Definition of a Franchise in Korea
by Brendon Carr
Yesterday, someone found Korea Law Blog by searching for the phrase “definition of a franchise in Korea”—several searches, and iterations of that phrasing (like “franchise definition korea” and “korea franchise act definition"). Although my recent other posts on franchise-related topics cover what is new about the Franchise Act, I now see that I’ve not posted anything setting forth the current state of things. Better fix that.
The definition of a franchise in Korea is found in the Franchise Act of 2002 (the “Act"), Art. 2 item 1:
“Franchise" means a continuous business relationship in which Franchisor allows Franchisee to sell goods (hereinafter to include raw and auxiliary materials) or services under certain quality standards using the Franchisor’s trademarks, service marks, trade name, signs and other business marks ("Business Marks") and supports, educates and controls Franchisee as regards relevant management and operating activities, and in which Franchisee pays Franchise Fees to Franchisor in return for the use of Business Marks and the support and education concerning the management and operating activities.
The Act was amended in August 2007, and although many parts of the Act were changed in substantial detail, the definition of a Franchise was amended only very slightly. Here’s the new definition which will be applicable from February 4, 2008 (the “Effective Date") (new text in bold):
“Franchise" means a continuous business relationship in which Franchisor allows Franchisee to sell goods (hereinafter to include raw and auxiliary materials) or services under certain quality standards or business methods using the Franchisor’s trademarks, service marks, trade name, signs and other business marks ("Business Marks") and supports, educates and controls Franchisee as regards relevant management and operating activities, and in which Franchisee pays Franchise Fees to Franchisor in return for the use of Business Marks and the support and education concerning the management and operating activities.
Not much difference, right? So basically, what is a franchise now is what a franchise will be when the new amendments to the Act become effective later in the winter.
Boiled down to its essentials, the Korean law requires three elements in order for a franchise to exist: (i) business marks, which include trademarks but probably also broadly sweeps up elements of identity which we would know as trade dress in America; (ii) a uniform and reproducible system for the use of franchisee; and (iii) a franchise fee, which may include a one-time fee or running royalties.
As I’ve mentioned before, I like international franchise work because it increases the possibility of me finding a hamburger, sandwich, pizza, or bowl of chili that is like the food I enjoyed growing up in the Midwest. But although chain restaurants are obvious franchises, the definition above sweeps up many kinds of retail and service establishments, including hotels, educational businesses, haircut parlors, gas stations, convenience stores, branded-goods stores that focus on a certain brand (for example, a Samsung Electronics store), and the like.
Anytime there is a combination of business marks, a system, and a fee for the use of the marks and the system, that constitutes a franchise in Korea. In the past this was not such a big deal, as the Act was relatively loose and imposed few duties on the franchisor (even disclosure could be avoided). But now with the August Amendment of the Act, the burden on franchisors will increase from the Effective Date in respect of new relationships, and renewals of existing franchise relationships formed before the Effective Date. Does this apply to your business?
Comments
4 Responses to This Entry
Comments Policy: Comments to Korea Law Blog are moderated. This means abusive, or just plain stupid comments will be deleted. So don't be a jerk. It also means there may be some delay from the time you post a comment to the time it shows up here. If your comment wasn't against the policy, it will show up in a little bit.
-
About Korea Law Blog
Korea Law Blog is brought to you by Brendon Carr, an American lawyer working as a foreign legal consultant for more than 10 years in Seoul. (Brendon is not admitted as an attorney in Korea. But you knew that.) -
Contact Details
-
Tel. +82 (0)2 772 2734
Fax +82 (0)2 772 2800
Mobile +82 (0)10 8788 0750 -
Download My FREE Korea Employment Law FAQ
-
Korean Media
-
Blogroll
-
Anytime someone talks “franchising”, I’m happy. This is great stuff.
How does Korean law deal with accidental/unintentional franchising?
The question of “unintentional” franchise is not dealt with in the law specifically. The law merely classifies any relationship involving those three elements in the definition of a “franchise”—which I distill into the essence of business marks, system, and fee—as a franchise falling under the regulation of the Franchise Act.
I asked our associate Mr. Si-Mok Kim to look for any court cases or KFTC administrative rulings addressing the “accidental franchise” or “unintentional franchise” issue. To the best of my knowledge he came up empty. The Franchise Act of 2002, though, is only five years old, and given the way court process works the body of precedents based on that law could only be about two years old by this point. We are probably still just waiting for the “unintentional franchise” rulings to emerge.
Si-Mok reads Korea Law Blog (at gunpoint). Maybe he’ll see this thread and grace us with his perspective.
As Brendon already mentioned, there are no Korean judicial or administrative precedents related to “unintentional” or “accidental” franchises, which I guess might be a concept used or understood in US or other countries with a well-developed body of franchise law.
Instead of specific concepts like “unintentional” or “accidental” franchise, the critical factor would be whether the contract or relationship has the three elements provided by the Korean Franchise Act. Even if there is no formal franchise agreement, the overall relationship would be analyzed according to general principles of contract law as well as the Franchise Act.
Anyway the possibility of there being an “unintentional” or “accidental” franchise is a interesting issue for me to learn and compare. Actually I had not thought about that. (My guess is there has been no concept or study on such issues in Korea yet.) Thanks to you, Brad!
Brendon and Si-Mok:
Thanks for the well-researched answer.
Unintentional franchising is a scary concept here in the U.S. Those F’ors who want to avoid the FTC Rule might try to get around one or more elements in the definition of a franchise, but some do get busted if their avoidance is not “artiful” and successful enough.
For a good read on this, I would recommend the following AUTHORITATIVE article:
Mark Miller, Unintentional Franchising, 36 St. Mary’s L. J. 301 (2005).