Regulator increases protection of franchisees

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Regulator increases protection of franchisees

Korea’s antitrust body is increasing protections for franchisees, requiring they be compensated for losses suffered because of wrongdoings by franchisors.

The Fair Trade Commission (FTC) said Thursday it made changes to the standard franchise contract. It added provisions obligating compensation be paid in cases where mismanagement, reputational damage or failures on the part of the brand owner harm the franchisee.

The change follows a number of scandals in recent years where franchise company owners and executives committed illegal acts that led to consumer protests and a decrease in sales for franchise stores.

In 2016, Jung Woo-hyun, former chairman of the MP Group and founder of Mr. Pizza, assaulted a janitor, which led to a boycott movement against the pizza franchise.

The FTC said illegal acts committed at a franchise headquarters or by senior executives that lead to the damaging of the name or actual sales declines will now be liable for compensation. The clause is distinct from existing standard compensation obligations.

“If the amendment is applied to each individual franchise contract, it will lead to a decrease of owner risk [...] and help with the protection of the franchise owners,” said Lee Sun-mi, director of the FTC’s Franchise Division.

The amendment applies to standard contracts in all four franchise categories: restaurants, wholesale and retail businesses, education services and convenience stores.

Changes to the contract standard reflect amendments to the Franchise Business Act made in October 2018.

The FTC also made a number of additional changes to standard franchise contracts for convenience stores.

Convenience store owners will now be exempt from fees incurred for shutting stores before the end of their contract due to reasons beyond their control.

Convenience store owners have typically had to pay closure fees based on their average monthly profit dividend when shutting down their businesses within the contract period.

The regulator said convenience store owners will not be held responsible if they close following a dramatic decrease in business due to excessive competition, reconstruction projects, disease or natural disasters.

Franchise headquarters will now have to provide evidence of responsibility in cases where they argue franchise owners are at fault.

The commission made further changes for convenience store franchise contracts to ensure holidays ahead of the Lunar New Year.

Franchisors will now have to accept requests for limited operating hours due to family events - like weddings and funerals, and major national holidays, such as the Lunar New Year and Chuseok.

The FTC said the amendment will allow franchisees to freely express their desire to take holidays.

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