[Legal Focus] ⑬ Franchise That Forced the Sale of PB Products... What Is the Solution for Compliant Management?

Fair Trade Commission sanction calls for a review of franchisee autonomy
Distinguishing essential items and incentive-based approaches as alternatives

It has been pointed out that if a franchise headquarters unilaterally imposes sales targets for its private brand (PB) products on franchisees and penalizes them for failing to meet those targets, it may face legal sanctions. Even in the process of managing franchisees' sales or product sales, preventive compliance management is needed so as not to infringe on the franchise owners' autonomous right of choice.

Attorney Son Kye-jun of Daeryun Law Firm emphasized on the 27th, in connection with a case in which the Fair Trade Commission imposed a penalty surcharge on a franchise headquarters that forced PB product sales targets on franchisees and penalized those failing to meet the targets, "Even if it is the franchise headquarters' business strategy, it must not be operated in a way that infringes on franchisees' autonomous right to choose products."

This sanction is significant in that it is the first case to penalize, among violations of the Fair Transactions in Franchise Business Act, the act of forcing a sales target for a specific product on franchisees.

Whereas control over the franchise headquarters' overall sales or transaction terms had been the main regulatory target until now, this case is interpreted as showing that going forward, the act of effectively forcing the sales ratio of a specific product may also become a legal problem.

Attorney Son said that even when a franchise headquarters seeks to expand PB product sales, it must design its business policy in a way that does not infringe on franchisees' right of choice.

He said, "Even if PB product sales expansion is pursued as a business strategy to secure brand uniformity or profitability, an excessive purchase obligation must not be imposed on franchisees," and "In particular, measures such as suspending product supply or stopping a franchisee's code on the grounds of failing to meet a sales target can go beyond mere sales encouragement and become a legal problem."

Accordingly, according to attorney Son's explanation, a franchise headquarters must clearly distinguish between essential items that must be purchased from headquarters and recommended items that franchisees can choose autonomously.

Even if something is classified as a recommended item in the contract, it can become a problem if purchase is effectively forced or continuously pressured in the actual business field. Attorney Son emphasized, "One needs to periodically check whether the contents stated in the contract match the business methods applied in the actual franchisee operation process."

He advised that promotions to expand PB product sales should also be designed around rewards rather than sanctions. This is a method of inducing autonomous participation by providing incentive payments or additional benefits to franchisees that meet the target, rather than penalizing those that fail to meet it.

In contrast, acts such as limiting the supply of goods or imposing disadvantages on contract renewal on the grounds of failing to meet a target may be interpreted as forced purchasing or the provision of unfair disadvantages to franchisees, so caution is needed.

Attorney Son emphasized that the scope of compliance management must not stop at the contract alone. He said one must scrutinize in detail not only franchise contract clauses but also how headquarters' business promotion guidelines and the contents conveyed by supervisors during the franchisee management process are actually applied in the field.

He said, "It is difficult to justify the act of forcing a sales target for a specific product merely on the grounds that it was customary in the industry in the past," and "It is important to check in advance for contracts and business practices that may infringe on franchisees' autonomy, and, even when sales expansion is necessary, to establish a lawful incentive structure rather than disadvantages."

He added, "As the Fair Trade Commission's inspection of unfair practices in the franchise sector may be strengthened, headquarters need to build a preventive compliance system in advance," and "One must consider not only the penalty surcharge for legal violations but also brand-level damage such as the decline of trust from franchisees and consumers."

Reporter Jeong Ye-jin yejin0311@inews24.com

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