Sanctions against Papa John’s Korea Co., Ltd. for forcing essential items and transferring remodeling costs
The Fair Trade Commission (Chairman Han Ki-jung, hereinafter referred to as the “FTC”) decided to impose a corrective order, an order to pay remodeling costs, and a fine (KRW 1.482 billion) on Papa John’s Korea Co., Ltd. (hereinafter referred to as “Papa John’s”), the franchise headquarters of the pizza brand “Papa John’s Pizza,” forcing it to purchase 15 types of cleaning products only from the franchise headquarters and for passing on the costs of store remodeling to franchisees.
From July 1, 2015 to the present, Papa John’s has designated 15 types of cleaning products, including hand sanitizers and kitchen detergents, as essential items* based on the information disclosure document and franchise agreement, and has restricted franchisees’ business partners to purchase the items only from the franchisor. [① Enforcing Essential Items]
In addition, if the head office detects the use of cleaning products not designated by the head office through regular store audits, the head office deducts audit points and sends a warning letter. In addition, the head office operates store management guidelines that suspend business in
case of repeated detections.
According to the Franchise Business Act, in order for the franchisor’s designation of essential items to be legal, the items must be essential to the operation of the franchise business, necessary for trademark protection and maintaining product identity, and this must be notified in advance through an information disclosure document and entered into a franchise agreement. However, the 15 types of cleaning products designated by Papa John’s were not directly related to the taste or quality of ‘Papa John’s Pizza’ products, and cleaning products with similar efficacy were readily available on the market, excessively limiting franchisees’ choices.
Meanwhile, Papa John’s did not pay franchisees the remodeling costs that the franchise headquarters is responsible for as stipulated by law, even though it required 25 franchisees to remodel their stores from August 2015 to April 2022. [② Passing on store remodeling costs]
The percentage of remodeling costs borne by the franchise headquarters: 20% (40% for store relocation/expansion).
Papa John’s sent an official letter to stores that had been over 10 years since the initial franchise agreement date, requesting store remodeling as a condition of contract renewal. If the franchisee accepted, the renewal was processed, but if the franchisee did not accept, the contract was terminated. In addition, Papa John’s created a list of stores subject to contract renewal starting in 2020, managed the remodeling date and progress, and received a promise from the franchisee to complete the remodeling and had them write an agreement or confirmation stating that they would be responsible for contract termination if they did not keep it.
This measure strictly sanctions the franchisor forcing franchisees to purchase non-essential items and passing on the remodeling costs that the franchisor should bear to the franchisees. The significance of this measure is that it eradicates the franchisor’s excessive practice of designating essential items and establishes a fair trade order in the franchise industry by rationally sharing the remodeling costs between the franchisor and the franchisees.
The Fair Trade Commission plans to continue to thoroughly monitor unfair practices by franchisors that infringe on the free decision-making rights and economic interests of franchisees and respond sternly when violations of the law are discovered.
Editor. Hong Se-yeong
