Franchise Non-Compete Ruling Upholds 50 Million Won

By Olivia Hart

According to STARNEWS, a District Court upheld 50 million won in contractual “liquidated damages” in full because the franchise agreement had been implicitly renewed. The case involved a barbecue franchisee who opened a specialized barbecue restaurant at the same location and changed only the trade name, although the owner believed the contract period had ended.

STARNEWS’s 77th “Kwon Byeon’s Law” column examines two District Court decisions that focus on the substance of each competing operation rather than its label. The source does not identify either case by name, date or appeal status, which limits how far the rulings can support a broader claim about franchise-law precedent.

The franchise relationship, as STARNEWS describes it, rests on an exchange: the franchisor provides the brand and operating know-how, while the franchisee pays royalties and follows prescribed methods. When sales fall short or conflict with headquarters emerges, an owner may think, “I might as well run the same business under my own name,” according to the source.

What does the statute require?

Article 6, Item 10 of the Franchise Business Act requires franchisees to comply with the obligation not to engage in the same industry as the franchisor during the contract term. STARNEWS says competing activities are prohibited in principle even without a separate contract clause, although most franchise agreements include relevant language.

The statutory restriction operates only during the contract period. STARNEWS therefore treats the timing and status of renewal as central to a dispute rather than a peripheral detail.

What made the photography studio a violation?

In one District Court case reviewed by STARNEWS, a franchisee in photography and videography operated a photo studio under another brand during the contract period. The agreement defined the non-compete scope as covering “same-industry businesses listed in the disclosure document where trade secrets would be infringed.”

The owner argued that no trade secrets had been used. The court nevertheless held that every industry listed as a same-industry business in the disclosure document was inherently prohibited and ordered the franchisee to cease operations.

Disclosure status alone carried more weight in that ruling than the owner’s trade-secrets argument.

Why did the barbecue restaurant trigger full damages?

In another District Court case reviewed by STARNEWS, a barbecue franchisee opened a specialized barbecue restaurant at the same location and changed only the trade name. The court found the menu and business methods sufficiently similar to treat the new restaurant as the same industry.

The court also found that the franchise contract had been implicitly renewed at the point the owner believed the term had ended. It therefore upheld the full 50 million won designated as “liquidated damages” and allowed no reduction.

A new name did not change the business, and an owner’s belief about expiry did not end the contractual obligation.

How did damages vary by more than double?

STARNEWS says courts look at substance, and a single phrase in the contract can change the financial burden on a store owner by more than double. The source identifies “pre-estimated damages” and “liquidated damages” as examples of labels that can produce a material difference.

• Photography case: A 50 million won award was reduced to 25 million won.
• Barbecue case: The full 50 million won was upheld as “liquidated damages.”

The source does not specify which label appeared in the first case or identify every reason for its reduction. Its examples establish a two-to-one spread, 25 million won against 50 million won, rather than proving that wording alone caused either result.

Contract labels deserve scrutiny, but the source does not isolate them as the sole cause of the different outcomes.

Can hardship explain competing operations?

STARNEWS identifies poor sales, excessive demands from headquarters and livelihood issues as possible reasons a store owner may compete. The source says those circumstances should be raised during the formal process of settling the franchise contract.

They are not easily accepted as a defense after the owner has already begun competing operations. STARNEWS gives no example of a court accepting those reasons after launch, so the article supports a negotiating rationale rather than a legal safe harbor.

Hardship belongs in contract settlement, not in a post-launch defense.

Which documents should owners review first?

STARNEWS recommends reviewing the franchise contract, disclosure document and separately signed confirmation letters before opening a new store. The source says this step can save tens of millions of won because, once a dispute begins, a single document can become the strongest evidence and a legal shield.

That advice is risk control, not a guarantee. Neither document review nor an owner’s belief can guarantee that a court will find an agreement expired or a competing business outside the restricted industry.

For franchisees weighing a rival store, the decisive work occurs before opening: review the contract, disclosure document and signed confirmation letters, and establish whether the franchise relationship has been renewed. A later dispute is likely to turn on those documents and the actual competing operation, not hardship alone.