Distribution and Franchise Law in south Korea Is the franchisor attempting to unfairly reduce the sales area?

 

Distribution and Franchise Law in south Korea

Is the franchisor attempting to unfairly reduce the sales area?


Franchise Business Dispute, Fair Trade Team, Franchise Attorney | Dowoo Hwasan Attorneys & Counselors | Hokeun Yoon, Managing Partner of Dowoo Hwasan


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In handling franchise law issues in Korea, case resolutions cannot be properly done with only legal provisions and cases of Korea. Dowoo Hwasan Attorneys & Counselors prides itself to be the top-notch team in Asia in the field of a national and international franchise. Please refer to https://dowoolaw.com/ for detailed expertise and experience of each attorney of our firm. 

 

Franchisor’s Sales Area Reduction & Forcing Compliance

How Much Can the Franchisor Adjust Franchisee’s Sales Area?

 

When a franchisee moves beyond its sales area and conducts sales activities to customers belonging to another franchisee’s sales area, the franchisor, in general, can take one of the following measures and reasonably adjust the mutual interests of its franchisees. (※ Korea Fair Trade Commission – Franchise (Wholesale/Retail Business) Standard Contract (Amended on Dec. 2017), Article 12 (Protection of Sales Area), Paragraph (3))

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[Example Provisions]

The Franchisee shall adhere to the sales area agreed with the Franchisor and shall not intrude the sales area of other franchisees beyond its sales area. When the Franchisee conducts sales activities to customers belonging to the sales area of another franchisee, the Franchisor may reasonably adjust the mutual interest of the franchisees by taking one of the measures under the following Paragraphs.

- 1. An act by the Franchisor presenting a mediation proposal for the payment of compensation between the two franchisees.

- 2. When a franchisee whose sales area is intruded requests adjustment of business designation, taking necessary measures such as investigating the status of sales

- 3. When a certain franchisee repeatedly intrudes another franchisee’s sales area and thereby causes serious damages to the sales of another franchisee and to the business management of the franchisor, an act of claiming for damage compensations and requesting correction of such an intrusion against the franchisee

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​Encroachment of a franchisee’s sales area by the franchisor may cause legal issues as unfair trade practice (for instance, after letting the franchisee open a franchise store, the franchisor sees the franchisor’s store with high earnings, establishing a direct retail store adjacent to the franchisee’s store).

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However, one franchisee’s sales area is sometimes intruded by another franchisee (for example, when the owner of A Chicken franchise, Gangnam branch, makes his staff distribute flyers for customers at an apartment near another franchisee of A Chicken, Seocho branch, to make orders to the Gangnam store). When this occurs, it cannot be deemed an unfair trade practice of the franchisor as long as it did not set the sales area of a franchisee that intrudes the existing sales area of another franchisee.

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In this regard, the franchisor may mediate with the methods specified above. In general, when a sales are is intruded by another franchisee, the intruded franchisee makes a complaint to the franchisor (complaint such as, “the franchisee of another region is advertising beyond its area.”), after which, in most cases, the mediation as above proceeds in the process.

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Cases of Violation of the Franchise Business Act (Transactions under Conditions of Unfair Restraints / Forcing Sales Area Adherence)

​· Facts

0000 Co., Ltd. (brand name 00CHICKEN) sent out the official announcement to 130 of its franchisees, including the branch store in Mok-dong, Seoul, under the title, Information on Contract Renewal Following Franchise Agreement Term Expiration, from December 2008 to August 2010 that said, “existing sales area must be changed as prerequisite conditions for contract renewal.” 0000 Co., Ltd. (brand name 00CHICKEN) renewed the contract for reducing the existing sales areas of 130 franchisees including the Mok-dong Seoul branch from March 2009 to December 2010, due to which the average number of households available for sales of the 130 franchisees was reduced by 8357 households on average, from 21,503 households to 13,146.


The Korea Fair Trade Commission imposed a corrective order and a penalty of KRW 217 million on 0000 Co., Ltd. (brand name 00CHICKEN), which unfairly inflicted disadvantages on its franchisees in renewing the contract, demanding reduction of existing sales areas.

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​▶0000 Co., Ltd.’s demand to reduce the sales areas is that it imposed disadvantages on its franchisees by setting and changing contractual conditions to conditions clearly more disadvantageous than the previous conditions using its transactional position in the process of renewing the franchise contract à Setting or changing of unfair contract provisions among types of abuse of transactional position!


​▶ In the appeal filed by 0000 Co., Ltd. against the KFTC seeking cancelation of corrective orders, etc., the Seoul High Court dismissed thereof by finding that “it is admitted that [0000 Co., Ltd.] imposed disadvantages on the franchisees by changing the contract terms to more significantly disadvantages terms than before in the process of contractual renewal.” (KFTC prevailed)

(Seoul High Court 2016. 5. 26. Decision 2015NU51554 [Cancelation of Corrective Order, etc.])

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 Contact

Samyoung Building, Suite 701

437 Teheran-ro, Gangnam-gu

Seoul, Republic of Korea 06158

T. +82.2.6207.1114

F. +82.2.6207.1124

E. dowoo@dowoolaw.com


 

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