Hello. I am Attorney Lee Young-kyung from Cheongchul Law Firm.

Today, I would like to introduce an important Supreme Court ruling related to franchise business. The ruling 2022Du64808, which was announced on July 11, 2024, provided a very important interpretation regarding the illegality of actions by the franchisor that disadvantage the franchisees based on their activities in the franchisee association. This ruling will be an important benchmark in disputes related to franchise business.

[Question]

If the series of actions such as the refusal to renew contracts and requests for extensions of contract term directed at the officers of the franchisee association by the franchisor were carried out with the intention of suppressing the activities of the franchisee association, would those actions fall under the provision prohibiting disadvantages to the franchisees as stated in Article 14-2, Paragraph 5 of the Franchise Business Act?

[Answer]

Yes, it may fall under the category of actions that provide disadvantages prohibited by the Franchise Business Act.

[1. Overview of the Case]

The plaintiff in this case is a chicken franchise franchisor, which grants franchise rights to franchisees to operate chicken franchises using its business sign. Due to the structural characteristics of the franchise business, the franchisor has a superior position over franchisees. Considering these characteristics, the Franchise Business Act (hereinafter referred to as the 'Franchise Act') includes several regulations to protect the rights and interests of franchisees.

In November 2018, approximately 400 of the plaintiff's franchisees formed the 'National Franchisee Association' (hereinafter referred to as the 'franchisee association'). This is based on Article 14-2 of the Franchise Act, which guarantees the formation and activities of franchisee associations.

On December 7, 2018, and November 15, 2019, the plaintiff notified the officers of the franchisee association (2 co-chairs and 2 vice-chairs) of the refusal to renew the franchise agreement, citing reasons such as 'difference in corporate management policy and stance on the franchise agreement' and 'failure to accept the generally applied franchise agreement terms or business policies.' This notification came after the expiration of the 10-year period for exercising the franchisee's right to request a renewal of the contract as stipulated in Article 13, Paragraph 2 of the Franchise Act.

Additionally, the plaintiff required the officers of the franchisee association whose franchise agreements were about to expire to prepare and submit requests for extensions of the contract term and memoranda. These documents included statements such as "I acknowledge that my activities in the franchisee association have harmed the plaintiff and will refrain from actions that defame the plaintiff or incite other franchisees."

In response, the Fair Trade Commission (defendant) determined on June 9, 2021, that the plaintiff's actions violated Article 14-2, Paragraph 5 of the Franchise Act, and issued a corrective order and an administrative fine of 495 million won. The 'related sales amount' that served as the basis for calculating the fine was the total amount of sales of goods or services sold by the plaintiff to related franchisees during the period of the violation.

The plaintiff contested this and filed a lawsuit, and the lower court judged that the plaintiff's actions did not constitute a violation of the Franchise Act. In response, the Fair Trade Commission appealed.

[2. Supreme Court Judgment]

The Supreme Court annulled the part of the lower court ruling unfavorable to the defendant (Fair Trade Commission) and sent the case back to the lower court for retrial and judgment. The main content of the Supreme Court's judgment is as follows.

A. Interpretation of Article 14-2, Paragraph 5 of the Franchise Act

The Supreme Court first cited the full text of Article 14-2, Paragraph 5 of the Franchise Act: "The franchisor shall not perform acts that disadvantage franchisees for reasons related to the formation, membership, or activities of the franchisee association, nor shall it condition the conclusion of the franchise agreement on joining or not joining the franchisee association."

Furthermore, the Supreme Court explained that the purpose of prohibiting acts that disadvantage franchisees based on their activities in the franchisee association is to allow franchisees to form and engage in activities in response to the franchisor's superior position due to the structural characteristics of the franchise business, thereby ensuring negotiating power regarding transaction conditions to protect their rights and facilitate economic position enhancement.

B. Criteria for Determining whether Actions are Disadvantageous

The Supreme Court presented factors to consider when determining whether the franchisor's actions constitute disadvantageous actions. These include "the intent or purpose of the action, the specific content of the franchisee's activities in the franchisee association, the circumstances of the disadvantage, the content and degree of the disadvantage, the general trading practices of the industry, differences in treatment depending on membership in the franchisee association, the content of the franchise agreement, and relevant legal provisions, among other circumstances."

Additionally, the Supreme Court mentioned that even if the period for exercising the franchisee's right to request a renewal of the contract has expired, there may be special circumstances under which the franchisor's refusal to renew the contract could be contrary to good faith. In such cases, a refusal to renew by the franchisor cannot be deemed as not constituting a disadvantageous action solely because the franchisee lacks the right to request a renewal.

C. Specific Judgment on the Case

The Supreme Court judged that the plaintiff's actions constituted disadvantageous actions prohibited by Article 14-2, Paragraph 5 of the Franchise Act. The basis for this judgment was that ① the grounds for the plaintiff's refusal to renew the contract were abstract and vague, without specifying concrete reasons for the refusal, and ② there were no contractual violations or culpability on the part of the relevant franchisees before and after their activities in the franchisee association, and ③ more than half of the franchises operated by the officers closed during the period of the franchisee association's activities, and ④ requiring the preparation of requests for the extension of contract terms or memoranda could be seen as imposing a disadvantage on the activities of the franchisee association, and ⑤ despite the reasonable expectation of contract renewal by both the franchisor and franchisee, the refusal of renewal was based on the activities of the franchisee association.

D. Judgment on the Basis for Determining the Administrative Fine

The Supreme Court ruled that the 'related sales amount' stipulated in Article 34, Paragraph 1 of the Enforcement Decree of the Franchise Act should be interpreted as "the total sales of goods or services sold by the franchisor to related franchisees during the period of the violation." This does not limit it to the sales amount directly related to the violation, thus acknowledging the legality of the Fair Trade Commission's imposition of the fine.

[3. Implications]

This ruling clarifies that the activities of the franchisee association are legally protected and presents criteria for judging disadvantageous actions. Additionally, it clearly states that the franchisor's freedom to refuse contract renewal cannot be exercised for the reason of the franchisee association's activities. In particular, through the application of the principle of good faith, it has broadened the scope for protecting the rights and interests of franchisees. The Supreme Court's ruling on the 'related sales amount' will serve as a significant criterion for future calculations of administrative fines related to franchise transactions.

Cheongchul Law Firm has extensive experience and expertise in cases related to the Franchise Business Act. We can provide you with the latest legal advice considering this Supreme Court ruling. If you have concerns regarding refusal to renew franchise agreements, disadvantageous actions related to the franchisee association's activities, or responses to the Fair Trade Commission's decisions, please feel free to contact us. We will do our best to protect your rights and achieve the best results nationwide, including in Seoul.

Cheongchul Law Firm will be your reliable legal partner. If you need to consult with a lawyer specializing in Franchise Business Act issues, please contact us right away.