The Supreme Court will issue a ruling on the 15th in the lawsuit over the return of differential franchise fees by Korea Pizza Hut, considered the biggest pending issue in the franchise industry.
The Supreme Court's Third Division will hand down its ruling at 11 a.m. on an appeal in an unjust enrichment case filed by 94 franchisees, including a person surnamed Yang, seeking the return of an amount equivalent to differential franchise fees from the franchisor, Korea Pizza Hut LLC.
A differential franchise fee is the amount the franchisor takes by supplying raw and subsidiary materials to franchisees at prices above the wholesale price. It corresponds to a supply margin. Even knowing they can buy raw and subsidiary materials cheaper in the market, franchisees must buy the ingredients recommended by the franchisor.
Franchisees including Yang argue that it is unjust enrichment for Korea Pizza Hut to receive a fixed fee equal to 6% of total revenue while separately taking differential franchise fees not specified in the contract. They filed a lawsuit in Dec. 2020 seeking an order for the headquarters to return the money.
The headquarters argues that, under the Fair Franchise Transactions Act, differential franchise fees do not have to be included in the franchise agreement, so it did not obtain unjust enrichment from franchisees.
Both the first and second trials sided with the franchisees. The first-instance court recognized as unjust enrichment only the amounts paid in 2019–2020, when the headquarters disclosed information on the rate used to calculate differential franchise fees. It ordered the headquarters to return 7.5 billion won to the franchisees.
In the second trial, the court held that the headquarters must additionally return amounts paid in 2021–2022, for which additional calculation rates for differential franchise fees were disclosed during the proceedings. It ruled that about 21 billion won must be repaid to the franchisees.
After this ruling, Korea Pizza Hut applied to the court in Nov. 2024 to begin corporate rehabilitation proceedings, citing a cash crunch, and received a comprehensive stay order. This is a measure that prevents creditors from enforcing against assets.
If the Supreme Court upholds the second-instance ruling as is on this day, Korea Pizza Hut's headquarters will have to pay the franchisees delay damages in addition to the 21 billion won in unjust differential franchise fees.
The ripple effect on the industry is expected to be significant. If the Supreme Court deems differential franchise fees to be unjust enrichment, it could affect other franchise cases going forward. Since the second-instance ruling, lawsuits seeking the return of differential franchise fees have already been filed in other franchise sectors such as fried chicken, coffee, and ice cream.