Criteria for Judging the Illegality of Restrained Transaction under the Fair Transactions in Franchise Business Act: focusing on the ʻEssential Itemsʼ

Abstract

In a franchise business, the franchise fee is not only a necessary condition for establishing a franchise agreement between the franchisor and the franchisee, but also a key factor that maintains the franchise system and determines the success or failure of the business. Essential items are items that require franchisees to purchase from the franchisor or a person designated by the franchisor in order to maintain a unified image and the same quality of the franchise business. In general, in case of violation, disadvantages such as suspension of product supply or refusal to extend the contract are provided. Although the designation of these essential items and the receipt of the difference in franchise fee are not illegal as they have legal grounds, disputes related to excessive profits and essential items continue to occur. Therefore, the franchisor has an incentive to designate non-essential items as essential items in order to maintain a unified image and the same quality of franchise business. On the contrary, if the majority of raw and subsidiary materials are individually purchased by franchisees, the existence of the franchise business itself by the franchise headquarters may become impossible. However, it is not easy to review whether all essential items are illegal. Therefore, in order to resolve disputes and conflicts between franchisors and franchisees, it is necessary to closely review them by referring to adequate court decisions and precedents. In order for the franchisor to select essential items, it would be desirable to select them individually by considering the nature, characteristics, use, and function of each item, rather than applying a uniform standard for each item type. First of all, this paper proposes that the franchisors provide franchisees with proper and adequate scope of essential items for business operation. The basic concept and legal issues will be explained in Section 2. Secondly, among the unfair acts that may occur after being designated as essential items, the illegality requirements and related precedents of restrictive transactions under the Franchise Business Act will be reviewed in Section 3. Through this, it aims to clarify the standards for the requirements for determining illegality in relation to essential items to market participants, such as franchisors and franchisees, and contribute to reducing unnecessary disputes and conflicts that may occur in the course of that business.