The franchise industry is facing a triple crisis. Amid the upcoming passage of a bill to amend the Franchise Business Act, which would require mandatory negotiations with franchisee associations, the issue of margin franchise fees is reigniting along with ongoing controversies regarding delivery app commission caps.
◇ Amendment to the Franchise Business Act requiring negotiations between the headquarters and franchisees expected to pass in September
According to political and retail industry sources on the 14th, the amendment to the Franchise Business Act is expected to pass the National Assembly's plenary session as early as September. The core of the amendment is to introduce a registration system for franchisee associations and to impose a duty on the headquarters to negotiate with these associations.
The amendment to the Franchise Business Act was designated as a fast track agenda in April. This increases the likelihood of passing in the plenary session. The fast track requires deliberation for up to 180 days and review by the Legal Affairs Committee for 90 days, followed by a vote within 60 days after being presented to the plenary session.
The franchisees have stated that a legal mechanism for negotiation is necessary due to unilateral notifications regarding the headquarters' price increases and excessive advertising and promotional costs. A representative from the National Franchisee Council noted, "An analysis of the collective disputes that occurred over the past decade found that in about 40% of cases where there was a negotiation table, agreements were only at the level of 'coexistence agreements.' This amendment at least guarantees minimal negotiation rights."
On the other hand, the headquarters is concerned that it could hinder the autonomy of corporate management. If negotiations with national franchisee associations become mandatory, the more franchisees there are, the slower and less flexible the headquarters' policy decisions will be. A representative from the Franchise Association claimed, "The more excessive the obligation for negotiation, the greater the possibility of negotiation breakdowns. Legal disputes will also increase, potentially escalating conflicts between the headquarters and franchisees."
◇ Reignition of the controversy over margin franchise fees, which was considered 'common practice'… concern over a surge in lawsuits
The controversy over margin franchise fees is reigniting. The Franchise Industry Association, which had been watching from the sidelines, has recently submitted a request to participate in the Supreme Court's appeal regarding the return of margin franchise fees by Pizza Hut. In the second trial of the lawsuit, Pizza Hut was ordered to return the margin franchise fee of 21 billion won, which was not specified in the contract, as unjust enrichment, but has filed an appeal.
Margin franchise fees are the distribution margins left by the franchise headquarters when supplying raw materials to franchise stores. About 90% of domestic headquarters rely on it as a core source of revenue, making it a sort of 'common practice' in the industry. There are concerns that if the Supreme Court ultimately rules this as unjust enrichment, the franchise industry could be embroiled in collective lawsuits amounting to approximately 1 trillion won.
Since the second trial ruling of the lawsuit for the return of margin franchise fees filed by Pizza Hut franchisees last year, franchisees from 15 brands, including Lotte Super, BHC, Kyochon Chicken, Twosome Place, Dujjim, Burger King, and Myung-ryun Jin-sa Galbi, are conducting related lawsuits. A franchisee operating a franchise store stated, "Even if it has been done as a common practice, wrongs must be corrected, and if we don't improve now, the same problems will repeat."
In contrast, a headquarters representative stated, "The margin franchise fee has become established as a common practice due to difficulties in royalty contracts. The specific details required to make a profit cannot be specified in the contract because they include trade secrets," adding that "As most headquarters have similar revenue structures, if the Supreme Court's ruling concludes this as unjust enrichment, we will face a series of legal disputes." He continued, "Following the amendment to the Franchise Business Act in July of last year, the issue of sharing distribution margins with franchisees has been addressed to some extent."
◇ Amid concerns over U.S. trade friction… attention focused on legislation to cap delivery app commissions
In this situation, the government of Lee Jae-myung and the Democratic Party of Korea, which have actively pursued legislation to cap delivery app commissions, have temporarily put the plan on hold. Franchisees believe that the delivery app commissions are excessive. In a meeting of the Democratic Party of Korea's task force on price measures held on the 12th, the issue of high commissions from delivery platforms was also raised. The intermediary commissions (9.7% to 15%) of delivery platforms such as Baemin and Coupang Eats, along with their virtually monopolistic market share (approximately 90% combined), are a burden on the industry.
Initially, the government aimed to incorporate the cap on delivery app commissions into the Online Platform Fair Trade Act, but discussions have been postponed due to concerns over trade friction with the United States, to be addressed after the Korea-U.S. summit scheduled for the 25th.
There are discussions about proceeding with the cap under either the Small Enterprises and Startup Promotion Act or the Food Service Industry Promotion Act instead of the Online Platform Fair Trade Act, which falls under the jurisdiction of the Fair Trade Commission.
A representative from the franchise industry stated, "In an era where both franchisees and headquarters cannot survive without using delivery platforms, it is essential to establish a law that aligns with the spirit of this proposal, as we are trying to balance with the fact that delivery platform operators are in a virtually monopolistic market." Another representative noted, "While the overall impact of this proposal on the market must be considered, we cannot find a breakthrough by merely looking for a sidestepped approach that delays action. "