“They Called It a Delegated Contract, but It Was Really a Franchise”… FTC Issues Corrective Order to Deokeun for ‘Evasive Contract’

Use of "Delegated Management" Label to Evade Franchise Law
Violation of Advance Disclosure and Contract Provision Obligations

A franchisor that signed a franchise agreement under the name “delegated operation and management contract” in order to avoid obligations under the Franchise Business Act, and failed to provide even a disclosure document, has been sanctioned by the Fair Trade Commission.

Fair Trade Commission building. The Asia Business Daily DB.

On the 26th, the Fair Trade Commission announced that it had imposed corrective orders (including future prohibition orders and mandatory training orders) against Deokeun, the franchisor operating food courts such as “Deokeun Sikttak,” for violating the Franchise Business Act.

According to the FTC’s investigation, Deokeun signed a contract in 2023 to delegate the operation of the food court “Deokeun Sikttak” located in Seoul Medical Center. At the time, Deokeun referred to this as a “delegated operation and management contract,” but in reality, it met all five requirements for a franchise agreement under the Franchise Business Act.

In fact, Deokeun granted franchisees the right to use its trade name, distributed recipe manuals, and provided hands-on cooking training, thereby controlling management activities. In addition, Deokeun collected 3% of monthly sales as a “head office management fee,” which the FTC determined to be a franchise fee in exchange for the use of business marks and related benefits.

Under the law, franchisors are required to provide prospective franchisees with the disclosure document and franchise agreement in advance so that they can make an informed decision before signing. However, Deokeun did not provide the disclosure document at all, claiming it was not a franchise agreement, and also entered into the contract without providing the franchise agreement in advance. Even the contract that was provided lacked some mandatory details.

The FTC explained that the significance of this action lies in reaffirming the principle that whether a contract constitutes a franchise agreement is determined by its actual content, not by its title.

The FTC stated, “We will continue to monitor actions by franchisors that evade their legal obligations by using terms such as ‘delegated contract,’ and will take strict action whenever violations are identified in order to protect the rights and interests of small business franchisees.”

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