On October 8th, Na Myung-seok, the President of the Korea Franchise Industry Association, held a press conference at the association’s headquarters in Yeouido, Seoul, urging the Fair Trade Commission (FTC) to comprehensively revise the proposed amendments to the Franchise Business Act. The association’s call for reform comes in light of the new provisions regarding the establishment of franchisee organizations and their rights to request negotiations with franchisors. While the association agrees with the intent to enhance communication between franchisees and franchisors, it contends that the current registration criteria for franchisee organizations are overly lenient, which could lead to confusion and unnecessary disputes.
One of the primary concerns raised by the association is the lack of adequate representation among franchisees. According to the FTC’s proposal, a franchisee organization can register if it has at least 10% of franchisees or a minimum of 30 members, with total franchisees numbering above 1,000. Na emphasized that this low threshold could result in a fragmented representation, where a small group could make demands that do not reflect the views of the majority. For instance, in a franchise with 1,000 locations, a group representing only 100 franchisees could push for opposite demands, creating conflict and confusion about whose interests are truly being represented.
The association advocates for a more rigorous registration standard, suggesting that the percentage of franchisees required to form an organization should be raised to between 30% and 40%. They argue that the current framework fails to account for the size of the franchise brand, which could render smaller brands unable to form a representative body. Furthermore, if the 10% threshold remains, the association believes that negotiation requests should require agreement from at least 40% of franchisees to ensure a more unified representation.
Financial implications for small and medium-sized franchisors are also a significant concern. The association estimates that a franchisor with around 300 locations may face additional costs of approximately 43 million won per year to manage the negotiations, which could lead to a substantial decrease in profit margins. Many franchisors are small businesses, lacking the resources found in larger corporations. Na pointed out that most franchisors do not have dedicated legal or negotiation teams, and the ongoing demands for negotiations could compel them to hire additional personnel, ultimately straining their operations and impacting their revenue.
Another contentious issue discussed was the participation of external agents in negotiations. The FTC’s initial proposal sought to limit the involvement of third parties; however, the revised draft allows for ‘legitimate representatives’ to attend negotiations, raising concerns about the potential for external parties to dominate discussions. The association fears that such involvement could lead to the sharing of sensitive business information, such as pricing strategies and trade secrets, which could jeopardize the competitive integrity of franchises. They are advocating for stricter regulations that would limit third-party participation to legal representatives bound by confidentiality agreements, ensuring that proprietary information remains protected.
The breadth of negotiation topics outlined in the proposed amendments has also drawn criticism. As it stands, the topics open for negotiation include critical business aspects like pricing, territory, and supply chain agreements. The association argues that exposing proprietary business strategies to negotiation is impractical and could undermine the franchisor’s operational integrity. They are calling for a more explicit delineation of negotiation topics, highlighting the necessity to exclude core business strategies from discussions.
The association has also proposed extending the timeframe for re-requesting negotiations on similar topics, currently set at 180 days. They argue that many franchisors operate on annual plans for pricing and marketing strategies, and being forced to negotiate on the same issues every six months could disrupt their business operations. They suggest extending this period to one year for similar topics and 90 days for different subjects to allow for a more stable business environment.
In light of these pressing concerns, the Korea Franchise Industry Association plans to present these recommendations during an upcoming meeting with the FTC on October 11th. They aim to address critical issues such as ensuring adequate representation for franchisee organizations, clarifying negotiation topics, defining the role of external representatives, and minimizing redundant negotiations. The association also intends to submit formal comments to the FTC during the public comment period, emphasizing the need for a balanced and fair framework that supports both franchisees and franchisors in a rapidly evolving market.
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