Hello, this is Attorney Eom Sang-yoon of Cheongchul Law Firm.

Behind familiar franchise brands such as pizza, chicken, and coffee lies a complex financial structure between the franchisor and franchisees. Among these, the "margin franchise fee" refers to the amount the franchisor receives by adding a certain margin to the cost when supplying raw and subsidiary materials to franchisees, and it has long been established as an industry practice in the franchise sector.

However, on Jan. 15, 2026, the Supreme Court ruled that collecting such margin franchise fees without specifying them in the franchise agreement constitutes unjust enrichment (Supreme Court Case No. 2024Da294033). Today, we will analyze the ruling in the so-called "Pizza Hut margin franchise fee case" and examine its implications for franchise business practice.

[Concept of Margin Franchise Fees]

Article 4(1), [Appendix Table 1], Item 5(b)2 of the Enforcement Decree of the Fair Transactions in Franchise Business Act (hereinafter, the "Franchise Business Act") defines a margin franchise fee as "the portion of consideration paid by a franchisee to the franchisor for items supplied through transactions that the franchisor compels or recommends the franchisee to conduct with the franchisor or a party designated by the franchisor in the course of operating the relevant franchise business, which exceeds an appropriate wholesale price."

This includes amounts the franchisor receives in excess of the supplier purchase price when supplying raw and subsidiary materials to franchisees. The Supreme Court and the Constitutional Court have already established that margin franchise fees are included in the "franchise fee" under Article 2(6) of the Franchise Business Act (Constitutional Court, decision dated Oct. 28, 2021, 2019Hun-Ma288). In the Pizza Hut case as well, the key issue was not the nature of the margin franchise fee itself, but whether there was an agreement to collect it.

[Overview of the Case]

The defendant, the franchisor of the "Pizza Hut" brand, entered into franchise agreements with 94 plaintiff franchisees. At the time of entering into each franchise agreement, the franchisees had paid an initial franchise fee, a fixed monthly fee equivalent to 6% of gross revenue during the term of the agreement, and advertising expenses equivalent to 5% of gross revenue. In addition, the plaintiffs purchased the raw and subsidiary materials necessary for pizza production as designated by the defendant from the defendant (or a party designated by the defendant) and paid for such goods monthly.

However, the defendant began registering the fact of collecting margin franchise fees in its disclosure document from 2019, and the plaintiffs, after confirming this in 2020, filed suit. The plaintiffs argued that the defendant had collected margin franchise fees without legal cause from 2016 to 2022 and sought their return.

[Court’s Judgment on Each Issue]

(1) Is an agreement required to collect margin franchise fees?

The court of first instance (Seoul Central District Court, judgment dated June 3, 2022, 2020Gahap607773), the appellate court (Seoul High Court, judgment dated Sept. 11, 2024, 2022Na2024467), and the Supreme Court all held that an agreement is required to collect margin franchise fees. Since payment of franchise fees constitutes an essential and important term of a franchise agreement, a specific agreement between the franchisor and franchisee is required to collect margin franchise fees.

The defendant argued that because the franchise-related statutes and regulations recognize margin franchise fees as one type of franchise fee, there was, by itself, a legal basis for collection. The court did not accept this argument. Whether receiving franchise fees in the form of margin franchise fees is recognized by law and whether an agreement to pay margin franchise fees was actually made are separate issues.

(2) Can an implied agreement be established through franchise agreement clauses or disclosure statements?

The defendant argued that because the franchise agreement required the plaintiffs to purchase raw and subsidiary materials from suppliers approved by the defendant, this clause served as the basis for collecting margin franchise fees. However, the court held that this clause concerns the parties to the transaction and cannot be viewed as establishing a supply contract between the plaintiffs and defendant or as a basis for collecting margin franchise fees.

Furthermore, the franchise agreement stipulated that its terms could be changed only if both parties executed the change in writing. Even if raw and subsidiary material transactions occurred between the plaintiffs and defendant as claimed by the defendant, the court held that absent a written contract, it is difficult to conclude that a separate supply agreement was formed, and that goods transactions and payment alone do not demonstrate the plaintiffs’ intent to pay margin franchise fees.

