First Supreme Court Ruling on "Differential Franchise Fee" Lawsuit
Judiciary Puts the Brakes on Franchise "Distribution Margin" Practices
The Supreme Court has ruled that the "margin franchise fee" collected by Korea Pizza Hut from its franchisees when supplying raw materials constitutes unjust enrichment. As a number of well-known domestic franchise owners have filed lawsuits against their headquarters over margin franchise fees, this ruling is expected to have a significant impact on the industry.
On January 15, the Supreme Court's Third Division (Presiding Justice Lee Heungku) upheld a lower court ruling that partially sided with the plaintiffs in a lawsuit filed by 94 Korea Pizza Hut franchise owners, including Yang, against the headquarters, seeking the return of unjust enrichment.
Previously, Pizza Hut franchise owners filed a lawsuit in December 2020, claiming, "Even though the headquarters receives a fixed fee equivalent to 6% of total revenue, it has also charged so-called margin franchise fees by adding a certain profit margin to the cost of raw materials supplied by the headquarters, without any legal or contractual basis, resulting in duplicate payments of franchise fees." They demanded the return of the margin franchise fees that had been unjustly collected. The margin franchise fee refers to the difference between the price paid by franchisees for various goods supplied by the headquarters and the appropriate wholesale price, essentially the distribution margin.
The first-instance court accepted the franchise owners' argument that "the headquarters received duplicate franchise fees without any legal or contractual basis," and ruled in favor of the plaintiffs, ordering the headquarters to return more than 7.5 billion won. However, the court dismissed the plaintiffs' claims regarding the margin franchise fees for 2016-2018 and 2021, as information on these amounts was not disclosed and therefore could not be determined.
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. Like the first-instance court, the appellate court found that an agreement is necessary for the collection of margin franchise fees, and that there was no basis or agreement justifying the headquarters' collection of such fees. Furthermore, the appellate court held that the headquarters was also responsible for returning the margin franchise fees for 2016-2018, which the first-instance court had not recognized.
The Supreme Court's decision was the same. The court stated, "We agree with the lower court's judgment that a specific agreement is necessary between the franchisee and the headquarters for the collection of margin franchise fees," and added, "A clear consensus is required for such collection." The court further noted, "Recognizing the existence of an implicit agreement that is unfavorable to the franchisee should be approached with caution," and concluded, "We accept the lower court's judgment that there was no implicit agreement between the plaintiffs and the defendant regarding the collection of margin franchise fees."
The Supreme Court's ruling, which has now been finalized, is likely to be directly applicable to other cases with similar key issues, drawing close attention from the industry to the outcomes of these verdicts. After the appellate court allowed Pizza Hut franchisees to recover a larger amount of margin franchise fees than in the first trial, more than 10 franchise owners from brands such as 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 have filed lawsuits against their headquarters seeking the return of margin franchise fees.
Hyun Minseok, an attorney at YK Law Firm who represented the franchisees and secured their victory, stated, "We welcome the court's wise judgment. This ruling is a wise and courageous decision by the judiciary that puts a stop to the outdated practice of headquarters abusing their authority to designate essential items and collect unjust 'tolls.' Now is the time for the franchise industry to move away from the opaque margin franchise fee structure and make a full transition to a 'royalty-based model' that transparently shares sales profits. Through this, I sincerely hope that a true culture of mutual growth, where headquarters and franchisees share the fruits of success beyond a simple power dynamic, will take deep root in our society."
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