[Choi Seok-jin's Law & Biz] Five Key Issues in the Differential Franchise Fee Lawsuit Seen Through the Pizza Hut Case

The core issues in the refund lawsuit for differential franchise fees revealed in the Pizza Hut case can be summarized into about five points.

First, whether the franchisor must have a separate agreement to receive differential franchise fees.

Franchisors argue that under the interpretation of the Franchise Business Act, they can receive such fees without a separate agreement, whereas franchisees insist that a separate agreement is mandatory.

The second trial court in the Pizza Hut case stated, “The Franchise Business Act specifically lists types of franchise fees without regard to their names or payment forms. Franchise fees are generally paid in monetary form, but the benefits provided by the franchisor in exchange for the fees vary, including franchise operation rights, support and training for business activities, real estate, goods, etc. Therefore, agreements regarding franchise fees must be made for each type of benefit provided by the franchisor.”

The court also noted, “The 2024 amendment to the Franchise Business Act added provisions related to differential franchise fees to the contents required in franchise contracts and stipulated in the supplementary provisions that existing franchise contracts must include related contents within six months from the enforcement date of the amended law. This should be seen as a clear indication that agreements regarding differential franchise fees are essential items to be recorded in franchise contracts.”

Second, whether there was an explicit or implicit agreement between the franchisor and franchisee regarding the differential franchise fees.

This is an area where different judgments may arise depending on the individual contract details or other circumstances of each franchisee within each franchise company currently involved in litigation, even within the same brand.

However, the second trial court in the Pizza Hut case found that such an agreement could not be recognized in Pizza Hut’s case. Citing a Constitutional Court decision, the court also ruled that implicit agreements between franchisors and franchisees could not be acknowledged.

Previously, in 2021, the Constitutional Court dismissed a constitutional complaint filed by franchisors claiming that the provision in the enforcement decree of the Franchise Business Act requiring disclosure of differential franchise fees in the information disclosure document infringed on their freedom to conduct business. The court stated, “Considering that differential franchise fees are the franchisor’s main source of revenue and represent profits derived from costs actually incurred by franchisees, this is a part that franchisees or prospective franchisees need to know more than other franchise fees.”

The court referenced this decision, stating, “To consider that franchisees have the intention to pay differential franchise fees included in the payment for raw and subsidiary materials, or that information about differential franchise fees was provided to franchisees, franchisees must at least be aware of the differential franchise fees or be provided with information about them.”

Third, the scope of unjust enrichment recognition and the statute of limitations issue.

Assuming the franchisor’s obligation to refund differential franchise fees is recognized, the question arises as to how far back franchisees who have maintained franchise contracts for several years to over a decade can retroactively claim refunds for differential franchise fees.

In the Pizza Hut case, the second trial court ordered payment of differential franchise fees estimated based on disclosed information not only after the time when franchisees could confirm the amount of differential franchise fees under relevant laws but also for the period before that. However, this was due to the franchisor’s failure to properly comply with the court’s order to submit related materials, so it is uncertain whether the same judgment will be made in other cases.

The statute of limitations can also be an issue related to the scope of unjust enrichment recognition.

In the Pizza Hut case, franchisees claimed differential franchise fees up to five years prior to the filing of the lawsuit. The court regarded the franchisor’s obligation to refund differential franchise fees as a “debt arising from commercial transactions” and applied the commercial statutory interest rate of 6% per annum.

Furthermore, the court applied the commercial statutory interest rate, not the civil statutory interest rate, to delayed damages, stating, “The unjust enrichment refund claims filed by the plaintiffs arise from the franchise contracts, which are commercial transactions between the plaintiffs and the defendant, and there is a need to promptly resolve the related business relationships.”

While the statute of limitations for commercial claims arising from commercial transactions is five years, the statute of limitations for civil claims is ten years. Since unjust enrichment refund claims are claims stipulated by civil law, franchisees may argue for the more favorable ten-year statute of limitations.

Meanwhile, the statute of limitations runs from the time the right can be exercised. In future lawsuits, the starting point for the statute of limitations, i.e., when franchisees can exercise their unjust enrichment refund claims, may also become an issue.

Fourth, the burden of proof issue.

In the Pizza Hut case, the court rejected the franchisor’s argument that costs should be deducted, based on the information asymmetry that the franchisor holds all information related to differential franchise fees and that if differential franchise fees were not received, Pizza Hut headquarters could easily prove it but failed to submit related materials. The court recognized the amount of differential franchise fees estimated by the franchisees.

However, the franchisor argued, “It is not the franchisor who must prove the deductible costs, but the franchisees who must prove the ‘appropriate wholesale price,’ which is the price the franchisee could obtain through a third party other than the franchisor, i.e., the price at which the franchisee can purchase the goods through normal business transactions, and compare it with the current purchase price through the franchisor. This aligns with the definition of differential franchise fees.”

For the same reason, they also claim, “The differential franchise fees stated in the information disclosure document are problematic because they are calculated based on the franchisor’s procurement price, i.e., the price the franchisor pays to purchase the goods from other businesses, not based on the appropriate wholesale price.”

The last, fifth issue is the claim to prohibit refusal of renewal.

Some franchisees filed lawsuits against the franchisor claiming refunds of differential franchise fees and simultaneously requested a prohibition on refusal of contract renewal on the grounds of filing the lawsuit but later withdrew this request due to litigation costs and other issues.

Franchisees argue, “Claiming refunds of differential franchise fees is exercising a legitimate right, and refusing contract renewal on this basis violates the Fair Trade Act and the contract, as well as being unjust and inequitable.”

As grounds for the prohibition claim, they cite Article 108 (Prohibition Claims, etc.) of the Fair Trade Act, which allows those who have suffered or may suffer damage from unfair trade practices violating the Fair Trade Act to request prohibition or prevention of infringement against the business operator or business association committing or likely to commit such violations, and Article 9 of the franchise contract, which stipulates that renewal refusal is allowed only under certain circumstances such as “delay in payment obligation.”

Meanwhile, Article 13 of the Franchise Business Act stipulates that franchisees with franchise contracts not exceeding 10 years who request renewal between 180 and 90 days before the contract expiration cannot be refused renewal by the franchisor without justifiable reasons, enumerating the grounds for refusal.

Although this issue has not yet been fully contested in actual trials, it may become a controversial issue if cases of contract renewal refusal against franchisees currently litigating against franchisors arise in the future.

*What is Differential Franchise Fee?

It refers to the difference between the price franchisors charge franchisees for supplying various goods and the appropriate wholesale price, i.e., the distribution margin. It is also called the logistics margin.