[Legal Spotlight] (8) They Promised "10 Million Won Guaranteed per Month" but the Reality Was a Loss... Can I Claim Damages?

False and exaggerated profit promotion, and whether it violates the Franchise Business Act, are the key issues
Attorney Lee Shin-gyu: "Securing evidence and an early response determine victory or defeat"

Franchise start-ups are perceived by retirees and young entrepreneurs as a relatively stable way to start a business, thanks to the advantage of being able to leverage a proven brand and operating system. However, there are not a few cases in which people sign contracts trusting only the headquarters' profit projections, only to face disputes because the actual business environment differs greatly.

According to the legal community, some franchise headquarters recruit prospective store owners by touting high profits such as "10 million won guaranteed net profit per month" or "securing an exclusive local commercial district," but there are continual cases in which owners complain of losses due to a sales structure and operating environment that differ from the promises made after signing.

Attorney Lee Shin-gyu of the law firm Daeryun explained, "The most common type of franchise dispute is one in which expected sales and profits are exaggerated without objective grounds," adding, "If a contract was induced by definitively guaranteeing or exaggerating profits and margin rates, it may constitute the provision of false or exaggerated information under the Franchise Business Act."

The current Franchise Business Act stipulates that a franchise headquarters that is not a small or medium-sized enterprise, or that has 100 or more franchise stores, must provide a written estimate of expected sales. If it guaranteed high profits only verbally without providing this, illegality may be recognized, he explained.

In addition, failing to properly provide the disclosure statement containing information such as the brand's store closure rate and burdens on store owners, or having contracts concluded without sufficient explanation, is also cited as a representative cause of disputes.

The attorney introduced a damages lawsuit case he had handled. In that case, during the contracting process the franchise headquarters presented the high sales and net profit of its head store and stated that it guaranteed a minimum margin rate. The store owner, who invested a large sum trusting this, recorded results that fell far short of the profits the headquarters had presented after actually starting the business, and eventually filed a damages lawsuit.

At trial, the objectivity of the profit projections presented by the headquarters became the key issue. The headquarters was unable to sufficiently present the specific calculation materials for the expected profits and the basis for calculating the minimum margin rate, and the court determined that the profit projection was merely an estimate without objective grounds, recognizing the provision of false and exaggerated information.

The attorney said, "In franchise disputes, securing evidence that can prove what explanations the headquarters gave is most important," adding, "Recordings of phone calls with sales representatives, KakaoTalk conversations, text messages, promotional flyers, and emails can all serve as important materials to prove false or exaggerated explanations."

He continued, "Unlike ordinary civil disputes, claims for the return of franchise fees or for damages require specialized review of the Franchise Business Act," advising, "If there are signs of a dispute, it can help to recover your rights to carefully retrace the contracting process and respond with the help of a legal expert from the early stages."

Reporter Jung Ye-jin yejin0311@inews24.com

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[Legal Spotlight] (8) They Promised "10 Million Won Guaranteed per Month" but the Reality Was a Loss... Can I Claim Damages? (Go to link)