South Korea’s Supreme Court has ordered Pizza Hut Korea to return Won21.5bn ($16m) to its franchise owners.
Upholding a lower court decision, the Supreme Court ruled that Pizza Hut must repay the money collected as “margin franchise fees” between 2016 and 2022.
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According to local reports, the lawsuit was filed by 94 Pizza Hut franchise owners. The plaintiffs had sought the return of what they argued was “unjust enrichment” by the franchisor.
The margin-based franchise fees refer to distribution margins on raw materials and ingredients sold by franchisors to franchisees.
Although such margins are common in the industry, the Supreme Court agreed with the lower courts that a franchisor may only levy such charges when there is a clear contractual agreement. However, it found that no valid agreement existed between Pizza Hut Korea and its franchisees covering margin-based franchise fees.
In their lawsuit, filed in December 2020, the franchisees argued that Pizza Hut Korea had imposed undisclosed margin-based fees while also collecting a fixed royalty equal to 6% of total revenue, in addition to a 5% advertisement fee, The Korea Bizwire reported.
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By GlobalDataBoth the trial court and the appellate court ruled in favour of the franchisees before the case reached the Supreme Court.
The latest decision finalises the obligation of Pizza Hut Korea to repay the specified amount.
This is the first Supreme Court ruling to directly question the widespread practice of Korean franchise headquarters earning substantial profits from differential or margin-based fees, rather than relying solely on fixed royalties or sales-based percentages.
Similar disputes are currently before the courts involving other franchise brands, including BHC, Baskin-Robbins, Kyochon Chicken and BBQ, The Chosun Daily reported.
