The Korea Franchise Association (the association) said on the 15th that it is concerned about an industry collapse that could upend established practices after the Supreme Court ruled that Pizza Hut Korea's headquarters must return the margin-based franchise fees it collected from franchisees.
In a statement the same day, the association said the Supreme Court ruled that only explicit agreements can justify receiving margin-based franchise fees, putting the 162 trillion won franchise industry in a situation where it must worry about collapse.
The association said, given the industry's structure where small and midsize brands dominate—with 72% having fewer than 10 outlets and 96% having fewer than 100 outlets—there are serious concerns about a wave of closures if similar lawsuits spread, adding that 1.34 million industry workers are also expected to suffer from job cuts and management difficulties, and even K-franchise expansion overseas will be significantly dampened.
It added that the ruling, which affirmed the lower court's finding that margin-based franchise fees not specified in the contract are unjust enrichment, is a decision that shakes the industry's long-standing practices and the general business customs of the distribution sector to the core.
Margin-based franchise fees are a kind of distribution margin that a franchisor receives when supplying raw and subsidiary materials to franchisees. The association argued that these fees became a business custom because Korea's territory is not vast, making logistics supply easy; many franchisors are small; royalty contracts, which compensate for trademark use, are difficult; and there is a risk of royalty avoidance such as through underreporting sales.
The association argued that it is natural for a merchant to receive compensation for providing products and services in the distribution process, and that it would be common sense that hundreds of thousands of franchise business owners (franchisees) have explicitly or implicitly agreed to the practice that has continued for decades.
The Supreme Court's decision is also expected to have a major impact on related lawsuits. On this, the association earnestly asked the judiciary to make reasonable judgments that consider the industry's realities and general business common sense in similar cases that are underway or will be filed in the future.