2003-2004 Franchise Law Review & Forecast

Korea's first franchise law, the Fair Franchise Transactions Act (the "FFTA") was adopted May 2002, effective Nov. 2002. Its Presidential Enforcement Decree - setting forth detailed information to be provided in the franchise information disclosure statement and a description of types of unfair transactions broadly prohibited under FFTA - was promulgated Nov. 2002 (last amended June 2003). In the Korean system, Enforcement Decrees provide detailed instructions for statutory compliance; therefore, it is to be expected that 2004's changes to applicable law will be found in future amendments to the Enforcement Decree.

Closing Loophole on Franchise Disclosure

Under the current law, a franchisor must provide a disclosure statement to a "prospective franchisee" no later than five (5) days prior to the earlier of (i) the franchise agreement's execution or (ii) payment of the franchise fee by the prospective franchisee (FFTA Art. 7). However, the current law does not expressly state that a franchisor must provide disclosure to all would-be franchisees, because the statutory definition of "prospective franchisee" is a "who requests the provision of disclosure with the purpose of becoming a franchisee" (FFTA Art. 2, para. 4). Therefore, franchisors may avoid disclosure to franchisees which do not, for whatever reason, request disclosure in writing.

Consequently, the Korea Fair Trade Commission (KFTC) -- which enforces FFTA and fair-trade matters under the Monopoly Regulation and Fair Trade Act (MRFTA) -- has received complaints of domestic franchisors bullying would-be franchisees into not requesting disclosure, or simply refusing to deal with any disclosure requests. The agency expects to remedy this condition by making disclosure mandatory in all circumstances once the next amendments of FFTA and its Enforcement Decree are promulgated sometime in 2004.

Official Language Requirement Expected Next Year

Additionally, it is expected that in 2004 the Enforcement Decree will be amended to require disclosure to be made in the Korean language. Current law is silent on the language of the disclosure statement and the franchise agreement. KFTC advises it "prefers" Korean to be default language of disclosure, provided that English-language disclosure is acceptable where the parties expressly agree in writing to a foreign language.

First Administrative Decision Applying FFTA

The first franchise dispute under FFTA was heard at the KFTC on Dec. 10, 2003. Although there have been administrative tribunal and court cases decided under the KFTC's 1997 "Franchise Notice" guidelines, the new law had not previously been tested.

In the dispute, a mineral-water supply franchisor had divided its franchisees into two classes (general residential and commercial, and commercial only) and set a minimum price at which the franchisees could sell its branded water. General franchisees were free to supply water to both residential and commercial customers, whereas commercial-only franchisees could supply only to businesses. KFTC enforcement officers alleged that minimum price standards violated the FFTA's prohibition on "unfair" price restrictions (FFTA Art. 12), and that prohibition of certain franchisees from selling franchised goods to residential customers constituted an unfair restraint of trade (FFTA Art. 12).

The KFTC Board ruled that the franchisor's fixed sale price constituted an unfair limitation, and held that franchisees must have liberty to set prices, although franchisors may recommend prices. However, the Board rejected the KFTC's unfair restraint of trade argument, ruling that franchisors must have discretion to the set terms of the franchise based on their own business judgments. The Board noted the franchise law's legislative intent could not be used to reserve to KFTC a right of approval over legitimate business judgments.

Franchise Consultant Examination

The June 2003 Enforcement Decree amendment established standards to accredit "franchise consultants." The inaugural qualification examination was in November 2003. Certified are officially sanctioned to (i) advise on franchise business plans; (ii) draft and review franchise agreements and disclosure statements; (iii) counsel franchisors and franchisees regarding ongoing duties under FFTA; and (iv) conduct franchisee-training workshops. Franchise consultants, once certified, must register with KFTC.

Franchise consultant certification resembles a quality-assurance mark rather than a professional license. The law does not forbid non-certified consultants from engaging in the sanctioned activities.

