Advisory Case on Responding to a Korea Fair Trade Commission Investigation and Reorganizing Supporting Materials Regarding Provision of Estimated Profit Information to Franchisees

1. The Client's Situation

The client is a company operating a franchise business that, on the grounds that the sales- and profit-related information presented during the franchisee-recruitment process constituted the provision of false or exaggerated information, was reported to the Fair Trade Commission (FTC) and became subject to an investigation. The complainant claimed that the sales and net-profit examples of a specific franchise outlet provided before the conclusion of the franchise agreement presented profit information exaggerated beyond reality. Accordingly, the client received a request to explain whether it had violated the prohibition on providing false or exaggerated information under the Franchise Business Act, and because the matter was also linked to an existing civil dispute, a response strategy and organization of materials were needed. In particular, how to explain and prove the actual sales structure and cost structure emerged as the key issue.

Your Legal Team first reviewed the criteria for applying the information-provision regulations under the Franchise Business Act, and designed a response structure centered on whether the profit data presented by the client was based on objective operating examples. Based on actual franchise-outlet operating data, the team systematically distinguished the sales-component items and cost items, and refined the explanatory materials so as to be able to explain that the net-profit calculation method was reasonable. In addition, considering the consistency with the civil lawsuit in progress simultaneously with the response to the FTC investigation, the team advised composing the content and logic of the submitted materials consistently. In this process, the team also organized the actual records of the support provided—such as franchise-outlet operating support, marketing, and management support—and prepared a response strategy to emphasize that this was the sharing of actual operating examples rather than mere profit promotion.

By submitting explanatory materials that systematically organized objective sales data, the cost structure, and the records of actual franchise-outlet operating support, the client established a basis on which to respond concretely to the complainant's claims. In particular, by explaining the reasonableness of the profit-calculation method based on the actual operating performance and cost structure of franchise outlets, the client was able to persuasively present that this was not the provision of false or exaggerated information. Through this, the client achieved the effect of simultaneously organizing its response to the FTC investigation and to the civil dispute, and it became an opportunity to more clearly arrange the manner of providing information in the course of operating the franchise business going forward.

Your Legal Team provides comprehensive advice on the various legal risks that arise in the course of corporate operations, including responding to franchise-business disputes, responding to FTC investigations, designing franchise-agreement structures, and reviewing disclosure statements and franchise-recruitment materials.