The Supreme Court's recent ruling ordering Pizza Hut to return the differential franchise fees makes clear that the differential franchise fee is an essential element of a franchise agreement. A structure in which differential franchise fees are collected without the parties' explicit agreement in the franchise contract will be difficult to sustain.
Attorney Kwon Jeong-sun said this at a forum titled "Exploring advanced franchise measures through the lens of the differential franchise fee ruling," held on Feb. 5 at the National Assembly Members' Office Building in Yeouido, Seoul, noting that the Supreme Court confirmed it is difficult to recognize a payment obligation based solely on entries in the disclosure document when there is no concrete meeting of the minds on the franchise contract.
The forum was organized to discuss improvements and fixes to the differential franchise fee system and structure as concerns grew that similar lawsuits could spread after the final ruling in the case over returning the differential franchise fees (distribution margins) by Pizza Hut Korea's headquarters. Earlier, on Jan. 15, the Supreme Court finalized a lower court ruling ordering the return of 21.5 billion won in differential franchise fees in an unjust enrichment lawsuit filed by Pizza Hut franchise owners against the headquarters.
As the first presenter, Attorney Kwon said there is a possibility of continued disputes over returning differential franchise fees when, as in the Pizza Hut case, the fees are not specified in the contract. The franchise industry has long faced criticism that an entrenched reliance by headquarters on excessive distribution margins has eroded franchise owners' profitability and triggered repeated disputes.
Lee Jeong-hee, a professor in the Department of Economics at Chung-Ang University, the second presenter, analyzed the current controversy over differential franchise fees as a structural problem in the franchise industry. Lee said that while franchise competitiveness lies in economies of scale, excessive differential franchise fees through required items are undermining that advantage, adding that a structure in which headquarters' revenue and franchise owners' revenue do not move together is the core of the conflict. Lee added that unless information asymmetry and the opaque distribution structure are improved, the same problem will keep recurring.
Panelists agreed that if lawsuits to return differential franchise fees spread into brand-by-brand disputes, confusion could grow across the franchise industry. After the Supreme Court's Pizza Hut ruling, if conflicts between headquarters and franchise owners over differential franchise fees expand excessively, it could burden the franchise industry overall.
In particular, since prolonged litigation would burden both headquarters and franchise owners, some said collective solutions such as dispute mediation or a social consensus should be pursued in parallel.
Jeong Jong-yeol, advisory chair of the National Franchise Owners' Association, said that if lawsuits to return differential franchise fees gain full steam, some headquarters could face liquidity crises, adding that institutional safeguards should be put in place before cases spread into individual lawsuits. Attorney Park Kyung-jun, a standing executive committee member at the Citizens' Coalition for Economic Justice, said the Pizza Hut ruling revealed a structural problem in which differential franchise fees continued to rise without agreement from franchise owners, adding that mechanisms are needed to block unfair elements from the contracting stage.
In this process, Attorney Kwon also noted that there are limits to resolving disputes over differential franchise fees solely through lawsuits. Kwon said collective solutions through a social consensus or a dispute mediation body need to be pursued in parallel, adding that because the controversy over differential franchise fees keeps recurring, discussion of a royalty model centered on brand use fees is also needed.
Government officials also agreed with the intent of the ruling. Jeong Hyeon-il, head of the Franchise Transaction Policy Division at the Korea Fair Trade Commission, said the ruling can be interpreted as judging based on the substantive standards of the transaction relationship rather than form, adding that they will continue to review institutional improvements to enhance transparency in franchise transactions, including designating required items, contract entries, and information disclosure. Lee Cheong-il, head of the Win-Win Cooperation Policy Division at the Ministry of SMEs and Startups, said that because franchises are a small-business organizational model, a structure in which headquarters and franchise owners grow together is important, adding that policy supplements are also under review from a win-win cooperation perspective.