As the countdown to the implementation of the revised Franchise Business Act approaches, the Korean Franchise Industry Association (KFIA) has raised significant concerns regarding the recent changes proposed in the law. With only six days remaining until the deadline for public feedback on the legislative draft, the association convened a press conference on October 8th at their headquarters in Yeongdeungpo, Seoul, to express their apprehensions about the potential impact of the new regulations on franchise operations and franchisee relationships.
Korean Franchise Industry Association President, Nam Myung-seok, emphasized that the proposed regulations could exacerbate existing conflicts rather than foster constructive dialogue between franchisors and franchisees. He remarked, “Franchisors do not hesitate to listen to the voices of franchisees; however, the crux of the issue lies in whether the new regulations will operate fairly and effectively in practice.”
The core of the proposed regulations mandates that if a certain number of franchisees form a collective and register with the government, franchisors are required to engage in negotiations with that collective. Failure to respond without valid justification would lead to corrective orders from authorities. This legislative shift is expected to take effect on December 31, following its passage through the National Assembly last December.
Previously, on September 3, the Fair Trade Commission (FTC) unveiled the draft of the revised regulations. According to the new stipulations, franchisee collectives can be formed when 10% of franchisees or at least 1,000 individuals (with a minimum of 30 members) join together. Franchisors are obliged to initiate discussions within 14 days upon receiving a negotiation request from these registered collectives.
Although the amendments appear to be mere administrative adjustments, they are intertwined with a long-standing imbalance of power between franchisors and franchisees that has persisted for nearly three decades. Additionally, the current political climate advocating for enhanced rights for small business owners adds further complexity to the situation.
During the press conference, President Nam highlighted a significant concern regarding the drastic reduction of the registration requirement from 30% to 10%. He expressed that allowing up to 10 separate collectives to form under one brand could lead to chaos, making it impossible for franchisors to establish coherent policies applicable to all franchisees. Unlike labor unions, this proposed system does not ensure that the outcomes of negotiations with the 10% collective will be binding for the remaining 90%. The association is advocating for an increase in the registration threshold to 30-40% or, at the very least, the establishment of a unified negotiation channel and mandatory application of agreed terms across all franchisees.
Another point of contention raised was the scope of topics subject to negotiation. The proposed framework includes not only mandatory contractual terms but also advertising and promotional matters, which raises concerns about potential repetitive discussions on crucial operational issues such as franchise fees, essential item pricing, and store operational standards.
Nam further elaborated that while the regulations intend to limit discussions on matters that could undermine a brand’s identity or lead to inappropriate interference in franchisor management, the vagueness of these provisions could result in all operational concerns being brought to the negotiating table.
An additional concern pertains to the inclusion of third-party representatives in negotiations. The association has cautioned that expanding the definition of representatives to include franchise transaction agents or simple proxies could distort the negotiation process and raise risks of confidential information leaks. They contend that only attorneys bound by confidentiality agreements should be permitted as representatives, emphasizing the necessity for robust protections for trade secrets.
Moreover, the association criticized the proposed re-negotiation intervals, arguing that the suggested six-month period for identical topics and 60 days for unrelated matters is insufficient. They believe that re-evaluating annual policies every six months could lead to significant managerial disruption and costly withdrawal from agreements. The association proposes extending these intervals to one year for identical topics and a minimum of 90 days for unrelated issues.
The KFIA estimates that a franchisor with 300 franchise outlets could incur a minimum cost of approximately 43 million won annually to comply with these negotiation obligations, accounting for 7-8% of the company’s operational profit.
In previous discussions, Fair Trade Commission Chairman Joo Byeong-gi acknowledged the disproportionate representation in the franchise sector and suggested that the registration requirements might be relaxed. The National Franchisees Council maintains that negotiations should facilitate dialogue rather than impose excessive representation criteria.
As the FTC prepares for an additional meeting on October 11, with the aim of finalizing the legislative draft on October 14, industry observers speculate that despite the KFIA’s assertive stance, the actual adjustments to the proposals may be limited. Nevertheless, the association remains resolute in advocating for comprehensive revisions, including enhancing representation criteria, clarifying negotiation topics, restricting third-party involvement, and mitigating repetitive negotiations. Nam reiterated the critical importance of maintaining a vibrant franchise sector, which contributes significantly to the economy and employs over 1.3 million individuals, underscoring that any adverse impact on the franchise industry would reverberate through the broader economy.
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