The final conclusion in the lawsuit filed by Korea Pizza Hut franchisees against headquarters to return the differential franchise fees is imminent. Depending on the Supreme Court ruling set for the 15th, there is talk that the revenue structure of franchise headquarters and overall transaction practices with franchisees could change. The industry sees this ruling as potentially a watershed moment for changes in the franchise business model.
According to related industries on the 12th, the Supreme Court's Civil Division 3 (Presiding Justice Seo Kyung-hwan) set the date for the final appeal ruling in the Korea Pizza Hut unjust enrichment return lawsuit for the 15th.
The Pizza Hut differential franchise fee lawsuit began in 2020 when 94 franchisees filed a claim against headquarters to return unjust enrichment. Differential franchise fees refer to the margin taken when a franchise headquarters supplies raw and subsidiary materials to store owners at prices higher than the wholesale price. In the United States, franchise headquarters are generally known to receive royalties of 7% to 10% of sales. In Korea, because royalties are low or nonexistent and differential franchise fees are often used as a main revenue source, this lawsuit is assessed as a case that touches on a structural problem.
Franchisees argued that Korea Pizza Hut collected differential franchise fees not specified in the contract in addition to royalties and that the fees should be returned as unjust enrichment. Headquarters countered that "differential franchise fees are a normal supply margin permitted under the Franchise Business Act" and "no separate prior agreement is required."
Both the first and second trial rulings favored the franchisees. In the second trial, the Seoul High Court ruled that "differential franchise fees without prior agreement constitute unjust enrichment" and ordered Korea Pizza Hut to return about 21 billion won to the franchisees. This is nearly three times the amount recognized in the first trial (about 7.5 billion won). After the ruling, Korea Pizza Hut filed for rehabilitation proceedings in Nov. 2024, citing a cash crunch.
The ripple effects of the Pizza Hut case are already spreading across the industry. After the second-trial ruling, lawsuits demanding the return of differential franchise fees have followed in other franchise sectors such as chicken, coffee, and ice cream. According to the industry, about 20 lawsuits are reportedly underway. They include bhc Chicken, Kyochon Chicken, BBQ, Goobne Chicken, Cheogajip Yangnyeom Chicken, Burger King, Baskin-Robbins, and A TWOSOME PLACE.
The industry is on high alert because this Supreme Court ruling could set a benchmark that determines the direction of these cases. The impacts of the Supreme Court ruling that the industry is watching can be distilled into three broad areas.
First, there could be a comprehensive reexamination of franchise revenue structures. If the Supreme Court upholds the second-trial decision, the likelihood will increase that differential franchise fees will be deemed unjust enrichment without contractual grounds. In that case, many franchise headquarters that have used differential franchise fees as a main revenue source could face the need to redesign their business models from the ground up.
According to a Korea Fair Trade Commission survey in Oct. last year, more than 60% of domestic franchise headquarters maintain a business structure centered on differential franchise fees. Therefore, depending on the Supreme Court ruling, there is an outlook that fundamental revenue structure adjustments, such as changing the method of calculating supply prices, will become unavoidable.
The ripple effect on similar lawsuits is also expected to be significant. If the Pizza Hut ruling is finalized, it could serve as an important criterion for lawsuits already underway in other sectors such as chicken, coffee, and ice cream. If the Supreme Court ruling favors the store owners, the possibility of additional class actions or new lawsuits cannot be ruled out. Concerns are growing in the industry that "this could spread from an issue of individual corporations to a structural risk across the entire industry."
It is also expected to affect how franchise agreements and disclosure documents are drafted. An industry official said, "If the legal nature of differential franchise fees becomes clear, franchise headquarters will have to specify the goods supply structure and the basis for margin calculation more concretely in contracts and disclosure documents." Analysts say there is a high possibility that, instead of broadly listing "goods supply" as is done now, contract practices overall will become more conservative, including strengthening explicit consent procedures by store owners and expanding the obligation to provide prior notice when changing supply prices.
◇ Will the Franchise Business Act amendment change the franchise revenue structure
However, some say it is difficult to generalize the Pizza Hut case. They argue that Pizza Hut differs from many domestic franchises in that headquarters received royalties and the contract did not clearly state the basis for differential franchise fees. Some industry officials said, "The Pizza Hut case should be seen as a special case arising from a specific structure."
The Franchise Business Act amendment is also weighing on the industry. The amendment centers on introducing a registration system for franchisee associations and strengthening headquarters' obligation to consult. If a franchisee association that meets certain requirements registers with the Korea Fair Trade Commission, it is granted official representation, and headquarters must consult with it on transaction terms and other matters. There is also speculation that, coupled with the Supreme Court ruling, the headquarters-centered operating structure could come under dual pressure. The amendment passed the National Assembly plenary session in Dec. last year and is scheduled to take effect in Dec. this year.
An industry official said, "Depending on the ruling on the 15th, the future of the franchise industry could change," adding, "If institutional changes then gather pace, headquarters will have to examine their revenue structures and their relationships with store owners from the ground up."