FTC to inspect 100 franchise headquarters over mandatory item pricing disclosures

The Korea Fair Trade Commission is launching on-site inspections of major franchise headquarters in the retail and service sectors to check whether they are meeting their obligation to disclose mandatory supply items in franchise contracts. The agency aims to ensure that recent regulatory reforms — requiring franchisors to list the types of mandatory items and the formulas used to set their supply prices — have taken hold in practice.

The Fair Trade Commission said Monday it will inspect 100 major franchise headquarters in the wholesale, retail and service industries to assess compliance with mandatory item disclosure requirements in franchise contracts.

Mandatory items refer to raw materials and other supplies that franchisees are required to purchase exclusively from the franchisor or from suppliers the franchisor designates.

The inspections are designed to assess how well franchise headquarters comply with an amended franchise business law that requires contracts to explicitly state the types of mandatory items and the method used to calculate their supply prices.

The Fair Trade Commission conducted the same type of inspection last year, covering 75 franchise headquarters in the food service sector. This year, it expanded the scope to include wholesale, retail and service businesses.

Inspectors will focus primarily on whether franchisors entered into new, renewal or amendment contracts only after properly listing the mandatory item types and supply price formulas in their contracts.

For new and renewal contracts, the obligation applies to agreements signed on or after July 3 last year. Existing contracts were required to be amended by Jan. 2 this year to reflect the relevant provisions.

In addition, the commission will check whether franchise contracts clearly state the reasons for designating mandatory items, the identity of designated suppliers, and the criteria for determining supply prices. It will use guidelines on recording mandatory item types and supply price formulas in contracts — issued in June last year — along with the standard franchise contract template, as benchmarks for evaluating compliance.

Through the inspections, the commission said it intends to accelerate adoption of the mandatory item disclosure reforms at the ground level.