Hello, I am Attorney Kim Gwang-sik from Cheongchul Law Firm.

The franchise business model is one that grows based on trust between the franchisor and the franchisee. To this end, the franchisor establishes certain standards and operational policies, but during this process, there can be issues that excessively restrict the autonomy of the franchisee. To prevent this, the "Act on Fair Transactions in Franchising (Franchise Act)" regulates various unfair trading practices, particularly imposing strict prohibitions on 'conditional transactions.' This article will specifically examine the significance and legal basis of conditional transactions, the main types, criteria for determining illegality, and practical issues.

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Conditional transactions refer to actions in which the franchisor unjustly restricts the franchisee's business activities or coerces specific trading conditions. Article 12, Paragraph 1, Item 2 of the Franchise Act prohibits "actions that unjustly restrict or bind the franchisee's business activities such as the prices of goods or services handled by the franchisee, trading partners, trading regions, or other conditions," and Article 13, Paragraph 1 of the Enforcement Decree of the same law and [Appendix 2] specify the detailed types and criteria for conditional transactions. These regulations are designed to prevent the franchisor from infringing on autonomy under the guise of maintaining brand consistency and quality, which we will examine in detail below.

1. Specific Types of Conditional Transactions

   Conditional transactions can be divided into four main types.

   First, price restrictions. This refers to actions that unjustly restrict the franchisee by setting the price of goods or services sold by the franchisee without a valid reason and forcing them to maintain that price, or by unduly restricting the franchisee's ability to determine the price of the goods or services. An example would be when the franchisor unilaterally sets the price for the goods or services sold by the franchisee or unduly limits their pricing freedom. The court recognized that forcing the franchisee to maintain the delivery fee for basic transactions at 0 won without specifying any obligations, duration, or cost-sharing by the franchisor in a special clause of the franchise agreement constitutes a price restriction prohibited by the Franchise Act (Suwon District Court, 2023GaDan568009 judgment).

   Second, restrictions on trading partners. This refers to actions that improperly compel the franchisee to transact with a specific trading partner (including the franchisor) in relation to real estate, services, equipment, goods, raw materials, or subsidiary materials. A representative example is when the franchisor designates a specific supplier and restricts the franchisee from using other suppliers. The court ruled that a case where a chicken franchise franchisor forced franchisees to produce flyers only through a specific company constituted a restriction on trading partners (Seoul High Court, 2021Nu52572 judgment).

   Third, restrictions on trading areas. This refers to actions that involve establishing a directly operated store or a franchise within the same business sector as the franchisee's operating area without valid reasons. Actions that restrict the franchisee's operational area without valid reason or open directly operated stores or other franchises in that area fall under this category. Such actions can severely violate the franchisee's freedom to operate.

   Fourth, restrictions on business activities. This refers to restrictions set by the franchisor concerning operational hours, number of operation days, marketing methods, and other business operation matters without justification. This can severely hinder the management freedom that franchisees should have as independent business operators.

2. Criteria for Determining the Illegality of Conditional Transactions

   The determination of whether a conditional transaction violates the Franchise Act is centered around 'unfairness.' Regarding general criteria for assessment, the court stated, "The legal effect should be assessed not in a general or uniform manner but should individually be determined based on the intent and nature of the Franchise Act, the content of each prohibitive regulation, the degree of violation of the Franchise Act, and the degree of confusion in legal relations caused by nullifying such actions, considering principles of justice and equity." (Suwon District Court, 2023GaDan568009 judgment).

   More specifically, in assessing the unfairness of trading partner restrictions, it should be determined whether the act of the franchisor requiring the franchisee to purchase promotional materials such as brochures only from themselves or specific trading partners constitutes an unfair restriction. Various factors, including the content of the franchise agreement, payment methods for franchise fees or purchase prices, general trading practices within the same industry, needs for maintaining a unified image of the franchise, protecting trademarks, or ensuring the identity of goods or services, and whether the franchisee was informed through a disclosure document beforehand about needing to transact with a specific trading partner must be comprehensively considered (Seoul Central District Court, 2023Na40122 judgment).

3. Exceptions to Conditional Transactions That Are Allowed

   Article 2, Item (b) of the Enforcement Decree of the Franchise Act stipulates the following exceptions for trading partner restrictions.

   1. It must be objectively recognized as essential for managing the franchise that real estate, services, equipment, goods, raw materials, or subsidiary materials are necessary.

   2. It must be objectively recognized that if not transacting with a specific trading partner, it would be difficult to protect the franchisor's trademark and maintain the identity of the goods or services.

   3. The franchisor must inform the franchisee of this fact in advance through a disclosure document and enter into a contract with the franchisee.

   In practice, the court ruled that actions related to requiring a franchisor to conduct advertisements only through specific companies, when considering factors such as ① the necessity of advertisements for managing the franchise, ② the need to unify advertising responsibilities for securing a consistent franchise image, and ③ the fact that the responsibility for franchise advertisements is documented in disclosure documents and franchise agreements, meant that such actions fell under the exceptions (Seoul Central District Court, 2023Na40122 judgment). In a case where the franchisor required the franchisee to solely obtain meat supplies from a designated company, it was ruled that maintaining the consistency of meat quality among franchisees was a crucial aspect for franchises selling meat-based foods, making such exclusive demands more or less inevitable (Seoul High Court, 2018Na2021119 judgment).

4. Conclusion: Practical Implications of Regulating Conditional Transactions

As can be seen from the above review of the Franchise Act and related cases, the regulation of conditional transactions is a key mechanism for maintaining balance between the franchisor and the franchisee. Even when striving to achieve legitimate goals such as brand image and quality maintenance, franchisors must operate cautiously without infringing on the operational autonomy of franchisees.

In particular, when it is necessary to designate essential items or restrict trading partners, transparency must be ensured through pre-information disclosure and clear contract documentation, and limitations can only be justified based on specific and reasonable grounds.

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