The Seoul Metropolitan Government on Monday introduced the country's first standardized guidelines for franchise penalty fees to protect small business owners.
Although the Fair Transactions in Franchise Business Act prohibits unfair or excessive penalties, the criteria remain vague.
This lack of clarity has allowed some franchisors to unilaterally impose high penalties or use them to pressure franchisees into maintaining contracts.
An analysis of disclosure documents and franchise contracts from 150 Seoul-based franchisors showed that penalties related to violations of trade secrets or non-compete clauses, among the most common type of charge, averaged some 32 million won ($22,200).
Penalties for early termination averaged 15.44 million won. The city also found numerous cases where franchisors imposed flat penalty amounts regardless of actual losses.
To address these issues, Seoul developed the guideline after consulting legal experts, reviewing dispute cases and conducting field studies.
The guideline clarifies the grounds for imposing penalties and provides a framework to calculate them based on actual damages.
For instance, in cases where franchisees source supplies externally rather than through headquarters, known as “self-procurement,” the guideline proposes calculating penalties using factors such as sales volume, royalty rates, franchise fee ratios, material supply fees and the duration of the violation.
Franchise owners may use the guideline to request reductions if the penalty charged exceeds the maximum suggested amount.
It will also allow prospective franchisees to better anticipate potential financial obligations during contract negotiations, the city explained.
The guideline is available through the Seoul Fair Trade Counseling Center website and is intended to serve franchise headquarters, current franchisees and entrepreneurs preparing to enter the franchise market.
jychoi@heraldcorp.com
