"Franchise Headquarters Providing False 'Over 100 Million Sales Possible' Information... Supreme Court Rules Compensation for Business Losses Required"

Court: "Business losses also included in damages"... Stronger protection for franchise business operators

[Asia Economy Reporter Heo Kyung-jun] The Supreme Court has ruled that if a franchisor provides exaggerated expected sales information and signs a contract with a franchisee, it must compensate for the business losses.

The Supreme Court's 2nd Division (Presiding Justice Min Yoo-sook) announced on the 19th that it overturned the lower court ruling which excluded the franchisees' business losses from the scope of damages in the appeal trial of a damages claim lawsuit filed by three franchisees of a famous accessory specialty store franchise against the franchisor, and sent the case back to the Seoul High Court.

In 2015, Mr. A and others signed franchise contracts to operate accessory franchise stores respectively in Pyeongtaek, Suwon, and Yongin, Gyeonggi Province. During the franchise contract consultation, the headquarters said, "Successful stores make monthly sales of over 150 million KRW," and explained that the three stores could easily achieve monthly sales of 40 million KRW.

The franchisor also showed an ‘Expected Sales Conversion Table’ which was created based on the previous year's sales of the five closest franchise stores to the planned locations of Mr. A and others. However, contrary to the headquarters' explanation, the actual average monthly sales were only 7 million KRW. Eventually, Mr. A operated the franchise store for one year from October 2015 but closed it due to accumulated losses. The other two, who made 20 to 30 million KRW less in sales than expected, also repeatedly incurred losses and closed their stores in 2016-2017.

Meanwhile, in 2019, this franchise headquarters was subject to corrective measures and fines by the Fair Trade Commission for violating the Franchise Business Act. The franchisor had provided Mr. A and others with an ‘Expected Sales Calculation Sheet’ in which it arbitrarily excluded some franchise stores with lower sales conversion amounts from the previous business year among the five closest franchise stores to the planned store location and included other franchise stores to determine the expected sales range based on those stores' sales conversion amounts.

Mr. A and others filed a lawsuit claiming damages due to the franchisor's provision of false and exaggerated information.

Both the first and second trials recognized the franchisor's liability for damages. However, they differed on whether ‘business losses’ such as product purchase costs, monthly rent, management fees, labor costs, and headquarters loan interest should be included in the scope of damages.

The first trial included business losses in the compensation scope, but the second trial ruled that the franchisor does not need to be responsible for business losses, which depend on factors such as the store owner's management ability and market conditions, and only included store opening costs in the compensation amount.

The Supreme Court found the second trial's ruling, which excluded the franchisees' business losses from the scope of damages, to be incorrect.

The court stated, "Although the business losses of Mr. A and others include parts caused by other factors such as management ability or market conditions, making it difficult to specifically prove the amount of losses caused by the franchisor's illegal acts, in this case, a ‘considerable amount of damages’ can be recognized under the Franchise Business Act and the Fair Trade Act."

A Supreme Court official explained, "This clearly declares that business losses of a business operator who signed a contract based on false and exaggerated information in a situation where information is skewed toward the franchisor are included in the franchisor's damages, and clarifies the method of recognizing damages," adding, "It is significant in that it strengthens protection for prospective franchisees and franchise business operators."

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