8 out of 10 Franchise Branches Experience Unfair Practices... Forced Purchase of Goods, etc.

[Asia Economy (Suwon) = Reporter Lee Young-gyu] Among the 10 'franchise regional headquarters' (franchise branches) that act as intermediaries between franchise headquarters and franchise stores, 8 were found to have experienced unfair practices such as forced purchase of goods and contract termination notices.

Gyeonggi Province announced on the 18th that from July to October, it conducted the "2021 Franchise Sector Franchise Regional Headquarters Survey" targeting 119 franchise branches (33 educational, 37 foreign language, 49 laundry) registered in the nationwide Franchise Business Information Provision System in the education service and laundry sectors. These sectors were chosen due to recent disputes between headquarters and franchise branches.

Franchise branches are responsible for managing and supporting franchise stores in each region to maintain certain quality standards and business methods through management and sales activity education and support. Although they act on behalf of the franchise headquarters, there are no clear regulations such as the Franchise Business Act, so they do not receive legal protection from unfair practices by the franchise headquarters.

The survey results showed that 80.7% of franchise branches responded that they had experienced unfair or improper acts by the franchise headquarters. By sector, laundry was the highest at 95.9%, followed by education at 78.8%, and foreign language at 62.2%.

Major unfair cases include Franchise Branch A, which sells textbooks to franchise stores during training, receiving a notice from the franchise headquarters that if they fail to meet the sales target of 500 copies within 5 months, the contract would be terminated. Since the highest annual sales record of Branch A was 412 copies, this notice was effectively a contract termination amid the COVID-19 recession. Franchise Branch B was required to purchase machinery worth tens of millions of won unrelated to branch operations but had to comply with the forced purchase due to an upcoming contract renewal.

The reason franchise branches experience unfair practices related to contract renewals is that the Franchise Business Act does not guarantee contract maintenance between franchise branches and headquarters, leaving them unprotected from unilateral contract termination. In this survey, 47.1% of franchise branches said they had received contract termination mentions (contract termination, renewal refusal, business abandonment, etc.) from the franchise headquarters. Unlike franchise branches, franchise stores are guaranteed contract maintenance for 10 years to recover their investment.

Moreover, only 38.7% of franchise branches recognized themselves as 'franchise branches.' Since franchise branches pay an amount under the name of franchise fees at startup like franchise stores, they mistakenly identified themselves as franchise stores, dealerships, or franchise headquarters partners. As a result, franchise branches only realized they were in a legal blind spot after suffering unfair damage. In fact, only 20.2% of franchise branches knew that they were not legally protected under the Franchise Business Act, the Fair Trade Act, or the Agency Act.

Additionally, analysis of 14 franchise branch contracts among the survey targets showed that 10 contracts were one-year contracts that automatically terminated without renewal, which was disadvantageous to the franchise branches.

The province views this as a violation of Article 9 of the Terms and Conditions Act, which states that "provisions that set the duration of validity as short or long term and may unfairly disadvantage customers are invalid."

It also pointed out that provisions such as ▲setting compensation interest rates higher than the maximum interest rate under the Interest Rate Restriction Act ▲mandatory facility expansion despite a one-year contract period with a complete ban on objections ▲clauses requiring prior waiver of the right to claim damages could be significantly disadvantageous to franchise branches.

Based on the survey results, the province plans to prepare improvement measures through industry stakeholder meetings and submit them to the Fair Trade Commission and the National Assembly.

Kim Ji-ye, Director of the Gyeonggi Province Fair Trade Bureau, emphasized, "Through this survey, we raised for the first time the issue of protecting the intermediary 'franchise branches,' which had been in a legal blind spot unlike franchise stores. We will actively pursue Gyeonggi Province-level measures such as proposing amendments to the Franchise Business Act to add protection regulations for franchise regional headquarters, reviewing violations of the Terms and Conditions Act, and recommending standard contracts."

This content was produced with the assistance of AI translation services.