[The Two Faces of McDonald's]④ Franchise Business Act 'Cuts' That Fail to Prevent Disputes

2-Year Adidas Contract Termination Conflict
Headquarters Judged to Fall Short of 'Control' Standard Under Franchise Business Act
Only Dealer Act with Lower Penalties Applied
Subjective Interpretation Left by Adopting English Expressions
10-Year Contract Renewal Request Amendment Also Stalled for Years

As Korean McDonald's has been in dispute over contract renewal issues with franchisees who have operated stores for nearly 10 years, calls to amend the Franchise Business Act are gaining momentum. This is because the franchisor has been using the Franchise Business Act, which stipulates a 10-year franchise contract renewal period, as if it were an expiration date. There are also calls to revise the ambiguous provisions of the Franchise Business Act.

According to the National Assembly Legislative Information System on the 13th, three amendment bills to the Franchise Business Act were proposed in the 22nd National Assembly to delete the current provision that sets the franchise contract renewal request period at 10 years.

Movement to Delete the 10-Year Franchise Contract Renewal Request Right

According to Article 13, Paragraph 2 of the current Franchise Business Act, a franchisee may exercise the right to request contract renewal within the total contract period, including the initial franchise contract period, not exceeding 10 years. This provision was added through a partial amendment in 2007. Previously, the franchisor could terminate the contract by notifying the franchisee 90 days before the contract expiration date. However, the purpose of this provision was to prevent refusal of contract renewal requests for 10 years so that franchisees could recover at least their minimum investment.

The amendment bill, led by Han Byung-do of the Democratic Party of Korea in June, includes deleting Article 13, Paragraph 2 entirely. Amendment bills led by Lee Hak-young and Lee Kang-il of the same party also propose deleting the same provision.

Han said, "Some franchisors unilaterally notify franchisees of contract renewal refusal after the 10-year period during which the right to request contract renewal is recognized has passed, or use annual contract renewals as leverage to impose disadvantages. This limitation on the exercise period of the contract renewal request right is highly likely to be abused as a retaliatory measure."

These amendment bills were submitted to the National Assembly's Legislation and Judiciary Committee in August but have not been discussed since.

Franchisors Generate Revenue Through New Contracts

Franchisors can generate revenue through franchise fees or interior design fees only by bringing in new stores instead of maintaining existing franchise stores. Even long-time franchisees face forced new interior investments or pressure to switch to other franchise businesses when the contract renewal period arrives. If they do not accept these demands and the franchisor refuses contract renewal, there is no remedy.

This is because Article 13, Paragraph 1 of the Franchise Business Act states that "the franchisor shall not refuse the renewal request without justifiable reasons if the franchisee requests renewal between 180 and 90 days before the expiration of the franchise contract," while allowing some exceptions. These exceptions include ▲the franchisee failing to fulfill payment obligations such as franchise fees ▲the franchisee not accepting contract conditions or business policies generally applied to other franchisees ▲the franchisee not complying with business policies deemed necessary to maintain the franchise business.

In fact, Korean McDonald's notified some stores that they could not renew contracts because they fell short of the owner review scores used to evaluate franchisees. On the other hand, franchisees believe the headquarters is nitpicking to convert high-performing stores with imminent contract renewals into company-owned stores.

There have been repeated attempts to delete the 10-year franchise contract renewal request right, but they have failed each time. In the 19th National Assembly, Kim Young-hwan, then a member of the New Politics Alliance for Democracy, proposed an amendment to extend the exercise period from 10 to 20 years, but it did not pass. The 20-year term was based on the global McDonald's franchise contract renewal standard. Attempts to change the period to indefinite in the 20th and 21st National Assemblies also failed to pass the plenary session.

KEF "Franchisees Maintain Lifetime Contract Privileges"

There are also counterarguments against the movement to delete the '10-year clause.' The Korea Economic Federation (KEF) recently submitted opinions to the National Assembly, arguing that "among business areas where substantial funds are invested based on continuous trading relationships, only franchise transactions recognize an indefinite right to request contract renewal, which may violate legal equity." They pointed out that the Commercial Building Lease Protection Act limits the contract renewal request period to 10 years, and laws such as the Subcontracting Act, Agency Act, and Large-scale Distribution Business Act do not separately guarantee contract renewal rights.

