Franchise industry group warns proposed rules will deepen franchisor-franchisee conflict

"We are deeply concerned that the proposed enforcement decree for the revised Franchise Business Act could fuel conflict and disputes between franchisors and franchisees, rather than improving communication."

Korea Franchise Industry Association Chairman Na Myeong-seok expressed concerns Tuesday at a press briefing at the association's conference room in Yeongdeungpo-gu, Seoul, over the enforcement decree and public notice drafts the Korea Fair Trade Commission announced ahead of the act's scheduled implementation later this year. Na said the government's proposed decree was likely to undermine the very intent of the law, and called for "full revision to reflect industry feedback on four key items."

The association identified four provisions it considers problematic: group registration requirements, the scope of negotiation topics and grounds for exclusion, third-party participation, and restrictions on re-negotiation. Under the government's proposal, a franchisee group may request negotiations with a franchisor if it has enrolled at least 10 percent of all franchisees in a brand and has a minimum of 30 members. That threshold was significantly lowered from the 30 percent figure in the initial draft, and the 30-member floor was newly added.

If implemented as proposed, up to 10 registered groups within a single brand could each demand negotiations with the franchisor. For groups with an enrollment rate below 30 percent, the government's plan requires that non-member franchisees be notified of any negotiation request and the group's position, and that a feedback process be conducted with supporting documentation submitted to both the registration authority and the franchisor.

The association is calling for a 40 percent enrollment threshold to ensure adequate representation. "The provision only requires that opinions be gathered and communicated — there is no clause requiring that the views of non-member franchisees actually be reflected, making it a purely procedural formality," the association said. "If the 10 percent threshold is retained, franchisee groups should at minimum obtain consent from a proportion that reflects genuine representativeness, or alternatively, the channels for organizing the many groups should be consolidated into one."

The association also took issue with the government's proposal to define the scope of negotiations as covering "all legally required items in the franchise agreement." It said sensitive information that amounts to core brand strategy — such as store expansion plans, new products and pricing methods — should be excluded from the negotiation scope. The government's draft does exclude demands that undermine brand consistency or constitute undue interference in management, but the association said specific guidelines are needed that clearly enumerate, item by item, what is and is not subject to negotiation.

A further concern involves the requirement that participants in negotiations with registered groups may include not only franchisors and franchisees but also "persons who lawfully represent the parties." The association said this provision in effect opens the door to third parties, and called for the exclusion of any third-party participants other than attorneys whose contractual relationship has been verified.

The association also argued that the re-negotiation cooling-off periods — currently 180 days for the same topic and 60 days for separate topics — should be extended to one year and 90 days, respectively. It said same-topic matters such as advertising and promotional agreements are tied to annual business cycles. For separate topics, it warned that if multiple registered groups divide up agenda items and submit requests in turn, the result would in effect be a permanent negotiation regime. The association also proposed extending the separate-topic period to 120 days for smaller brands with fewer than 100 franchisees.

The association said the government had not adequately sought input from franchisors in drafting the decree. "The industry had concerns about the government's initial draft in June, but engaged in good-faith discussions out of respect for the intent of the regulation and waited for a balanced proposal to emerge — only to find that the announced draft had actually gotten worse, and that prior consultation and explanation had been insufficient throughout the process," Na said. "If the procedures for hearing industry voices are reduced to formality, public trust in government policy will inevitably be shaken."

The association plans to formally present its call for full revision at a meeting with Korea Fair Trade Commission Chairman Ju Byeong-gi scheduled for Friday. In addition, the association said it plans to launch an ethics certification program this year for member companies that demonstrate a commitment to fair and ethical business practices. The move is intended to prevent unfair conduct by a small number of franchise brands from triggering sweeping regulation across the entire industry.

"It is heartbreaking to see the gapjil of a handful of brands cast as the defining image of more than 10,000 franchisors," Na said. "We will continue to provide education targeting CEOs of franchisor companies and others." Kim Sang-hoon, the association's secretary general, said the group plans to revoke certifications and take other measures against franchisors found to have engaged in gapjil or disputes with franchisees. "If a franchisor violates the Franchise Business Act or the Fair Trade Act, the answer is to strengthen or firmly enforce the penalties," he said.