[Choi Seokjin's Law & Biz] Aftermath of the Pizza Hut Ruling... Franchisees File Lawsuits One After Another

Wave of lawsuits spreads after Supreme Court ruling in Pizza Hut case
Other lawsuits against different franchisors also pick up speed
Following YK, Choi Sun and Doa also pursue differential franchise fee suits
Franchisors' information disclosure

In September 2024, after the appellate court in the Pizza Hut differential franchise fee lawsuit ordered the franchisor to return to franchisees a differential franchise fee amounting to nearly three times the amount recognized in the first trial, other franchise franchisees who had been watching how the case unfolded began filing a series of lawsuits against their own headquarters.

Starting with BHC and Lotte Super and Lotte Fresh, franchisees from 16 brands, including Baskin Robbins, Puradak, Kyochon Chicken, BBQ, Goobne Chicken, Twosome Place, Mom's Touch, and Burger King, visited YK Law Firm and entrusted their cases to the firm. After the Supreme Court finally ruled in favor of the franchisees on the 15th of last month, inquiries from franchisees of many other brands have continued, and additional appointments are being made.

Frank Burger, Myeongnyun Jinsa Galbi, Mega MGC Coffee... Wave of lawsuits against franchise headquarters spreads

Other law firms have also jumped into differential franchise fee litigation.

Choi Sun Law Firm filed separate lawsuits in July last year to demand the return of differential franchise fees from Frank F&B Co., Ltd., which operates Frank Burger, and Myeongnyundang Co., Ltd., which operates Myeongnyun Jinsa Galbi. The Frank Burger case was referred to mediation in August last year, but the mediation broke down in October of the same year, and a hearing has been scheduled for March 24. The Myeongnyundang case was referred to mediation in September last year, and two mediation sessions were held in October and December of the same year. A third mediation session is scheduled for the 11th of this month.

Doa Law Firm plans to file the first differential franchise fee lawsuit against Mega MGC Coffee, which has more than 4,000 franchise outlets in Korea, in March. Going beyond simply recruiting plaintiffs to participate in the lawsuit, the firm signed a memorandum of understanding (MOU) with the Mega MGC Coffee Franchisees Council, which has about 1,000 franchisees as members, and has begun providing responses and legal advice regarding the headquarters' unfair trade practices.

Park Jongmyung, Representative Attorney at Doa Law Firm. Doa Law Firm homepage

Park Jongmyung, representative attorney at Doa Law Firm, said, "Since the Supreme Court handed down its ruling in the Pizza Hut case, we have been inundated with inquiries from people who want to join the lawsuit," adding, "Many franchisees are contacting our office, but at the moment we are not taking on individual cases; we are only accepting cases through the council."

Attorney Park added, "In addition to differential franchise fees, we plan to support franchisees through separate lawsuits over other problematic areas, such as the unfair shifting of promotion costs."

Meanwhile, with the Pizza Hut case now concluded, the remaining cases are also expected to move forward more quickly. In the Twosome Place case, a mediation session will be held on the 3rd of next month. In the BBQ case, a hearing is scheduled for the 6th of next month; in the Dujjim case, a hearing is scheduled for the 12th of next month; and in the Burger King case, a hearing is scheduled for the 24th of next month.

Law, enforcement decree, and notifications revised... A turning point for modernizing the system

The Pizza Hut lawsuit served as a catalyst for an overhaul of the entire domestic franchise business system.

After the litigation began, the Franchise Business Act and its enforcement decree were amended to expand the obligations to register and provide a franchise disclosure document and to escrow franchise fees to even small franchisors with annual sales of 200 million won or less and fewer than five franchise outlets. In addition, when conducting advertising and promotional activities for which franchisees bear the costs, it became mandatory to obtain prior consent from a certain percentage or more of franchisees.

Furthermore, the types of mandatory items and the method for calculating their supply prices became essential terms that must be included in franchise agreements, and a new clause was introduced requiring franchisors to consult in advance with franchisees when changing mandatory items or other transaction terms in a way that is disadvantageous to franchisees. As a measure to strengthen the bargaining power of franchisees, a registration system for franchisee business associations was introduced, and a new provision was added that obliges franchisors to faithfully respond to consultation requests from associations registered with the Korea Fair Trade Commission.

At the end of last month, the Korea Fair Trade Commission pre-announced for legislation a draft amendment to the enforcement decree of the Franchise Business Act that restructures the format and content of the franchise disclosure document in order to resolve "information asymmetry" between franchisors and franchisees, and also pre-announced for administration a draft amendment to the related notifications. The amended enforcement decree and notifications include provisions requiring that disclosure documents contain information on payments made by franchisees before opening, such as initial franchise fees and other costs, including the franchisor's payment information related to those amounts.

On the 2nd, at the YK Law Firm Gangnam main office in Gangnam-gu, Seoul, attorney Hyun Minseok is giving an interview to The Asia Business Daily. Photo by Yoon Dongju

Despite industry concerns, seen as "inevitable growing pains"

The Pizza Hut differential franchise fee lawsuit, which shook Korea's franchise market worth 162 trillion won in sales, posed the question to our society: "Is it really legitimate for a franchisor to collect undisclosed margins that are not agreed upon and not written in the contract from franchisees under the name of business practice?" The Supreme Court answered that question by ruling that "undisclosed differential franchise fees (distribution margins) are unjust enrichment without legal grounds."

It is true that the franchise industry is facing a crisis, as the risk of litigation has been added to the burdens of sluggish domestic demand, intensifying competition, and rising various costs. Both inside and outside the industry, there is an assessment that these are growing pains that had to be endured at some point in order to establish an advanced franchise business system. What is clear is that this ruling has become the starting point for eliminating the so-called "black-box distribution margins" that had been condoned under the name of business practice.

Attorney Hyun Minseok of YK Law Firm, who represented the franchisees in the Pizza Hut differential franchise fee lawsuit, said, "It has been finally confirmed by the judiciary that the legislative decision embedded in the Franchise Business Act that 'there is no such thing as an automatic margin' is correct," adding, "This ruling is a stern order from the judiciary for franchisors and franchisees to meet again on the basis of a 'transparent contract'."