KEF also stated, "If the contract renewal request period is indefinitely extended, existing franchisees will maintain vested rights through lifetime contracts, and franchisors will find it difficult to maintain competitiveness by removing poor franchisees, making it hard to establish efficient franchise and management operation plans. Ultimately, this may lower the quality of service to consumers, so the system reform should be approached cautiously."

On the other hand, Jeong Jong-yeol, advisory chairman of the National Franchisee Council (franchise transaction specialist), said, "Well-established native franchise companies generally comply with current laws, but global headquarters in sectors such as distribution, automobiles, and e-commerce are recklessly causing disputes. The current law is insufficient to keep up and resolve these issues." He added, "If these global companies sell their Korean subsidiaries to other overseas companies or private equity funds, franchisees will be defenseless. This is a golden time to legislate and fix this."

Ambiguous Provisions of the Franchise Business Act Also Targeted for Revision

There are also calls to revise ambiguous provisions of the Franchise Business Act related to the case where Adidas Korea introduced the Future Partner policy in January 2022 under the pretext of streamlining distribution network management and notified contract termination to about 80% of approximately 100 franchisees operating existing stores, resulting in nearly three years of dispute.

The Franchise Business Act, enacted in 2002, is said to be disadvantageous to franchisees due to the ambiguity of words in detailed provisions, contrary to the original legislative intent to develop suppliers and franchisees in a balanced and complementary manner on equal footing.

According to Article 2, Item 1 of the Franchise Business Act, to be recognized as a franchise business, five conditions must be met: ▲use of the franchisor's trade mark ▲sale of goods and services according to certain quality or business methods ▲support, education, and control over the franchisor's management and business activities ▲maintenance of a continuous payment relationship of franchise fees to the franchisor ▲franchisees being independent entities.

Kim Jeong-jung, chairman of the Adidas National Franchisee Council, argued, "Even when ordering products, we have been controlled by the headquarters in everything from quantity to size, so this should be regarded as a franchise relationship to which the Franchise Business Act applies." Based on this, he reported Adidas Korea twice to the Fair Trade Commission (FTC) in March and September last year for violating the Franchise Business Act.

However, the FTC did not even review whether Adidas violated the Franchise Business Act, reasoning that for the relationship between headquarters and stores to be recognized as a franchise contract, the headquarters must exercise a considerable level of 'control,' such as managing the interior of individual stores, which was not found in the Adidas case. Instead, the FTC found sufficient circumstantial evidence that the headquarters' abuse violated the Fair Transactions in Agency Business Act (Agency Act) and is only investigating violations of the Agency Act.

The contentious issue here was the considerable level of control. The franchisees argue that the term 'considerable,' which is not specified in the law, is a subjective interpretation added by the FTC. The FTC explained, "We judged the support, education, and control requirements as important based on the Constitutional Court's precedent interpretation."

Advisory Chairman Jeong pointed out that the problem lies in the ambiguous expressions stipulated by the Franchise Business Act amid these conflicting interpretations. He said, "Our Franchise Business Act was derived from the U.S. federal government's 'Franchise Rule,' but the English words were literally translated with dictionary meanings, and the term 'control' was included in the provisions. This implies a master-servant relationship rather than an equal status between headquarters and franchisees."

Kim Nam-geun, a member of the Democratic Party of Korea, led an amendment bill last month to soften the term 'control' specified in Article 2, Items 1 and 7 of the Franchise Business Act to 'management.' It is also known that ruling party members, led by Lee Jong-bae of the People Power Party, are gathering opinions from the FTC and franchisees to resolve the ambiguity of the expression.

The FTC decided to transfer the Adidas issue raised during the National Assembly audit from the Seoul office to headquarters for re-examination. The Adidas National Franchisee Council has filed a constitutional complaint with the Constitutional Court, claiming violations of constitutional rights to equality and the right to be heard in judicial procedures. Legal circles believe that if this dispute is proven to violate the Franchise Business Act, the disciplinary level could be about ten times higher than under the Agency Act.