Franchise Margin Fee | Return of KRW 21.5 Billion in Franchise Margin Fees to Pizza Hut Confirmed; Supreme Court Holds That a Revenue Structure Without Agreement Is Not Permitted

A franchise margin fee is a form of distribution margin that the franchisor receives by setting the price of raw and subsidiary materials supplied to franchisees higher than the actual wholesale price.

At most franchise businesses, this franchise margin fee constitutes a principal source of revenue for the franchisor, and from the franchisee's standpoint it is close to a fixed cost borne every month regardless of sales.

Ninety-four Korea Pizza Hut franchisees claimed that the headquarters had received franchise margin fees by including them in the price of goods without specifying them in the contract, and that the amounts in question constituted unjust enrichment with no contractual basis, and they sought their return.

The Pizza Hut franchisees raised the issue that, although they were already paying a fixed royalty equal to 6 percent of sales, franchise margin fees were being imposed on top of that without any separate agreement.

This case was a lawsuit addressing a structural issue across the franchise industry as a whole, namely to what extent a franchisor's revenue structure can be justified by contract.

The point that the Supreme Court made clearest in this case is the following.

A franchise margin fee is not in itself unlawful, but neither is it money that can be collected at any time.

The Supreme Court defined a franchise margin fee as "the portion exceeding the appropriate wholesale price among the consideration that a franchisee pays for goods or materials supplied by the franchisor in connection with its business activities," and held that it is included in the franchise fee under the Fair Transactions in Franchise Business Act.

However, it drew a line, stating that whether a franchise margin fee constitutes a franchise fee and whether a specific agreement to pay a franchise margin fee actually existed are separate questions.

In other words, the Court made clear that the fee is not something that may be collected unconditionally simply because the law permits it, and that it becomes legitimate revenue only when it is premised on agreement with the franchisee and the provision of information.

The Supreme Court upheld the determinations of the first and second instances as they stood and confirmed the judgment that the Pizza Hut headquarters must return the KRW 21.5 billion in franchise margin fees it had received from 2016 through 2022.

A point that merits particular attention is that, for the periods during which the headquarters failed to comply with the order to produce documents, the Court found the transaction structure to be identical and recognized the calculation of the amount to be returned through an estimation method.

This shows that, in future similar lawsuits, a defense to the effect that "if there are no records, the matter falls outside the scope of franchise margin fees subject to return" will not be easy to maintain.

The average franchise margin fee per franchise amounted to tens of millions of won per year, and this was a cost that directly affected net profit.

This judgment set a baseline by which franchisees may raise legal challenges to a cost structure that had been taken for granted in the name of custom.

With numerous franchisees of various brands already pursuing similar lawsuits, this judgment is likely to serve, beyond any particular brand, as an occasion that prompts a reexamination of the revenue structure of the franchise industry as a whole.

Franchise business disputes, including the franchise margin fee issue, are in many cases decided at an early stage, when the situations of multiple franchises are compared and analyzed structurally, rather than after the matter has already moved to the litigation stage.

To identify structural problems across franchise operations at an early stage and connect them to practical resolution, rather than handling one-off consultations for individual franchisees, Daeryun Law Firm LLP operates a "Franchise Business Harm Report Center."

▶Principal roles of the Franchise Business Harm Report Center

The Franchise Business Harm Report Center is to operate as a channel that receives and analyzes, on an anonymous or confidential basis, matters that franchisees encounter in the field but find difficult to raise on their own, such as franchise margin fees, compulsory mandatory purchases, insufficient disclosure of information, and changes to transaction conditions.

Rather than recommending immediate litigation for each individual case, the Center first examines, through the accumulation of similar cases, whether a matter is a collective structural problem or one that can be resolved by improving the contract.

Through this, franchisees can objectively confirm where their situation stands legally, without the burden of unnecessary disputes.

The franchise margin fee issue is not a matter of "whether money has already been lost," but a matter of checking whether costs are still being drawn off through the same structure even now.

If you have any doubt at all about your franchise agreement structure or the manner in which raw and subsidiary materials are traded, simply having your current situation reviewed through the Franchise Business Harm Report Center can serve as a sufficient starting point.

If you would like to receive legal advice on a related matter or have suffered unfair harm in connection with a franchise, you are welcome to make a 🔗legal consultation reservation at any time.