Franchises and the law

By Hwang Ju-myung

In the news lately there have been several negative storylines about Korean franchise owners enriching themselves at the expense of their franchisees. Of course, the very idea behind a franchise is to own intellectual property (a brand, a product or a business model) that makes money through other people's labor who pay for the right to use it.

The Korean franchise industry is not an easy one to survive in. According to Korea Fair Trade Mediation Agency statistics cited in this paper last month, every day on average 114 franchise shops open, while 66 close their doors for the last time. Judging by survival rates, out of the 41,851 outlets that existed in 2015, over 4,000 are doomed to close. Yet despite this bleak outlook, franchises hold the lure of money earned by running one's own business, backed by a big parent company, and without having to invent a product. This is why many people pushed to retire early from their jobs inject their lump-sum severance pay and life savings into buying into a promising franchise. Failure means at least the loss of one's financial security.

In a franchise business, each individual store owner (the franchisee) pays a franchise fee to the mother company (franchiser) for the right to operate under that trademark. Setup costs include the first installment of that franchise fee, training fees and other expenses, but don't include store deposit, rent and the interior fit-out. For example, as reported in this paper recently, it costs 479 million won to open a Burger King franchise, 400 million won for a Lotteria, or 279 million won for a Mr. Pizza. After that there are regular payments of fees, which may be a proportion of revenue or profits, or a flat amount. If the franchisee ceases or falls behind on payments, then the franchise agreement may be declared null and void.

In a Korean contract between a franchiser and franchisee, the former is always given the appellation"gap" (roughly equivalent to "Party A" in English), while the latter becomes "eul" ("Party B"). Beyond merely being a convenient shorthand, these labels establish an asymmetrical power relationship from the very beginning. Two Koreans in a business relationship are very rarely on equal footing. The "gap" party is almost always much more powerful, while the "eul" party is obliged to do almost anything to keep "gap" happy. This is such an entrenched hierarchy that even outside the business world we say that a person who asserts dominance over another by abusing their position has committed "gapjil."

For far too long this was considered an acceptable business practice. But now, as recent media scrutiny of cases of "gapjil" in the franchise world has shown, both mainstream and social media are now predisposed to support the "eul" party in franchise situations. The Democratic Party of Korea set up the "Euljiro Committee" to "support eul" by stamping out abuses and ensuring that minor parties to contracts get a fair deal. Sparked by recent social outrage over alleged abuses by some franchisers, this month Seoul Metropolitan Government announced it would be receiving complaints from franchisees about any unfair treatment they have received from franchiser firms.

A contract is a legal instrument to cause both parties to follow the terms of a particular agreement. This is as true of a franchise contract as it is of any other. In theory, a franchiser can demand anything of a franchisee, as long as the latter agrees to it. However, Korea does have a law to curb abusive practices. The new Fair Transactions in Franchise Business Act [act number 14839] that came into for on July 26, replacing an earlier act of the same name, specifically outlines and then forbids or restricts a number of practices.

For instance, Article 12-2 prohibits a franchiser from applying undue pressure on a franchisee to renovate the interior or exterior environment of a store, and also stipulates a proportional cost sharing where a franchisee does need to redo the store. The reason for this is because some franchise owners were forcing franchisees to completely upgrade their stores every three years, regardless of store profitability and turnover, and to bear the full costs alone. Curiously, this Article has been in versions of the franchise law since its insertion in 2013, and yet it is still one of the most common complaints, according to an article in this paper on Aug. 1. The same is true of other common complaints _ the abuses are already illegal, but for a number of reasons the law is not being fully enforced.

The abovementioned Act in Article 16 established a Franchise Business Transaction Dispute Mediation Council within the Korea Fair Trade Mediation Agency to mediate and otherwise resolve disputes arising from franchise businesses. Article 32-2 and 34 give the Korea Fair Trade Commission (FTC) investigation and enforcement powers to find and correct abuses. Therefore, the law is well equipped to deal with problems that are occurring. Rather than asking the government to make a new law or change the system, we should call upon the FTC to enforce the existing law and umpire the system as it is. If this is impossible because of manpower or budgetary shortages, then we should push the government to equip and empower the FTC to do its job fairly and effectively.

Hwang Ju-myung is the chairman of HMP Law.