Can a Franchisor Force Franchisees to Purchase New Menu Items? FTC Sanctions in South Korea
Table of Contents
- 1. Why Is Forced Purchase of New Menu Ingredients Illegal?
- 2. What’s Wrong with Providing Nationwide Average Sales as Projected Revenue?
- 3. When Does Forcing Specific Suppliers Become Unfair Practice?
- 4. How Are Excessive Damage Clauses Evaluated?
- 5. How Can Franchisees Respond to Unfair Practices?
- 6. FAQ
Real Case: In July 2025, Darum Plus, operator of the beef brisket specialty franchise “Ichadol” in South Korea, received a corrective order from the Fair Trade Commission. The issue was bulk delivery of new menu ingredients to franchisees without consent and refusing returns. Between 2019 and 2022, 251 franchise stores were affected by these practices. If you’re a franchise owner in Korea, shouldn’t you know exactly what conduct violates the law?
Why Were 251 Franchise Stores Affected?
From July 2020 to June 2022, Darum Plus launched 11 new menu items and bulk-delivered 17 types of ingredients to all franchise stores without any orders from franchisees. The inventory burden for new menu items with unknown consumer preferences fell entirely on the franchisees. The Fair Trade Commission determined this violated the Franchise Business Act through its resolution on July 18, 2025 (Resolution No. 2025-154). This case involved four types of violations: forced purchase, false/exaggerated information provision, supplier restriction, and unfair damage compensation clauses. Let’s examine each violation type and its legal standards in detail.
1. Why Is Forced Purchase of New Menu Ingredients Illegal?
Key Answer
Bulk delivery of new menu ingredients without franchisee consent or voluntary orders, combined with refusing returns, constitutes “forced purchase” under Article 12(1)(3) and Attached Table 2, Item 3(a) of the Enforcement Decree of South Korea’s Franchise Business Act. This forces franchisees to purchase goods exceeding their business needs and is an unfair trade practice that undermines fair transactions in franchise business.
Forced Purchase Conduct in the Ichadol Case
According to the FTC resolution, Darum Plus launched 11 new Ichadol menu items from July 6, 2020 to June 20, 2022, bulk-delivering 17 types of ingredients to all franchise stores without franchisee consent or orders. The bigger problem was refusing returns. As a result, franchisees bore not only the responsibility of selling new menu items but also the burden of inventory for unsold ingredients.
Legal Standards for Forced Purchase
Attached Table 2, Item 3(a) of the Franchise Business Act Enforcement Decree defines forced purchase as “forcing franchisees to purchase or lease facilities, equipment, goods, services, raw materials, or subsidiary materials unrelated to franchise business operations or exceeding operational needs.” For new menu launches, even if nationwide unified product launches are necessary, bulk delivery without franchisee consent and voluntary orders, combined with refusing returns, is illegal.
Practical Implications
This case clarified the legal limits of common new menu launch practices in food service franchises. Franchisors must consider individual franchisees’ business situations and required quantities when launching new menus; unilateral allocation and return refusal are not permitted. Franchisees should clearly express refusal in writing for such forced deliveries and secure relevant evidence.
2. What’s Wrong with Providing Nationwide Average Sales as Projected Revenue?
Key Answer
Under Article 9(5) and Article 9(3) of the Enforcement Decree of South Korea’s Franchise Business Act, projected revenue must be calculated based on expected sales at “the prospective franchisee’s planned store location” for one year. Uniformly providing nationwide franchise average sales fails to reflect individual store characteristics and constitutes false/exaggerated information provision under Article 9(1)(1) of the Franchise Business Act.
False Information Provision in the Ichadol Case
Darum Plus contracted with 251 prospective franchisees from January 3, 2019 to December 29, 2022, providing projected revenue based on the nationwide average sales of all franchise stores. According to the FTC resolution, for 116 franchise contracts signed from January to November 2019, stores in Seoul Gangnam and Chuncheon, Gangwon Province all received the same projected revenue range of “KRW 5,086~8,477 thousand per 1㎡ of exclusive floor area annually.”
Statutory Method for Calculating Projected Revenue
Article 9(4) of the Franchise Business Act Enforcement Decree specifies the calculation method for projected revenue. If there are 5 or more franchise stores in the city/province where the prospective franchisee’s planned store is located, the range should be calculated based on sales from the 3 nearest franchise stores after excluding the highest and lowest performers among the 5 nearest stores. This provision reflects individual market characteristics.
Standards for Determining False/Exaggerated Information
According to Supreme Court precedent (Case No. 2012Du22560), whether information about future earnings is false or exaggerated should be determined based on “the rationality and appropriateness of future earnings predictions and the accuracy of explanations.” In this case, the FTC confirmed that Darum Plus’s projected revenue information failed to consider individual store characteristics, falsely stated compliance with the Enforcement Decree, and showed inflated figures in some regions compared to actual performance.
