- Requiring purchases of hand sanitizers and other items solely from the franchisor and not covering the franchisor's portion of remodeling costs; corrective orders and fines imposed -
The Korea Fair Trade Commission (hereinafter referred to as the "FTC") has decided to issue corrective orders and impose a fine (1.48 billion KRW) on Korea Papa John's Co., Ltd. (hereinafter "Papa John's"), the franchisor of the pizza brand “Papa John’s Pizza.” This action addresses Papa John's requiring franchisees to purchase 15 cleaning supplies exclusively from the franchisor and its refusal to cover part of store remodeling costs for franchisees when such renovations were required by the franchisor.
Since July 1, 2015, Papa John's has specified 15 cleaning products, such as hand sanitizers and dish soap, as essential items in its information disclosure statement and franchise agreements. It has limited franchisees' suppliers for these items to only the franchisor. Essential items refer to products that the franchisor mandates franchisees to purchase directly from itself or its designated suppliers.
Moreover, when non-designated cleaning products were found during routine inspections, the franchisor reduced the inspection score and issued warning letters, and if found again, imposed store closures according to its management guidelines.
Under franchise law, for a franchisor’s designation of essential items to be lawful, the item must be essential to the operation of the franchise, necessary for brand protection or maintaining product consistency, and disclosed in advance in the franchise information statement and agreement. However, the 15 cleaning products specified by Papa John's are not directly related to the taste or quality of “Papa John’s Pizza” products, and similar products with equivalent efficacy are available in the market. Therefore, this restriction excessively limited franchisees’ freedom of choice.
Furthermore, between August 2015 and April 2022, Papa John’s required 25 franchisees to remodel their stores but did not cover the franchisor’s legally obligated share of the remodeling costs.
Papa John's issued letters to stores that had operated for more than 10 years from the date of the initial franchise agreement, demanding store remodeling as a condition for contract renewal. If the franchisee agreed, the renewal proceeded; otherwise, the contract was terminated. From 2020, Papa John's created lists of stores subject to renewal, tracked the remodeling schedules and progress for these stores, and had franchisees sign agreements or confirmations accepting the risk of contract termination if they did not complete the remodeling as agreed.
This measure sanctions the franchisor for unjustly mandating non-essential items to be purchased solely from itself and shifting its own remodeling costs onto franchisees. It raises awareness within franchisors against excessive designations of essential items and aims to establish fair trade practices in the franchise sector, promoting reasonable cost-sharing between franchisors and franchisees.
The FTC will continue to rigorously monitor franchisor unfair practices that infringe on franchisees’ freedom of choice and economic interests, and respond strictly when violations are detected.