🚨 Differential Franchise Fees

Today Korean Social News for Beginners | 2025.10.12

0️⃣ Pizza Hut Ruling and Franchise Contract Transparency

📌 'Implicit Agreement' Rejected... Korea Pizza Hut Differential Fee Refund Ruling Shocks Franchise Industry

💬 The Seoul High Court ruled that differential franchise fees collected by Korea Pizza Hut when supplying raw materials to franchise stores constitute unjust enrichment without contractual agreement. The court stated that "disclosure in an information statement alone does not establish contractual agreement," firmly rejecting the long-standing industry practice of profit margins. This ruling strengthens transparency across the franchise business and signals major changes to an industry that relied on 'implicit agreements.' While franchise owners' rights are protected, franchise headquarters now face a complete review of their contract structures.

💡 Summary

• Differential franchise fees are amounts headquarters charge above wholesale prices when supplying raw materials.
• The court ruled that differential fees not specified in contracts constitute unjust enrichment.
• Disclosure in information statements alone is not recognized as contractual agreement; explicit consent is required.

1️⃣ Definition

Differential franchise fees are amounts that franchise headquarters obtain beyond wholesale prices when supplying raw materials or products to franchise stores. These are not simply distribution margins, but are classified as a type of franchise fee included in the headquarters' revenue structure.

The franchise industry has long considered this a normal practice. Franchise headquarters would lower costs through bulk purchasing and keep the difference as their profit. However, this court ruling made clear that such practices cannot be justified without explicit consent from franchise owners.

💡 Why Is This Important?

• It's a core cost structure directly affecting franchise store profitability.
• It becomes an important legal standard for ensuring contract transparency and fairness.
• It provides an opportunity to improve the unbalanced relationship between headquarters and franchisees.
• It's something prospective entrepreneurs must check when choosing a franchise business.

2️⃣ Legal Issues and Meaning of the Ruling

📕 Key Points of the Korea Pizza Hut Case

• The court clearly defined the legal nature of differential fees. The main judgments are:

  • Differential franchise fees are classified as a type of franchise fee, not just distribution margins.
  • Under franchise business law, franchise fees require explicit agreement between contracting parties.
  • Even if differential fee rates are disclosed in information statements, this alone is not recognized as contractual agreement.
  • Franchise owners must clearly recognize and consent to the existence and scale of differential fees.

• The claim of 'implicit agreement' was completely rejected. The key points are:

  • Korea Pizza Hut argued that "implicit agreement existed through long-standing business practices."
  • The court considered that franchise owners have significantly less bargaining power than headquarters.
  • In a one-sided transaction structure, silence or lack of objection cannot be viewed as consent.
  • No matter how long-standing a practice is, it has no legal effect without explicit contracts.

📕 Existing Industry Practices

• Differential fees were an open secret revenue structure. The main situation:

  • Most franchise headquarters took substantial margins from raw material supplies.
  • Some companies had differential fees accounting for 30-50% of total revenue.
  • Franchise owners found this unreasonable but were reluctant to object due to contract termination concerns.
  • Headquarters justified the difference under names like "brand usage fees" or "logistics management fees."

• Franchise owner complaints had been accumulating. The main problems:

  • It was difficult to know the exact difference between actual costs and supply prices.
  • They were forced to buy from headquarters even when the same products were available cheaper elsewhere.
  • High costs compared to competitors frequently led to declining franchise profitability.
  • Differential fees were sometimes unilaterally increased at contract renewal time.

💡 Core Problems with Differential Franchise Fees

1. Contract Opacity: Franchise owners struggle to accurately understand the actual margin structure
2. Bargaining Power Imbalance: Headquarters' superior position makes it difficult for franchises to object
3. Entrenched Practices: Unfair trade practices solidified over time like industry standards
4. Lack of Legal Basis: Justified only by practice without explicit contracts
5. Declining Profitability: Excessive differences pressure franchise operations

3️⃣ Impact of Ruling and Future Outlook

✅ Impact on the Franchise Industry

• Complete revision of franchise contracts is unavoidable. The main changes:

  • All franchise headquarters must specify differential fees in contracts.
  • They must transparently disclose specific supply prices, costs, and difference rates for each raw material.
  • They must include procedures to obtain explicit consent from franchise owners in the contracting process.
  • Existing contracts must also be clarified through supplementary or renewed contracts.

• Restructuring of headquarters' revenue models is expected. The main outlook:

  • Headquarters that heavily relied on differential fees may experience revenue declines.
  • They may shift toward increasing the proportion of other revenue sources like franchise fees and royalties.
  • They will face pressure to adjust raw material supply prices to reasonable levels.
  • Some brands may need to reconsider their business models entirely.

✅ Implications for Franchise Owners and Prospective Entrepreneurs

• Thorough pre-contract verification has become essential. Key checkpoints:

  • Carefully review differential fee rates disclosed in information statements.
  • Confirm that raw material supply conditions are specified in contracts.
  • Distinguish between items available for external purchase and those requiring headquarters supply.
  • Clarify supply price change conditions, frequency, and consultation procedures in advance.

• Active responses for rights protection have become possible. The main methods:

  • Claims for refund of unjust enrichment can be made for undisclosed differential fees.
  • Unfair trade practices can be reported to the Fair Trade Commission.
  • Help can be obtained from franchise owner associations or legal support organizations.
  • Bargaining power can be increased through class actions or collective responses.

