The end of the ‘implied agreement’… Franchise-for-difference ruling that shook the franchise industry [Daeryun’s Biz law forum]

Seoul High Court, ruling on ‘Korea Pizza Hut’ case
Structural transparency issues in the franchise industry are revealed
“Headquarters must prioritize trust-based management”

In the so-called 'Korea Pizza Hut Case' (2022na2024467), the Seoul High Court ordered the return of the difference in franchise fees collected by the franchise headquarters from franchisees, claiming that it was unfair profit. It is evaluated as a decision that goes beyond a simple financial dispute and directly exposes the problem of structural transparency in the franchise industry. Starting with this ruling, franchisors must prioritize legal risk management and the establishment of a trust-based management system rather than short-term profits.

“There was an agreement as a matter of custom”, blocking the source of logic.

The difference in franchise fee refers to the amount that the franchisor takes in excess of the wholesale price when supplying raw and subsidiary materials, that is, the delivery margin. Originally, the franchisor can designate a specific supplier to the franchise for reasons of quality unification and logistics efficiency, and if margin is acquired during this process, it is legally considered a type of franchise fee.

This is already specifically defined in the Enforcement Decree of the Franchise Business Act. It is also a regulation in the information disclosure statement to specify the ratio of the average difference in franchise money per franchise to sales. However, in this ruling, the court clearly drew a line, saying, “The difference in franchise fee is not a simple distribution margin, but a franchise fee that requires contractual agreement.” If there is no relevant clause in the franchise agreement and the franchisee is unaware of its existence, it is clear that it is unfair profit.

For a long time, franchisors included the difference in franchise fees in the price of raw and subsidiary materials. However, the court's judgment is that if there is no clause or individual agreement to justify this, it is unfair enrichment. The court's statement in the ruling that "a contractual agreement is not established solely through the disclosure of information" has great significance to the industry as a whole.

This is because it fundamentally blocks the franchisor's logic that "there was an implicit agreement due to long-standing trading practices." Collecting the franchise fee difference without the franchisee's clear knowledge or consent is no longer a practice but has become a violation of the law. Even if the name is changed due to transportation costs, management costs, etc., if there is insufficient proof, it is considered the difference in franchise fee.

Impact on the entire franchise industry

This ruling sends a structural warning to the franchise industry. The key points that franchisors should keep in mind regarding franchise difference are as follows.

① Strengthening the obligation to specify in the franchise contract: The Franchise Business Act, revised on July 3, 2024, includes the ‘supply price calculation method’ among the required information in the contract. This means going beyond simple price disclosure and clearly presenting the margin structure and calculation basis. If this is not recorded or handled opaquely, there is a high possibility that it will lead to an unfair enrichment lawsuit.
② Exemption is not possible with an information disclosure statement alone: ​​Registration of an information disclosure statement is merely an administrative procedure. The court ruled that ‘the provision of an information disclosure statement does not mean the franchisee’s consent.’ If there is a discrepancy between the information disclosure statement and the contract, the court will give priority to the franchisor's liability.
③ Non-recognition of customary/implied consent: Considering the franchisee's weak bargaining power, the court does not recognize the franchisee's claim of 'implied agreement'. In order for a franchisor to maintain a legal structure, it must go through three steps: prior notice, written consent, and price disclosure.

Franchisees must prioritize ‘trust’ over short-term profits

If the ruling is confirmed by the Supreme Court, the impact on all future sales, accounting, and legal departments of franchise headquarters will be significant. Practical countermeasures to reduce risk are as follows:

① Complete reexamination of supply contracts: The structure of supply contracts with partner companies, logistics cost calculation method, and margin rate must be transparently redesigned. An unclear contract becomes unfavorable evidence in future lawsuits.
② Ensuring consistency between the contract and the information disclosure statement: If the figures or expressions between the two documents are different, the court may consider it as ‘intentional concealment.’
③ Clarification of accounting structure: Accounting codes for each item, such as logistics costs, management costs, and commissions, should be separated and the practice of ‘supply price processing in one piece’ should be eliminated.
④ Institutionalization of franchisee prior consent procedures: Supply unit price and margin basis must be documented and franchisee’s signature or electronic consent must be secured.
⑤ Regular renewal of information disclosure statements: Information disclosure statements that differ from actual operations may be considered false information, so annual renewal is essential.
 

This ruling is not limited to one brand, Pizza Hut Korea. This is because most franchise industries, including restaurants, beauty, education, and services, have the same franchise structure. In particular, if the franchisor is operating a ‘logistics-centered model’ that makes profit through delivery margins instead of franchise fees, it can take a direct hit.

It is also highly likely that the Fair Trade Commission's investigation standards will be strengthened. This means that if the difference in franchise fee is not specified in the contract or notified to the franchise, it is not just a civil matter, but may even be grounds for administrative sanctions and fines.

The essence of the franchise industry is not expansion but ‘trust’. Only when franchisors disclose their profit structure transparently and restore trust with franchisees will the foundation for sustainable growth be laid. In that sense, 'franchise difference' is not just a financial item, but is also a barometer of legal risk and an indicator of brand reputation. Designing a structure of trust before a structure of profit is the only way for the franchise industry to survive in the future.

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