[Exclusive] 247 Kyochon Chicken Franchise Owners File Lawsuit for Refund of 'Difference in Franchise Fees'

Franchisees of Kyochon Chicken have filed a lawsuit against the headquarters demanding the return of differential franchise fees they received without separate agreements. This has drawn attention as lawsuits from franchisees of bhc, Baskin Robbins, Puradak, Lotte Super, and others have followed after Pizza Hut franchisees won a second trial in September last year regarding the return of differential franchise fees.

If the franchise headquarters lose the case, they will have to return all differential franchise fees received from franchisees that have not yet expired under the statute of limitations, which could cause significant operational damage. Korea Pizza Hut, which lost in the second trial and is required to return 21 billion KRW in differential franchise fees, is currently undergoing corporate rehabilitation procedures.

Kyochon Pangyo New Headquarters. Provided by Kyochon F&B

According to the legal community on the 20th, 247 Kyochon Chicken franchisees, including Mr. A, filed an unjust enrichment claim lawsuit on the 17th at the Seoul Central District Court against Kyochon F&B Co., Ltd., the Kyochon Chicken franchise headquarters, demanding the return of 1 million KRW each in differential franchise fees.

Differential franchise fees refer to the difference, or distribution margin, between the appropriate wholesale price and the amount the franchise headquarters charges franchisees for supplying various goods. The Constitutional Court ruled that differential franchise fees within the appropriate wholesale price should be excluded from franchise fees because the headquarters simply restricts suppliers to maintain uniformity in the franchise business. However, amounts exceeding the appropriate wholesale price must be included as franchise fees under the Franchise Business Act. In 2018, the enforcement decree of the Franchise Business Act was amended to require disclosure of differential franchise fees by item in the franchise business information disclosure document, and last year, the Franchise Business Act was revised to make matters related to differential franchise fees mandatory entries in franchise contracts.

Franchisees from all over the country, including Seoul, Gyeonggi, Busan, and Gwangju, participated as plaintiffs in this lawsuit. The franchisees have paid differential franchise fees based on the ratio of differential franchise fees to sales. Therefore, the amount each franchisee should receive from the headquarters varies depending on the operation period, sales, and whether the statute of limitations for unjust enrichment claims has expired. The plaintiffs clarified that this is a partial explicit claim and initially demanded the minimum amount of 1 million KRW plus interest from the day after the delivery of the complaint copy until payment. The plaintiffs plan to specify and expand the claim amount for differential franchise fees to be returned as annual disclosure documents become available.

According to the disclosure document prepared by the Kyochon Chicken franchise headquarters and registered with the Fair Trade Commission, the average differential franchise fee paid per Kyochon Chicken franchise in 2023 was approximately 10.265 million KRW, with an average ratio of differential franchise fees to sales of 1.479%. This is a significant increase compared to 2019, four years earlier, when the average differential franchise fee per franchise was about 6.509 million KRW, and the ratio to sales was 0.997%.

The franchisees stated in the complaint, "For the headquarters to receive differential franchise fees, there must be an agreement between the headquarters and the franchisees, but there is no such agreement anywhere in the franchise contract," and argued, "Receiving differential franchise fees without a separate agreement constitutes unjust enrichment and must be returned."

Earlier, in September last year, the Seoul High Court ruled in favor of 94 Korea Pizza Hut franchisees in a second trial against the headquarters regarding the return of differential franchise fees, increasing the unjust enrichment amount recognized in the first trial from 7.5 billion KRW to 21 billion KRW. The court reasoned that "for the headquarters to receive differential franchise fees, there must be a separate agreement, but the franchise contract does not explicitly stipulate differential franchise fees, nor is there any other basis or agreement justifying the headquarters' receipt of such fees."

The court also rejected the headquarters' argument that "if differential franchise fees included in the cost of raw or subsidiary materials must be returned, it would unjustly allow the plaintiffs to use the costs, time, and value incurred by the defendant in supplying those materials without appropriate compensation," stating that "the plaintiffs' claim for the return of differential franchise fees does not contradict the principles of equity and justice, which are the essence of the unjust enrichment system."

The lawsuits for the return of differential franchise fees by franchisees are being led by Law Firm YK, which has expanded its scale since entering the top seven domestic law firms last year. Franchise headquarters have hired firms such as Kim & Chang (bhc) and Bae, Kim & Lee (Pizza Hut) to defend themselves.

Lee In-seok, the lead attorney at Law Firm YK, said, "This is a process to correct structural problems arising in the relationship between the headquarters and franchisees beyond mere monetary returns," adding, "We will do our best to clarify the responsibilities of the headquarters and protect the rights of franchisees."