Must Franchisors Disclose Differential Franchise Fees in South Korea? Supreme Court 2024da294033
Table of Contents
Case Background: A Pizza Hut franchisee in South Korea had been paying monthly supply invoices to the franchisor for years. Only later did she discover that those invoices included a hidden margin — a “differential franchise fee” — that was nowhere mentioned in her franchise agreement. She sued to recover the amounts. The question before the South Korea Supreme Court: was she entitled to repayment?
A Ruling That Reshapes Decades of Franchise Practice in South Korea
※ This article is based on the publicly available contents of the Supreme Court of Korea judgment dated January 15, 2026, Case No. 2024da294033.
Pizza Hut franchisees filed suit against the franchisor claiming that differential franchise fees embedded in supply invoices from 2016 to 2022 were collected without legal basis. Both the lower courts and the Supreme Court of Korea sided with the franchisees, dismissing the franchisor’s appeal. The implications extend far beyond the Pizza Hut brand. Every franchisor operating in South Korea that collects differential franchise fees must urgently review its franchise agreements. For franchisees, the ruling creates a concrete legal basis to seek recovery of fees already paid — potentially going back a decade under the general statute of limitations.
1. What Is a Differential Franchise Fee?
A differential franchise fee (차액가맹금) is the amount by which the price charged by a franchisor for raw materials or ingredients supplied to a franchisee exceeds the appropriate wholesale market price. It is classified as a type of franchise fee under the Enforcement Decree of the Fair Transactions in Franchise Business Act (가맹사업거래의 공정화에 관한 법률, hereinafter “Franchise Business Act”) of South Korea.
Types of Franchise Fees and Where the Differential Fee Fits
The Franchise Business Act defines franchise fees broadly to include all consideration paid by a franchisee to a franchisor. Initial franchise fees, ongoing royalties, and advertising contributions are the most visible components. The differential franchise fee sits alongside these as a recognised category. The Supreme Court of Korea confirmed in Case No. 2024da294033 that because differential franchise fees fall within the statutory definition of franchise fees, their collection requires specific agreement between the parties, just like any other significant financial obligation under the franchise relationship.
| Type of Franchise Fee | Description | Must Be Stated in Agreement |
|---|---|---|
| Initial Franchise Fee | Lump sum paid on signing the franchise agreement | Yes |
| Continuing Franchise Fee (Royalty) | Ongoing payments based on sales during the franchise term | Yes |
| Advertising / Marketing Fee | Contributions to joint advertising and promotional activities | Yes |
| Differential Franchise Fee | Supply price margin above appropriate wholesale price | Yes — confirmed by this ruling |
Why Did This Issue Arise?
Many South Korean franchisors have collected differential franchise fees as a matter of longstanding commercial practice, often without explicit contractual provisions. Because franchisees are typically required to purchase designated supplies exclusively from the franchisor or its approved suppliers, they have limited ability to verify or challenge pricing structures. The Supreme Court’s ruling directly challenges the assumption that this practice could continue without informed, express consent.
2. What Did the South Korea Supreme Court Decide?
The Supreme Court of Korea addressed three central issues in Case No. 2024da294033: first, whether specific agreement is required for a franchisor to collect differential franchise fees; second, whether implied agreement had been established on the facts of this case; and third, whether the method used to calculate the unjust enrichment was appropriate. The Court ruled in favour of the franchisees on all three issues and dismissed the franchisor’s appeal.
Specific Agreement Is Required — General Contract Law Principles Applied
The Court applied South Korea’s general principles of contract formation to the question of differential franchise fees. It reasoned that because a contract requires a meeting of minds on all essential and important terms — either through specific agreement or at minimum through agreement on criteria and methods by which those terms can be determined in the future — and because differential franchise fees constitute an important financial term of the franchise relationship, their collection requires the franchisee’s specific, informed consent (Supreme Court of Korea, January 15, 2026, Case No. 2024da294033).
The Structural Imbalance of the Franchise Relationship
The Court also highlighted the structural characteristics of franchise agreements. It observed that franchisors typically enjoy significant advantages over franchisees in terms of information and bargaining power, and that they have every opportunity during the contracting process to record favourable terms clearly in the agreement. The Court stated that franchisors using standard-form franchise agreements “have ample opportunity to eliminate uncertainty by clearly stating terms favourable to themselves in the franchise agreement” (Supreme Court of Korea, January 15, 2026, Case No. 2024da294033). The failure to do so cannot subsequently be cured by claims of implied agreement.
3. Why Was Implied Consent Rejected?
The franchisor argued that because the franchisees had paid supply invoices containing differential franchise fees for several years without objection, they must have impliedly agreed to the arrangement. Both the lower court and the Supreme Court of Korea rejected this argument.
Strict Standards for Implied Agreement in Franchise Relationships
The Court set out the factors that must be carefully and comprehensively considered before implied agreement unfavourable to a franchisee can be recognised (Supreme Court of Korea, January 15, 2026, Case No. 2024da294033):
- The relative social and economic positions of the franchisor and franchisee
- The circumstances in which the franchise agreement was concluded and its overall contents
- Whether the franchisee was provided with sufficient information
- Whether any special circumstances justified the franchisor’s decision not to record the arrangement in the franchise agreement, notwithstanding the risk of legal uncertainty or regulatory sanctions
Specific Grounds for Rejecting Implied Agreement in This Case
The lower court identified two grounds for finding that no agreement — express or implied — had been reached, and the Supreme Court accepted both. First, the franchise agreement could not be construed as a supply contract for the raw materials to which the differential franchise fee applied. Second, because franchisees had no choice of supplier, counterparty, or price for designated supplies, their situation was fundamentally different from ordinary commercial procurement. The mere act of receiving supplies and paying invoices could not be taken as evidence of a voluntary intention to pay differential franchise fees above the wholesale price.
