I. Introduction

Recently, the Fair Trade Commission (FTC) set forth two significant measures with respect to franchises. The first gives notice of the guidelines governing unfair trade practices of domestic franchises. The other is the decision to include franchise agreements within the purview of examinations of unfair international contracts.

Many franchises have come into being since the establishment of Lotteria in 1979, the focus lately being on CVS and fast food restaurants. The appearance of international franchises on Korean soil has particularly been a major factor in this increase. According to the FTC, there are presently close to 350 franchisors and 15,000 franchisees in 30 different business categories.

Until now, the FTC did not provide any concrete guidelines for unfair trade practices to be applied to franchise agreements. Thus, the FTC either watched impassively because no direct regulations applied to franchises, or at times the guidelines for agencies were applied indiscriminately to franchises without regard for its special characteristics. The confusion that resulted due to the absence of regulations has been redressed, however, with the FTC's institution of guidelines which specifically apply to franchises.

II. Guidelines for Unfair Trade Practices of Franchises

The "Guidelines for Unfair Trade Practices of Franchises" as prescribed by the FTC and effective beginning on February 1, 1997, focus on two central points described below. The first requires public disclosure of necessary data and information so that a prospective franchisee can properly determine whether to start a relationship with a franchise before entering into an agreement with the franchisor. The other requires sufficiently considered judgment in whether certain specific involvement by the franchisor in the business operations of the franchisee is necessary under the terms of the franchise agreement.

Regarding the disclosure of information, the prospective franchisee may demand the franchisor to provide data on the following in writing: (1) "the financial status of the franchise business, business records covering the most recent 5 years, necessary data with respect to any litigation in progress which involves the franchise business," (2) the costs the prospective franchisee must bear at the time of joining the franchise and thereafter that concern the franchise fee, security, other publicly imposed taxes and related pecuniary matters, (3) conditions on the supply of merchandise and services, the business plan and its methods on provision of compensation, provisions on business management, and information on the specific conditions governing the termination, expiration, and renewal of the agreement, (4) the present status of the area in which the franchise store to be operated by the franchisee is located and specific information on the calculation of the sales volume amount in the event the franchisor provides an expected sales volume amount for a particular store.

With respect to the interior and exterior displays of the franchise store, the franchisor may require compliance with its proposed options and standard of quality in the interest of "uniformity of the franchise's image," but the franchisor is prohibited from forcing the franchisee to purchase from a designated party in the event that there is no difficulty in "securing uniformity of its image.

The available merchandise, services, and business activities of the franchise store may be restricted to the extent necessary to accomplish the objectives of the franchise system. It is prohibited, however, to force the franchisee to purchase merchandise for sale or acquire services from either the franchisor or a party designated by the franchisor if this exceeds what is necessary to accomplish the above.

Absent a proper reason for such actions the franchisor is prohibited from engaging in the following practices: (1) discontinuing or refusing to supply the merchandise for sale (including raw materials) during the business period or to provide services as well as support for the business operations, in addition to practices that restrict its quantity and content, (2) forcing to adopt disadvantageous payment terms, (3) modifying the terms of the contract unilaterally, (4) imposing non-competition obligations after the end of the business relationship.

These guidelines apply to all currently valid franchise agreements, but the provisions regarding disclosure of information will only apply to agreements entered into after the effective date of the guidelines.

The guidelines are broad and general as currently formulated, however, they will gradually become more fully developed through the enforcement process of the FTC.

III. International Franchise Agreements

The FTC provides guidelines for unfair trade practices with respect to international contracts, but its scope in the past has only covered License Agreements, Distributorship Agreements, and Joint Venture Agreements. Franchise Agreements, however, have been added to the Enforcement Regulations of Unfair Trade Laws that became effective on April 1, 1997. Nevertheless, no notice has been given of any specific guidelines for unfair trade practices concerning franchise agreements, although it is expected that its content will be similar to the ones described above which apply in the domestic context.

Writer :	Jong-Gil Kim Partner Member of Korean Bar
For more details, please contact BAE, KIM & LEE Tel: 82-2-317-4114 Fax: 82-2-755-7676