3. When Does Forcing Specific Suppliers Become Unfair Practice?
Key Answer
Under Article 12(1)(2) and Attached Table 2, Item 2(b) of the Enforcement Decree of South Korea’s Franchise Business Act, forcing specific suppliers for items not essential to franchise business operations or unnecessary for trademark protection and quality consistency is unfair supplier restriction. However, exceptions may apply if disclosed in advance through the Information Disclosure Statement and included in the contract.
Products at Issue in the Ichadol Case
Darum Plus forced franchisees to purchase foil insulated bags (March 4, 2020 ~ September 3, 2024), tteokbokki container sets (July 11, 2023 ~ September 3, 2024), and spoon/chopstick sets (August 6, 2021 ~ present) exclusively from itself. The FTC determined these items were not essential to the beef brisket specialty food service franchise business and that similar substitute products could easily be purchased in the market, so there was no justification for requiring purchase from a specific supplier.
Standards for Determining Illegality of Supplier Restriction
The proviso of Attached Table 2, Item 2(b) of the Franchise Business Act Enforcement Decree specifies three requirements for exceptionally permitted supplier restrictions: first, the items must be objectively recognized as essential to franchise business operations; second, it must be objectively recognized that trademark protection and quality consistency cannot be maintained without trading with specific suppliers; third, the franchisor must disclose this in advance through the Information Disclosure Statement and execute the contract. All three requirements must be satisfied.
Can Items with Business Marks Still Not Be Forced?
In the Ichadol case, the spoon/chopstick sets were printed with the “Ichadol” business mark. However, the FTC determined that even for items bearing business marks, restricting purchasing sources for general consumer-provided items may constitute unfair supplier restriction. This clarified that the mere presence of a business mark does not justify forcing specific suppliers.
4. How Are Excessive Damage Clauses Evaluated?
Key Answer
Article 12(1)(5) of South Korea’s Franchise Business Act prohibits “imposing excessive penalties compared to the purpose and content of the contract and expected damages as prescribed by Presidential Decree, or otherwise unfairly imposing damage compensation obligations on franchisees.” Clauses setting compensation significantly exceeding actual damages or imposing liability for matters beyond franchisee fault are illegal.
Damage Compensation Clauses in the Ichadol Case
Darum Plus included two problematic clauses in franchise contracts from January 2, 2019. First, a clause requiring payment of triple the unauthorized purchase amount as damages when franchisees purchased required items through other channels. Second, a clause requiring franchisees to compensate for damages caused by franchise store employees’ fault regardless of whether the franchisee exercised due care and supervision over employees.
Actual Damage Claims
The more serious issue was that Darum Plus actually enforced these clauses. According to the FTC resolution, Darum Plus filed damage claims against 2 franchisees caught making unauthorized purchases under these contract clauses, arbitrarily estimating the unauthorized purchase amounts going back to store opening and claiming triple damages.
Standards for Determining Unfair Damage Compensation
The FTC determined that even if damage compensation clauses are specified in the contract, imposing excessive compensation obligations violates the law, and actually claiming damages under such clauses also violates the law. This confirmed that despite principles of contractual freedom, the Franchise Business Act sets certain limits to protect franchisees.
5. How Can Franchisees Respond to Unfair Practices?
Key Answer
Franchisees can report franchisor unfair practices to the Fair Trade Commission under Article 32 of South Korea’s Franchise Business Act. Securing relevant evidence and specifying violations before filing is effective. If violations are confirmed, the FTC can take measures including corrective orders and penalty surcharges.
Preparation for FTC Reports
Effective reporting requires first securing evidence: franchise contracts, projected revenue statements, product supply records, bulk delivery notices, return refusal records, etc. Next, specifically identify the violations: when the conduct occurred, what the conduct was, and which legal provisions were violated. Calculating the extent and amount of damages in detail also helps the investigation.
Corrective Orders in the Ichadol Case
The FTC imposed four corrective orders on Darum Plus. First, prohibition of false/exaggerated projected revenue information. Second, immediate cessation and prevention of forced supplier restriction for spoon/chopstick sets, tteokbokki container sets, and foil insulated bags. Third, prohibition of forced purchase of new menu ingredients. Fourth, immediate cessation and prevention of excessive damage compensation clause application. Additionally, the FTC ordered written notification of the legal violation to all current franchisees.
Penalty Surcharges and Exemption
The FTC determined that three violations—forced purchase, false/exaggerated information provision, and supplier restriction—warranted penalty surcharges. However, considering that Darum Plus was undergoing rehabilitation proceedings, the FTC decided to exempt penalty surcharges. This represents an adjustment of sanctions for companies in rehabilitation, comprehensively considering the severity of legal violations and the company’s financial situation.
6. FAQ
Atlas Legal has extensive practical experience in corporate disputes and fair trade matters. If you need assistance with franchise business disputes or responses to unfair practices in South Korea, we provide specific legal advice tailored to your situation.
※ This article is based on the Fair Trade Commission press release (July 27, 2025) and resolution (Resolution No. 2025-154, July 18, 2025). Legal determinations for individual cases may vary depending on specific facts and circumstances. Please consult with professionals for your specific situation.