[Exclusive] Supreme Court to Rule on Pizza Hut Difference in Franchise Fees Appeal on the 15th... Franchise Industry Watching Closely

Supreme Court to Deliver First Ruling on Difference in Franchise Fees Lawsuit
Attention on Whether Larger Refund Ordered by Appellate Court Will Be Upheld
Baskin Robbins, Kyochon Chicken, Burger King, and Others Engaged in Similar Lawsuits

The final verdict in the lawsuit filed by more than 100 Pizza Hut franchisees against the headquarters, demanding the return of the difference in franchise fees paid in addition to fixed royalties, will be announced on January 15. This comes more than five years after the lawsuit was filed in December 2020.

Following the appellate court ruling in the Pizza Hut case in September 2024, franchisees from more than 10 well-known domestic brands-including BHC, Baskin Robbins, Kyochon Chicken, and Puradak Chicken-have also filed lawsuits against their respective headquarters over the difference in franchise fees, and these cases are currently ongoing.

The Supreme Court's upcoming decision is expected to draw significant industry attention, as its judgment on major overlapping issues could be directly applied to these other cases as well.

According to the legal community on January 5, the Supreme Court's Civil Division 3 will hold a final hearing at 11 a.m. on January 15 for the appeal filed by 108 Pizza Hut franchisees, including Yang, against Korea Pizza Hut LLC, demanding the return of unjust enrichment. Since the initial filing, some plaintiffs have withdrawn, and currently, 94 plaintiffs are awaiting the Supreme Court's verdict.

The 108 franchisees filed the lawsuit in December 2020, claiming that although the headquarters received a fixed royalty equivalent to 6% of total revenue, it also charged a so-called difference in franchise fees by adding a certain margin to the cost of raw materials supplied by the headquarters, without any legal or contractual basis, resulting in double payment of franchise fees. They demanded the return of these unjustly received difference in franchise fees.

The difference in franchise fees refers to the distribution margin-the difference between the price at which the headquarters supplies goods to franchisees and the appropriate wholesale price. For example, if the headquarters purchases food ingredients or utensils for 5 million won and supplies them to franchisees for 7 million won, the 2 million won difference constitutes this margin.

The key issues in the trial included: ▲ the necessity of an agreement on the difference in franchise fees ▲ the existence of such an agreement ▲ the scope and statute of limitations for recognizing unjust enrichment ▲ the subject and burden of proof.

The first-instance court accepted the franchisees' argument that the headquarters received duplicate franchise fees without legal or contractual grounds and ruled in favor of the plaintiffs, ordering the headquarters to return approximately 7.5 billion won.

In court, the headquarters argued that the difference in franchise fees is a legally recognized form of franchise fee and thus cannot be considered without legal grounds. However, the court held that whether agreeing to pay franchise fees in the form of a difference in franchise fees is legally recognized, and whether such an agreement actually existed, are separate issues. The court further stated that the mere fact that various forms of franchise fees are exemplified in the law and enforcement decree does not automatically justify the receipt of such fees. It concluded that an agreement is necessary to receive difference in franchise fees.

However, the first-instance court dismissed the plaintiffs' claims regarding the difference in franchise fees for the periods 2016-2018 and 2021, citing the lack of public information and difficulty in verification for those years.

Initially, the franchisees only claimed half of the difference in franchise fees they believed should be returned in the first trial. After winning the first trial, they expanded their claim to the remaining half in the second trial and extended the claim period to include up to 2022.

On December 10, 2024, in front of the Seoul Bankruptcy Court in Seocho-dong, Seoul, Pizza Hut franchisees are protesting to demand the refund of the difference in franchise fees. Provided by the Korea Pizza Hut Franchisee Association

The Seoul High Court, which heard the appeal, ruled on September 11, 2024, that the headquarters must return a much larger amount (21 billion won) to the franchisees than what was recognized in the first trial.

The appellate court, like the first-instance court, found that an agreement is necessary to receive difference in franchise fees and determined that there was no basis or agreement justifying the headquarters' receipt of such fees. Furthermore, the appellate court ruled that the headquarters is responsible for returning the difference in franchise fees for 2016-2018, which the first-instance court had not recognized.

In the appellate court, the headquarters argued that it had notified franchisees of the supply price for raw and subsidiary materials, that franchisees specified the goods, prices, and quantities in their orders, and that tax invoices were issued. Therefore, it claimed, a supply contract for goods was established between the plaintiffs and the defendant. The headquarters also contended that there was an agreement or ratification by franchisees regarding the difference in franchise fees included in the price of goods.

However, the court rejected this argument, citing a clause in the franchise agreement stating that contract terms can only be changed if both parties sign a written agreement.

The court further noted that, in transactions between merchants, distribution margins may be included in the price of goods and need not be disclosed to the counterparty because the parties can voluntarily choose the transaction counterpart, subject, and price. In contrast, in franchise agreements where the franchisee is supplied with designated raw and subsidiary materials by the headquarters, there is no room for choice regarding the counterpart, subject, or price, making it different from ordinary goods transactions.

After the appellate court ruled that Pizza Hut franchisees could recover a larger amount than in the first trial, franchisees from more than 10 other brands-including Lotte Fresh BHC, Baskin Robbins, Kyochon Chicken, Puradak Chicken, Twosome Place, Goobne Chicken, Cheogajip Yangnyeom Chicken, Duzzim, Gcova Chicken, Mom's Touch, and Burger King-filed lawsuits against their headquarters seeking the return of difference in franchise fees.

The lawsuits over the difference in franchise fees are reportedly being led by attorney Hyun Minseok of YK Law Firm (Judicial Research and Training Institute, 39th class). In the Pizza Hut case, the headquarters is represented by the law firm Bae, Kim & Lee LLC.