korea, regarding the unilateral termination of the dealership contract during the Fair Trade Commission's national audit. Video from the National Assembly Broadcasting System.

McDonald's Long-Term Franchisee Contract Renewal Denied... Fair Trade Commission Disposition Details and Court Rulings Reviewed

On the 11th, an analysis of the Fair Trade Commission's disposition details and court rulings regarding the Korean McDonald's Franchise Business Act violation report revealed that the Franchise Business Act, which explicitly guarantees a 10-year franchise contract, ironically became a pretext for denying long-term franchisees' contract renewals.

According to Article 13, Paragraph 2 of the current Franchise Business Act, a franchisor may exercise the right to request contract renewal within the total contract period, including the initial franchise contract period, not exceeding 10 years.

Franchisee Yeo, who operated the McDonald's Daegu Jincheon Drive-Thru (DT) near Jincheon Station on Daegu Subway Line 1 since April 2013, was denied contract renewal by Korean McDonald's last April. Yeo reported Korean McDonald's to the FTC for violating the Franchise Business Act and refused to hand over the McDonald's store to the headquarters after the contract period expired.

In response, Korean McDonald's filed for a provisional injunction for real estate delivery against Yeo, but the Seoul Central District Court ruled in favor of the headquarters, stating, "It is difficult to find legal grounds to impose an obligation to conclude a renewal contract." The franchisor has the freedom to judge and decide whether to accept renewal requests and agree on renewals, and in this case, Korean McDonald's made the decision based on its own evaluation criteria for franchise stores.

The FTC also dismissed the case in August this year, judging that "the right to request contract renewal has expired under Article 13 of the Franchise Business Act" regarding Yeo's report of Korean McDonald's violation. The decision was based on the fact that the franchisee repeatedly failed annual franchise business evaluations and that Korean McDonald's notified the franchisee of the low likelihood of contract renewal in the last evaluation before renewal, with no objections from the franchisee.

Regarding the franchisees' claim that Korean McDonald's denied contract renewal to convert stores to directly operated outlets, the FTC stated, "Considering that stores with good evaluation results maintain franchise contracts even after the contract period has passed without converting to directly operated stores, it is difficult to view the contract renewal denial as aimed at establishing directly operated stores."

"Arbitrary Evaluation Criteria... Conversion of Profitable Stores to Direct Operation"

However, franchisees challenged the FTC's decision, arguing that Korean McDonald's evaluation criteria lack objectivity and that profitable franchise stores were converted to directly operated stores. For example, the Daegu Jincheon store received a failing evaluation due to foreign substances found. However, franchisee Yeo protested, saying, "A warning is issued upon the first detection of foreign substances, and business suspension upon the second, but there was no business suspension."

Jung Jong-yeol, advisory chairman of the National Franchisee Association (franchise transaction specialist), said, "In cases where franchisors deny contract renewal causing controversy, it is often to convert well-performing stores to direct operation or because business owners formed associations and fell out of favor with the headquarters." He added, "The purpose of the right to request contract renewal is to guarantee at least 10 years, but the problem is that franchisors abuse this by treating it as if only 10 years need to be guaranteed."

Franchisees express frustration that even if they invest money and time expecting long-term contracts, the headquarters can terminate contracts without special reasons by abusing the 10-year clause, and this can be justified.

Kim Jeong-jung, chairman of the Adidas National Franchisee Association, appeared as a reference at this year's audit and stated, "More than half of the 108 franchisees have closed their businesses, and seven have gone bankrupt." He claimed, "Adidas cited the widening gap with competitors as a reason, only cutting costs, taking away profitable stores, or withholding popular products, causing franchisees to go bankrupt." He appealed, "Such behavior should not be tolerated or become widespread. Please pay attention so that the misconduct of malicious companies is eradicated and a world where the strong and the weak coexist is realized."