From Seoul, South Korea, where new tech and old relationships collide
Philip F. Zeidman
Illustration by Jonathan Hankin
Columnist note: I traditionally report on the activities of the International Bar Association’s International Franchising Committee during the IBA Annual Conference. Because colleagues Stephanie Zosak and Tao Xu participated in this year’s conference (in September in South Korea), Stephanie filed this report from Seoul.
These conferences are usually a whirlwind but, held in a place that has become known to foreign tourists as a metropolis that never sleeps, this year’s was especially so. In addition to its round-the-clock lifestyle, South Korea also has become synonymous with cutting edge technological innovations. With Samsung and LG actively producing futuristic 8K TVs faster than this country’s cable providers can keep up, it seemed fitting that the International Franchising Committee would feature a program at the conference on the application of blockchain technology to franchising.
Blockchain, at its essence, is a growing list of records (i.e., blocks), each of which is linked to the previous block and contains a timestamp and transaction data. Blockchain was initially invented to serve as a public transaction ledger for Bitcoin, the first cryptocurrency. These days, however, anyone and everyone appear to be extolling the virtues of blockchain beyond cryptocurrency transactions and, as was evident at the conference, the franchise world has been bitten by the blockchain bug.
Blockchain, it is claimed, can be applied to any form of recordkeeping, so the potential uses include not only digital payment, but smart contracts, loyalty programs, database record and supply chain management systems and more. Advantages for franchisors include speed, cost savings, data security, and privacy (a word which could be heard through the halls here).
And these applications are not theoretical; they are being introduced to the marketplace at a brisk pace. Walmart China implemented a blockchain platform a few months ago, in partnership with China’s Chain-store & Franchise Association, to provide traceability of the fresh grocery products in its stores in China. One prediction here: the technology could potentially produce real world mass applications in 18 to 24 months.
Blockchain is one of many new technological developments that have emerged in recent years that could have a profound impact on franchising. To keep up with the times, it is clear franchisors will have to continue to learn a lot of new tricks, but one has to wonder, will technology really address all ills in international franchising? It remains to be seen how technology—blockchain or otherwise—will improve the age-old and fundamental relationship in franchising between the franchisor and the franchisee.
And it is here that we get off the blockchain high-speed train and take a broader but brief survey of the state of the franchisor-franchisee relationship in South Korea. The picture we see is, unfortunately, troubling. On the one hand, it seems that press reports about predatory business practices by some Korean franchisors still abound, despite South Korea having one of the most comprehensive franchise regulatory regimes around the world.
Take the recent press reports about a couple of Korean-based pizza franchisors. Each system has hundreds of franchised outlets in South Korea serving unique (to Western tastes, at least) pizzas to customers. Both brands recently caught the attention of South Korea’s Fair Trade Commission (KFTC) for gapjil—a Korean word representing the abuse of power in a business relationship by someone in a dominant position. The CEO of one brand, who later stepped down in another scandal, was prosecuted for obtaining improper profits by forcing franchisees to buy cheese for higher prices from a supplier owned by the CEO’s family member.
Closer to home, those who have followed the focus on “a fair and reasonable price” for sales by franchisors to franchisees, as interpreted by the Supreme Court of Washington shortly before the conference here, will surely hear echoes.
These revelations predictably prompted the KFTC in 2018 to respond by adopting a series of new regulatory requirements. Among them: the requirement that franchisors disclose in their franchise disclosure documents any mandatory purchase items and mark-ups (e.g., rebates) that franchisors receive from selling such items directly to their franchisees.
Just as predictably, criticism by Korean and foreign franchisors followed swiftly. They voiced concerns about the length and cost of initial and annual registration updates as a result of these additional disclosures, as well as the risk of disclosure of certain trade secrets or other proprietary information.
Earlier this year, the Korea Franchise Association filed a lawsuit with the Korean Constitutional Court, seeking a preliminary injunction against the disclosure in the franchise disclosure document of “franchisee fee difference”—the disclosure of any mark-up—that franchisors receive from their sale of certain mandatory or recommended items to franchisees. The Constitutional Court has delayed the hearing several times. Many observers are of the view that this indicates the Court does not view this debate as sufficiently important to warrant an immediate deliberation to prevent any injury to franchisors. That this requirement has been implemented since early 2019, and most franchisors have already (however begrudgingly) disclosed this sensitive information to the KFTC, seems to bolster this view. It seems safe to assume that the Constitutional Court will not come to the rescue of the franchisor.
Let’s jump back on that blockchain high-speed train. Would the Korean pizza franchisor’s supply chain governed by blockchain have cured all ills in this case? Hardly.
Blockchain surely has its uses, but overcoming the factor of human greed is not one of them. In embracing the virtues of technology, franchisors should not lose sight fundamental relationship issues, or clock their franchise systems’ shortcomings behind the next shiny new thing. Perhaps, franchisors should continue to focus on fixing what is broken first, before moving on to building more blocks.
Philip Zeidman is a partner in DLA Piper’s Washington, D.C., office. Reach him at 202.799.4272 or email@example.com.