4. How Is the Unjust Enrichment Amount Calculated?
Even where the legal basis for recovery is established, franchisees face a practical challenge: how to quantify the differential franchise fees included in supply invoices, particularly for past years where detailed records may be unavailable. The Supreme Court’s endorsement of the lower court’s calculation method is therefore highly significant for future claims.
The Calculation Method Approved by the Court
The lower court calculated the unjust enrichment by multiplying each franchisee’s annual sales by the differential franchise fee rate recorded in the franchisor’s information disclosure document (정보공개서). For the years 2016 to 2018, where the specific rate data was not directly available, the court used the 2019 rate as a basis for estimation. The Supreme Court of Korea confirmed that this approach was reasonable (Supreme Court of Korea, January 15, 2026, Case No. 2024da294033).
| Item | Details |
|---|---|
| Basic Formula | Franchisee Annual Sales × Differential Fee Rate (from Information Disclosure Document) |
| Where Rate Data Is Unavailable | Rate from a later year may be used as a retrospective estimate |
| Source of Rate Data | Information Disclosure Document (mandatory disclosure under Franchise Business Act) |
Practical Implications
This calculation method has important practical consequences for both sides. For franchisees, it means that the information disclosure document — which franchisors are legally obliged to provide — can serve as the evidential foundation for quantifying a claim, even where contemporaneous records are incomplete. For franchisors, it is a reminder that the differential franchise fee rates recorded in their information disclosure documents carry direct legal and financial consequences and must be maintained accurately.
5. What Must Franchisors Do Now?
This ruling demands immediate action from every franchisor in South Korea that collects differential franchise fees. Where the current franchise agreement contains no explicit provision — or only a vague one — the legal risk has already materialised.
Step 1: Conduct a Full Review of Existing Franchise Agreements
Franchisors should immediately audit their standard franchise agreements for the following: a clear definition of differential franchise fees and the method of calculation; identification of the raw materials and ingredients to which the fee applies and the pricing structure; and an express consent clause from the franchisee. As the Court emphasised, franchisors had every opportunity to include this information in the agreement from the outset. That opportunity cannot be recovered after the fact through claims of implied agreement.
Step 2: Seek Written Agreement with Existing Franchisees
For existing franchise relationships, franchisors should consider entering into separate written agreements with franchisees covering differential franchise fees. This process must involve full and accurate disclosure of the concept, amounts, calculation method, and legal basis for the fee, with confirmation that the franchisee genuinely understood and agreed. A purely formal signature-gathering exercise, without meaningful information provision, risks falling foul of the very principles the Court articulated.
Step 3: Review the Business Model
In the longer term, franchisors may wish to reconsider their overall fee structure. Options include reducing differential franchise fees and increasing continuing royalties correspondingly, restructuring supply margins to a reasonable level and converting the difference to an explicitly agreed fee, or expanding franchisee support services and charging transparently for those services. Each approach has different legal and commercial implications that warrant careful analysis.
6. How Can Franchisees Respond?
This ruling provides franchisees with a clear legal foundation to seek recovery of differential franchise fees paid without proper agreement. Where the franchise agreement contains no explicit provision on this point, a claim for unjust enrichment under South Korean civil law may be viable.
Preliminary Checklist
Before initiating a claim, franchisees should verify the following: whether the franchise agreement contains any provision on differential franchise fees; whether the information disclosure document records a differential franchise fee rate; the approximate amount of differential fees included in supply invoices paid; and how much time remains before the applicable statute of limitations expires.
Evidence and Litigation Strategy
The key documents in a differential franchise fee recovery claim are the franchise agreement, the information disclosure document, supply records, and payment receipts. As confirmed by the Court, the differential franchise fee rate in the information disclosure document provides the basis for calculating the claim, making it an essential document to obtain early. Where multiple franchisees of the same franchisor are affected, coordinated action may be more efficient and effective than individual claims.
Statute of Limitations
The general statute of limitations for unjust enrichment claims under Article 162(1) of the Civil Act of Korea is ten years. However, depending on the specific facts, shorter limitation periods may apply, and the question of when time begins to run can be contested. It is important to seek legal advice promptly to avoid any risk of a time-barred claim.
7. FAQ
Franchise disputes in South Korea frequently arise from the gap between what is written in the franchise agreement and what has become accepted commercial practice. This Supreme Court ruling makes clear that practice can no longer substitute for contract. Drawing on experience in corporate disputes and franchise-related litigation, Atlas Legal advises both franchisors on agreement compliance and risk management, and franchisees on assessing and pursuing recovery claims.
※ The legal information in this article is provided for general informational purposes only. The application of the law depends on the specific facts of each case, and this article does not constitute legal advice. Please consult a qualified attorney regarding your specific circumstances.