The Franchise Business Act in Korea has undergone several amendments due to the significant economic impact of the franchise sector. The latest change, effective from July 2, 2024, focuses on the disclosure of “essential goods” in franchise agreements. Previously, franchises could mandate franchisees to purchase goods from specific suppliers if the goods were necessary to maintain business uniformity or protect trademarks.
Key Conditions for Mandatory Purchase:
- The goods must be essential for the operation of the franchise.
- It must be proven that purchasing from designated suppliers is crucial for maintaining brand uniformity and trademark protection.
- Full disclosure must be provided in the Franchise Information Document and clearly stated in the franchise agreement.
Updates in 2024:
The revised law now requires additional disclosures regarding essential goods. Franchisors must now not only specify the type of goods but also the pricing methods and how prices are determined. This change was introduced to address concerns about transparency, especially in cases where franchisees were compelled to purchase overpriced goods from franchisor-designated suppliers.
The Fair Trade Commission issued guidelines stating that essential goods pricing can be disclosed via POS systems or other rational methods, rather than directly in the franchise agreement. This allows for flexibility while maintaining transparency.
New Guidelines for Disclosure:
- The pricing and price determination methods must be disclosed via POS systems to franchisees.
- Price changes can occur due to external factors, such as global supply chain issues or raw material price surges.
- Any price change must be communicated through POS systems and should occur no more than once per quarter unless there are special circumstances.
Franchisee Protection:
The new rules also offer protections to franchisees. If there is a significant change in the conditions under which franchisees must purchase from designated suppliers (e.g., price, quantity, or quality), franchisors are now required to consult with franchisees before implementing changes.
Impact of the Law:
The revised Franchise Business Act applies to all new franchise agreements signed after July 2, 2024. Existing franchise agreements must comply with the law by January 2, 2025, when the grace period ends. Franchise headquarters must review and update their agreements accordingly to ensure compliance.
Franchisees, especially those in associations, should closely monitor these changes to better negotiate with franchisors. Ensuring that the franchise headquarters follow these new disclosure rules will help maintain fairness in franchise transactions.
In summary, these amendments promote transparency and protect franchisees from potentially unfair practices while allowing franchise headquarters to maintain necessary business standards.
