Abstract

Territorial encroachment problems are common to most franchise systems approaching maturity in their life-cycle. Encroachment, because of its destructive effects on franchisee sales, brings in serious conflicts between franchisor and its franchisees. It sometimes leads to time-consuming disputes incurring huge legal costs, damages the reputation of the franchise brand, and ultimately threats the stability and growth of the franchise system. For this reason, most franchisors seek to balance their desire for system growth and the negative effects on franchisee profitability and the system stability. This study purports to explore constructive solutions for the encroachment problem in Korean franchise industry. It undergoes enormous restrictions on the encroachment practices by the recently renewed Franchise Law of the Korea Fair Trade Commission(KFTC). The author discusses the various definitions and forms of encroachment, and reviews the judicial decisions addressing the illegality of encroachment practices, mostly in terms of the applicability of the implied covenant of good faith and fair dealing. Next the author raises some critics on current harsh restrictions imposed by the regulatory agency. Finally, based on the extant research and the legal theories, the author suggests some directions for resolving encroachment-related conflicts in a constructive way. Basically this study insists that legislative and regulatory approaches to the issue of encroachment are not desirable because the issue falls within the realm of franchisor’s strategic choice. It is believed that these approaches are not firm-specific, thus failing to protect franchisees effectively. Rather, it is recommended that franchisor’s institutionalized self-regulatory efforts are more appropriate for resolving encroachment problems. These efforts include the development of dispute settlement policies and operating programs, a clear and concrete specification of the exclusive territorial rights in the Franchise Disclosure Document, and the development of industry-wide self-regulation programs including the mediation and arbitration programs initiated by the franchise association. It is expected that these efforts will help franchisors resolve conflicts with minimal legal costs and franchisee complaints and maintain the systems with collaborative and successful relationships with their franchisees.

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