A lawsuit seeking the return of 2.3 billion won in differential franchise fees filed by Kyochon Chicken franchise owners against headquarters has begun. The key issue is whether the owners clearly knew of and agreed under the contract to the distribution margins that headquarters added while supplying materials and supplies.
The Daegu District Court Civil Division 11 (Presiding Judge Kwon Jun-beom, Director General) on the 28th held the first hearing in a lawsuit for the return of unjust enrichment filed by 233 Kyochon Chicken franchise owners against franchisor Kyochon F&B.
Differential franchise fees refer to the difference that arises when a franchisor supplies mandatory items to franchisees at prices higher than the purchase cost. Although this is a revenue structure earned by franchise headquarters in the process of supplying materials and supplies, the Supreme Court recently ruled in the Pizza Hut Korea case that a specific agreement with owners is required, prompting similar lawsuits.
The owners argued that Kyochon F&B collected differential franchise fees without properly specifying in the contract the basis, method, and specific items for calculating them. They said the mere fact that they knew materials and supplies would be supplied by headquarters cannot be seen as agreeing to pay differential franchise fees.
The plaintiffs' attorney said, "Because differential franchise fees are an essential matter of the franchise agreement, a specific agreement is required," adding, "The Supreme Court's Pizza Hut Korea ruling also confirmed the legal principle that specific mutual assent is required regarding the receipt of differential franchise fees."
They continued, "Under the Enforcement Decree of the Fair Transactions in Franchise Business Act, royalties and differential franchise fees are separate concepts," and said, "Kyochon argues that an agreement on royalties is effectively an agreement on differential franchise fees, but in fact the criteria and items for calculating the differential franchise fees are not specified anywhere."
Kyochon F&B countered that the contract, disclosure documents, and records of supply price negotiations show that owners were aware of the differential franchise fee structure. It also argued that because headquarters is the supplier of mandatory items and bears warranty liability for defects, the contract structure differs from the Pizza Hut Korea case.
The defense attorney explained, "Unlike in the Pizza Hut case, Kyochon's contract expressly names the franchisor as the party supplying goods and it bears warranty liability for defects," adding, "Since 2019, the disclosure documents have also listed differential franchise fees, and related information was provided during the process of opening new franchise locations."
They further argued, "If the plaintiffs are correct, it would mean Kyochon operated its franchise business without differential franchise fees, which is hard to view as a sustainable business structure," adding, "At the very least, an implied agreement can be recognized."
The owners' side responded that whether they knew of the existence of differential franchise fees and whether they agreed to specific calculation methods are different issues. The plaintiffs reiterated, "What Supreme Court precedent requires is not merely awareness of the existence of differential franchise fees, but whether there was agreement on the specific criteria and methods for calculating them."
The court requested additional written submissions from both sides. The next hearing is set for Jul. 23 at 2 p.m.
Kyochon Chicken owners filed the lawsuit against Kyochon F&B in Mar. last year. At the outset, they sought 1 million won per owner, but later increased the claim to 10 million won per owner. The total amount in dispute is about 2.3 billion won.
Earlier, the Supreme Court held that Pizza Hut Korea's headquarters must return about 21 billion won in differential franchise fees to franchise owners. Since that ruling, lawsuits seeking the return of differential franchise fees have been filed against major franchise brands including Kyochon Chicken, BHC Chicken, BBQ, and Baskin Robbins.