The franchise industry is in turmoil after the Supreme Court ruling on the recent Korea Pizza Hut differential franchise fee lawsuit. Based on opinions from the industry and legal circles, collecting differential franchise fees and royalties in itself does not immediately pose a problem. However, outcomes of the 20 or so lawsuits to follow will likely vary depending on whether the company collected fees as specified in the contract, whether there was sufficient prior notice and agreement, and whether headquarters took excessive profit.
As of the 21st, according to the industry, 17 lawsuits related to differential franchise fees are under way, centered on chicken, coffee, and dining brands. Law firm YK is representing franchisees, and all are at the first-instance stage. Among them, the Mom's Touch, Jikoba Chicken, and Dujjim cases were transferred from single-judge civil panels to full panels. This is interpreted to mean the court viewed the matter as requiring judgment on the franchise contract structure and legal principles, beyond a simple goods price dispute.
The Baskin-Robbins, A TWOSOME PLACE, Cheogajip, and Burger King cases were sent to mediation. The court moved to arbitrate, saying, "First examine the possibility of an agreement between the parties." In the Baskin-Robbins case, a mediation date was held in Aug. last year, but the court has not proceeded since, saying it would wait for the result of the related Supreme Court appeal. In the Burger King case, mediation broke down, and the main trial is now continuing.
Beyond the 17 brands, similar lawsuits are expected to follow. MEGA MGC COFFEE franchisees are preparing to file a lawsuit against headquarters to claim the return of unjust enrichment. Law firm Doa is representing the franchisees.
According to the franchise industry, franchise business structures differ by brand. Some may collect only royalties or only differential franchise fees, while others collect both royalties and differential franchise fees.
In the Korea Pizza Hut case, the courts at first instance, second instance, and on appeal all sided with the franchisees. The issue was whether there was an explicit clause in the contract to pay a franchise fee in the form of a differential franchise fee. Although franchisees paid for goods every month, the fact that a certain differential was added to the price of supplied goods was not specifically stated in the contract or the disclosure document, and headquarters was also separately collecting royalties, which became a problem.
In differential franchise fee lawsuits that are under way or forthcoming, companies that collect royalties include Lotte Fresh, A TWOSOME PLACE, Burger King, MEGA MGC COFFEE, Dujjim, and Ttang Ttang Chicken.
◇ Tension rises ahead of arguments and mediations in Feb.–Mar.
Legal and industry circles say it will be difficult for this litigation wave to end in a uniform conclusion. That is because each brand's contract language differs, and the timing of contract execution and communication methods with franchisees also vary. Park Jong-myeong, an attorney at law firm Doa representing MEGA MGC COFFEE franchisees, said, "How much is collected and by what standard, whether it is clearly stated in the contract and the disclosure document, and whether there was franchisee consent will be key issues."
A franchise industry official said, "At franchises with long histories, the initial contracts have been gradually supplemented, and current contracts are completely different from before," and added, "Judgments will inevitably vary by case and by company."
Some franchises draw a line, saying their cases are fundamentally different from Pizza Hut's. Lotte Fresh said, "Food franchises and distribution franchises have different structures," and added, "At Lotte Fresh, stores do not have to receive products only from headquarters and can choose among various distribution channels." Mom's Touch also has a past similar case in which headquarters prevailed. At the time, the court recognized that franchisees were aware of the logistics margin structure.
A franchise industry official said, "Even when raw materials prices rise, we consult with franchisees," emphasizing, "This differs from a structure like Pizza Hut's, which imposed charges unilaterally without any discussion." Another industry official said, "Not only is the structure of receiving distribution margins itself included in the contract, but how much more is received is also included," and added, "Because purchases are made through joint buying, franchisees often purchase at lower prices than through other channels."
A BBQ official said, "We operate with differential franchise fees as our only source of revenue, without separate royalties. There is a fundamental difference from the Pizza Hut case in terms of the nature of the revenue structure and the transparency of the agreement," and added, "Since 2020, we have clearly stated differential franchise fees in both the franchise contract and the disclosure document, fully explained the matter during contracting, and directly obtained receipt confirmation from franchisees."
Some franchisees, meanwhile, claim that headquarters supplied materials and supplies at prices far higher than market rates. Attorney Park said, "In the case of MEGA MGC, until the 2024 amendment to the Franchise Business Act, differential franchise fees were not clearly written in the contract. Even the language added after the amendment is abstract," and added, "It appears that headquarters induced investment by offering favorable terms to franchisees and then attached large margins to recoup revenue."
Key cases are set for arguments and mediation dates in succession between Feb. and Mar., starting with Jikoba Chicken on the 22nd and Goobne Chicken on the 28th. A franchise industry official said, "If headquarters takes no logistics margin at all, it is difficult to maintain staffing, marketing, and franchisee support systems," and added, "The direction of the lawsuits will hinge on how headquarters has communicated with franchisees so far."