The court also held that entries in the disclosure document do not constitute a basis for agreement. The appellate court clearly stated that the margin franchise fee section in the disclosure document is merely ex post information on margin franchise fees collected by the defendant in the immediately preceding year and cannot function as a basis for agreement with individual franchisees regarding whether margin franchise fees will be collected in the future.

By synthesizing these points, the Supreme Court reaffirmed existing legal principles (Supreme Court judgments dated June 15, 2018, 2017Da248803, 248810), stating that, "to recognize that an implied agreement containing terms unfavorable to a franchisee has been established, one must comprehensively consider the social and economic status of the franchisor and franchisee, the background and overall content of the franchise agreement, whether sufficient information was provided, whether there were special circumstances for not specifying the agreed terms in the franchise agreement, the extent of disadvantage suffered by the franchisee, and trade practices, and then make a careful determination." It thus upheld the lower court’s conclusion denying formation of an implied agreement.

(3) Method of calculating margin franchise fees for periods not stated in the disclosure document

In the Pizza Hut case, the defendant began stating margin franchise fees in the disclosure document from 2019. Therefore, for prior periods where this information was not stated, there was an evidentiary issue as to how to calculate the margin franchise fees. On this point, the first-instance court dismissed claims for 2016–2018 on the ground that there was no evidence to recognize the margin franchise fee ratio.

However, the appellate court pointed out that the defendant failed to comply with a court order to produce documents and did not submit transaction details for raw and subsidiary materials for the relevant period. Noting that the increase rate in the margin franchise fee ratio between 2019 and 2020 (about 19%) was the highest annual increase rate, it calculated 2016 at 2.24%, 2017 at 2.67%, and 2018 at 3.18% by sequentially reverse-applying that increase rate from the 2019 ratio (3.78%).

Regarding this, the Supreme Court held that "considering the defendant’s noncompliance with the document production order and the fact that the transaction structure and form for raw and subsidiary materials did not change from 2016 to 2021, the calculation of unjust enrichment cannot be viewed as unreasonable or contrary to the ideals of equity and justice," and upheld the lower court’s judgment.

[Practical Implications of the Pizza Hut Ruling]

The Pizza Hut ruling is having a major impact across the franchise industry as a whole, and similar unjust enrichment return lawsuits are expected to be filed in succession going forward. Accordingly, franchisors need to revise franchise agreement clauses and prepare for disputes.

①     Collecting margin franchise fees requires an explicit clause in the franchise agreement. Agreement cannot be recognized merely because the disclosure document states that margin franchise fees are collected or because franchisees have paid for goods. Franchisors wishing to collect margin franchise fees must specifically state in the franchise agreement the target items and calculation method for such fees and obtain franchisees’ consent.

②     If there is no margin franchise fee clause in the franchise agreement, all previously collected amounts may be subject to return as unjust enrichment. In the Pizza Hut case, a total of KRW 21.5 billion in margin franchise fees over seven years (2016–2022), plus delay damages, became subject to return. According to media reports, similar lawsuits involving around 20 brands are currently underway or being prepared, so the ripple effect of this ruling is expected to extend beyond Pizza Hut.

③     With the 2024 amendment to the Franchise Business Act, matters concerning the types of mandatory items and the method for calculating supply prices were added as mandatory items to be included in franchise agreements (amended Jan. 2, 2024, Article 11(2)12). However, this ruling concerns the period before that amendment, and the court also made clear that the amended law does not retroactively provide legal cause for margin franchise fees collected in the past without agreement. Therefore, the mere fact that margin franchise fee-related content was added to the franchise agreement under the amended law may not exempt past obligations to return unjust enrichment.

Cheongchul Law Firm has successfully carried out fair trade-related advisory services and investigation response work based on the expertise and experience built through major domestic law firms such as Kim & Chang, Bae, Kim & Lee, Lee & Ko, Shin & Kim, and Yulchon, as well as in-house counsel experience at large corporations. With Cheongchul, we will be a reliable partner who accurately identifies the essence of your case and effectively conveys your position.