Franchise owners from chicken to ice cream chains are launching a series of lawsuits against the franchisor over the return of additional franchise fees. The additional franchise fee refers to the profit earned by the franchisor when it purchases materials and supplies from a third party and sells them to franchisees at a markup.
This lawsuit follows the recent victory of 94 franchisees of Pizza Hut Korea in a lawsuit against the franchisor for the return of undue profits related to additional franchise fees. Earlier, the court favored the franchisees in the second trial of the relevant lawsuit involving Pizza Hut Korea. According to the ruling, Pizza Hut Korea must pay 21 billion won to the franchisees.
According to the retail industry on the 13th, around 280 franchise owners of bhc Chicken are preparing to file lawsuits for the return of additional franchise fees. If the participation of 300 franchisees is confirmed, the complaint will be submitted soon. Not only bhc Chicken, but also 480 stores operated by SPC Group's Baskin-Robbins have confirmed their participation in the lawsuit. In January next year, over 250 franchisees of Kyochon Chicken will also file lawsuits against the franchisor.
The key issue in the lawsuit is whether the franchisor sufficiently agreed on the additional franchise fee beforehand. According to the requirements for the collection of additional franchise fees, a separate agreement is deemed necessary. Therefore, additional franchise fees obtained without agreement are considered undue profits, thus subject to return.
In the franchise industry, the additional franchise fee is regarded as the core of the franchise business and has been adequately detailed in disclosure documents and contracts. It is also argued that the matter was sufficiently discussed in the franchisee council.
A representative from a franchisor said, "The problem was that Pizza Hut received undisclosed additional franchise fees. In contrast, those mentioned as participating in recent lawsuits have diligently disclosed information regarding additional franchise fees in their contracts or disclosure documents," and added, "Some underperforming franchisees are being encouraged by law firms."
However, Law Firm YK holds that there are similarities between the judgment regarding Pizza Hut and the circumstances in the franchise industry. They argue that all large franchises collect additional franchise fees in the same manner as Pizza Hut, thus legal principles can be applied uniformly.
Legal circles expect that whether there was no fault in the discussion process between the franchise stores and franchisees regarding the expense of additional franchise fees will determine the outcome. It is not about whether it was mentioned in disclosure documents or contracts, but rather whether sufficient discussions took place between both parties when determining the rates of additional franchise fees or fluctuations in franchise fees. If it was a unilateral notification, even if it was specified in a contract, it will be subject to return.
One notable case mentioned is regarding the supply price of sunflower oil by bhc Chicken. In 2022, bhc Chicken announced a 60.9% increase in the supply price of sunflower oil to franchisees due to the impact of the Russia-Ukraine war. As international prices stabilized, the company also lowered the sunflower oil supply price last year. In this regard, a legal expert stated, "It is not important that prices were raised and lowered; the key issue is whether these fluctuations in the supply prices of raw and auxiliary materials were adequately discussed with franchisees."
With franchisees actively pursuing lawsuits, the franchise industry is feeling pressured. A representative from the franchise industry noted, "If we lose, it could shake the foundation of the franchisor. Franchisees who do not participate in the lawsuit could also incur losses," and mentioned that "Pizza Hut has also entered rehabilitation proceedings."
However, Law Firm YK stated, "If the lawsuits proceed, the franchisor may adopt a royalty model that shares sales profits with consumers based on equity, allowing franchisors and franchisees to become partners in mutual cooperation," adding that "price setting could also be done rationally, gaining consumer support."
The expenses incurred by franchisees participating in the lawsuits are relatively low. The initial fee is between 200,000 and 300,000 won per store, and success fees range from 5% to 8%. The expected amount if they lose the lawsuit is not high either. If 400 franchisees participated in a class-action lawsuit with a claim amount of 300 million won, the burden per person would be 2.46 million won (1.52 million won for the opposing lawyer's fees and 940,000 won for court fees). The claim amount of 300 million won is calculated based on the 10% additional franchise fee ratio for stores with annual sales of 600 million won over a 5-year operation period.
A franchisee involved in the lawsuit mentioned, "If only a few participate, they could face disadvantages from the head office, but if many participate in the lawsuit, we were advised that we could avoid such disadvantages." They also noted, "If the head office imposes disadvantages, the law firm will share that part and seek solutions together."
A representative from the franchise industry stated, "If they closed down within five years, they can participate in the lawsuit, so I understand that former franchisees are participating en masse." They added, "Ultimately, this is a lawsuit where franchisees who are currently running their stores well could incur losses, but the law firm is aggressively pushing for it."