4️⃣ Related Terms Explained

🔎 Franchise Business Act Enforcement Decree

• The legal basis for ensuring franchise business transparency.
  • Article 6 of the Franchise Business Act Enforcement Decree mandates that franchise headquarters disclose the pricing method for goods or services and differential franchise fee rates in information statements. This is a mechanism to ensure prospective franchise owners can understand the actual business structure.
  • Information statements must include: First, raw material supply conditions and pricing methods. Second, if differential fees exist, their rates and calculation basis must be specified. Third, the possibility of supply price changes and adjustment procedures must be disclosed. Fourth, whether franchise owners can make external purchases must be stated.
  • However, this ruling clarified that disclosure in information statements alone is not recognized as contractual agreement. It must also be specified in contracts and explicit consent obtained from franchise owners for legal validity.

🔎 Unjust Enrichment Refund Principle

• A civil law principle requiring the return of benefits obtained without legal cause.
  • Article 741 of the Civil Act stipulates that anyone who obtains benefits from another's property or labor without legal cause and thereby causes damage to that person must return those benefits. This differential fee ruling is based on this provision.
  • Requirements for unjust enrichment include: First, obtaining benefits from another's property. Second, causing damage to the other party as a result. Third, a causal relationship between the benefit and damage. Fourth, no legal justification.
  • If differential fees are not specified in contracts, they are judged to have no legal cause. Therefore, franchise headquarters may need to return the differences they obtained to franchise owners. The statute of limitations is 10 years, so refund claims are possible for amounts paid within the last 10 years.

🔎 Implicit vs. Explicit Agreement

• Methods of reaching mutual consent between parties necessary for contract formation.
  • Explicit agreement refers to agreements made when contracting parties clearly express their intentions in writing or verbally. In contrast, implicit agreement is when there's no clear expression of intent, but agreement is presumed from actions or circumstances.
  • In general commerce, implicit agreements are often recognized. For example, long-standing repeated business practices or paying fees without objection may be interpreted as implicit agreement.
  • However, in this ruling, the court considered the special nature of franchise contracts. There is a significant bargaining power imbalance between franchise headquarters and owners. Franchise owners find it difficult to object due to concerns about contract termination or disadvantages. Therefore, silence or lack of objection cannot be viewed as consent, and important matters like franchise fees absolutely require explicit agreement.

🔎 Strengthened Role of the Fair Trade Commission

• The government agency that supervises and sanctions franchise business fairness.
  • The Fair Trade Commission (FTC) has the authority to investigate violations of the Franchise Business Act and impose sanctions such as corrective orders and fines. After this ruling, the FTC plans to significantly strengthen supervision of differential franchise fees.
  • The FTC's main roles include: First, verifying the accuracy and completeness of information statements. Second, reviewing franchise contracts for unfair terms. Third, investigating franchise owner reports or complaints. Fourth, issuing corrective orders or imposing fines when violations are found.
  • After this ruling, the FTC is expected to focus on cases where differential fees are not specified in contracts. It will also review the reasonableness of differential fees, and can sanction excessively high margins as unfair trade practices. Franchise owners can seek relief through FTC reports or consultations.

5️⃣ Frequently Asked Questions (FAQ)

Q: Can existing franchise owners get refunds for past differential fees?

A: If not specified in contracts, unjust enrichment claims are possible, but statute of limitations and burden of proof must be considered.

• According to this ruling's legal principle, if differential fees are not specified in contracts, they constitute unjust enrichment and refund claims are possible. First, the statute of limitations for unjust enrichment claims under civil law is 10 years. Therefore, claims can be made for differential fees paid within the last 10 years. Second, franchise owners must prove the existence and amount of differential fees. Transaction statements, tax invoices, and bank transaction records must be secured as evidence. Third, contracts and information statements must be reviewed to prove there was no explicit agreement.
• In practice, collective responses through franchise owner associations or FTC reports may be more effective than individual lawsuits. It's advisable to prepare systematically with help from lawyers or legal support organizations. However, lawsuits involve time and cost, and the possibility of deteriorating relationships with headquarters must be considered.

Q: What should I check when starting a franchise business?

A: Thoroughly verify differential fee content in information statements and contracts, and have professionals review them.

• There are essential items to check before starting a franchise. First, check the differential fee rates disclosed in information statements. Review whether they're excessively high compared to industry averages. Second, confirm that raw material supply conditions are specifically stated in contracts. Prices by item, difference rates, and price adjustment conditions must be clear. Third, clearly distinguish between items available for external purchase and those requiring headquarters supply. Fourth, check whether consultation procedures exist for supply price changes.
• Before signing, it's advisable to have contracts reviewed by lawyers or franchise consultants. It's also important to meet existing franchise owners of the same brand and hear about actual operating experiences. If contract terms are unclear or unfavorable, definitely demand revisions, and if headquarters refuses, it's wise to consider other brands.

Q: If differential fees are specified in contracts, are any amounts acceptable?

A: Even if specified, excessively high or unfair fees can face FTC sanctions.

• Not all differential fees are justified just because they're specified in contracts. First, the Franchise Business Act prohibits franchise headquarters from abusing their superior position to obtain unfair benefits. Second, if differential fees significantly exceed reasonable distribution margins, they can be judged as unfair trade practices. Third, the FTC can crack down on excessive differential fees based on appropriate margin rates by industry.
• Franchise owners can report to the FTC if they judge differential fee levels are excessive even if specified. If the FTC judges them as unfair trade, corrective orders and fines can be imposed. There's also room to claim invalidity of unfair contract terms in civil cases. Therefore, from headquarters' perspective, setting reasonable and transparent differential fee levels is advantageous in the long term.

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