[Kwon Byeon's Law] 77. The Franchisee’s Non-Compete Obligation

*This content was translated by AI.View Original

The franchise business operates on the premise of trust.

The franchisor provides the brand and operational know-how, while the franchisee pays royalties in return and conducts business according to prescribed methods. However, there are moments when this relationship becomes strained. That is when a store owner decides, "I might as well run the same business under my own name," due to sales falling short of expectations or conflicts arising with the headquarters.

Article 6, Item 10 of the Franchise Business Act stipulates that franchisees must comply with the obligation not to engage in the same industry as the franchisor during the contract period. This means that competing business activities during the contract period are, in principle, not permitted, even if there is no separate clause in the contract (though most franchise agreements do include relevant clauses).

Recent court rulings have applied this principle quite strictly. In one District Court case, a franchisee in the photography and videography business operated a photo studio under another brand during the contract period. The contract stated that the non-compete scope covered "same-industry businesses listed in the disclosure document where trade secrets would be infringed," and the store owner argued that they had not used any trade secrets. However, the court ruled that any industry listed as a same-industry business in the disclosure document is inherently subject to prohibition, and ordered the cessation of operations.

In another District Court case, a barbecue franchisee opened a specialized barbecue restaurant at the same location, changing only the trade name. The court determined it was the same industry, noting that the menu and business methods were quite similar, and fully upheld the 50th million won specified in the contract as "liquidated damages" without any reduction. This was because it was determined that the contract had been implicitly renewed even at the point when the store owner believed the contract period had ended.

Courts look at substance. And a single phrase in the contract, for example whether an amount is designated as pre-estimated damages or liquidated damages, can result in a difference of more than double the amount borne by the store owner. In fact, in the first case, 50 million won was reduced to 25 million won, but in the second case, the full amount was upheld.

From the store owner’s perspective, there may be reasons such as poor sales, excessive demands from headquarters, or livelihood issues. However, these circumstances should be raised during the process of formally settling the contract; they are not easily accepted when used as a defense after having already started competing business activities.

The effort to review the contract, disclosure document, and separately signed confirmation letters before opening a new store can save tens of millions of won. This is because, once a dispute begins, that single document can become the most powerful evidence and shield.

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*This content was translated by AI.View Original