Franchise Business Transactions Disputes Mediation Council

A Franchise Dispute Mediation Council (the "Mediation Council") was established by the Korea Franchise Association under authority delegated by KFTC on Jan. 1, 2003 as an optional dispute resolution mechanism. Nine mediators are appointed to the council: three representing the public at large, three representing franchisor interests, and three representing franchisee interests. Through Dec. 15, 2003, over 250 cases had been filed. Mediation proceedings usually take two or three months, and are free of charge.

Additional Disclosure Obligations for Franchisors in Taiwan

by: David Lu

In an effort to promote fair competition and the interests of potential franchisees in the Taiwanese franchise market, on November 26, 2003 the Fair Trade Commission of Taiwan amended its "Rules on Disclosure of Information by Franchisors". The amendment adds to the original rules a number of disclosure requirements that franchisors must satisfy when recruiting potential franchisees in Taiwan.

The original disclosure rules were issued in June 1999. They required franchisors to provide potential franchisees with information concerning a list of important items. Those items include the franchisor's business scope, the names and relevant experience of the franchisor's responsible persons, the amount of royalties and other fees payable, applicable payment methods and conditions for refunding royalties, and a description of any assistance to be provided by the franchisor in relation to managing and operating the franchisee's business.

As a result of the Fair Trade Commission's most recent amendment to its franchisor disclosure rules, franchisors must now disclose the following additional information when recruiting franchisees in Taiwan:
  1. Intellectual property rights. Under the original rules, a franchisor must provide the franchisee with information regarding the trademarks and service marks that the franchisor is licensing to the franchisee, and in particular, the specific rights involved, the periods of validity, the authorized scope of use and any restrictions imposed. The new rules expand this disclosure requirement to include "intellectual property rights" more generally, "including "trademarks, patents and copyrights". In most instances, this expansion will not be of great practical significance, since generally speaking franchisors do not license patent rights or copyrights to franchisees. Typically, the intellectual property rights that franchisors and franchisees are most concerned about are the trademarks belonging to the franchisor that the franchisee will use. In addition, franchisors are now required to disclose the date of each application to register the intellectual property rights or the date on which each application to register such rights was approved.

  2. Pre-existing franchisees. The franchisor must disclose the business name and address of each franchised store located in the cities or counties where the potential franchisee is located. In addition, the franchisor must specify the number of franchised store openings and closings in the most recent fiscal year in the cities or counties where the potential franchisee is located as well as in the entire country. The rules make no distinction between foreign franchisors and local franchisors, and thus it would appear that a foreign franchisor must disclose the same details as any local franchisor. It is noteworthy, however, that the term "entire country" is not defined in the rules and thus it is unclear to what extent this disclosure will affect foreign franchisors. According to our recent correspondence with the Fair Trade Commission, "entire country" refers to Taiwan and, as such, foreign franchisors are not required to disclose the number of franchise store openings and closings worldwide, but only those in Taiwan in the most recent fiscal year.

  3. Additional restrictions. The franchisor must disclose any additional restrictions that may exist in relation to the business relationship between the franchisor and the franchisee.

This additional information, along with the information required under the original rules, must be provided by the franchisor to the franchisee in writing at least ten days before the franchise agreement is executed. Furthermore, the latest amendment to the rules provides that the franchisor must give the franchisee at least five days to review any agreement that relates to the business relationship of the franchise before signing such agreement.

This amendment to the disclosure rules takes effect immediately and is not retroactive. If a franchisor fails to observe these amended disclosure rules and is suspected of concealing or delaying the disclosure of important information, such franchisor may be in violation of Article 24 of Taiwan's Fair Trade Law and subject to investigation or penalty by the Fair Trade Commission of Taiwan.

This article is for reference purposes only and should not be taken as legal advice. For professional advice on the disclosure rules or other matters related to franchising in Taiwan, please contact David Lu at Alliance International Law Offices (e-mail: david.lu@ailo.com.tw).

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