Pizza Hut Ordered to Refund 21.5 Billion Won in Fee Dispute (Yonhap)
SEOUL, Feb. 6 (Korea Bizwire) — A recent Supreme Court ruling that deemed undisclosed supply markups collected by franchisors as unlawful gains has sent tremors through South Korea’s franchise industry, where nearly half of Seoul-based brands were found to have imposed such fees.
According to data released Friday by the Seoul Metropolitan Government, 47.9 percent of the 1,992 franchise brands registered in the city and reporting sales in 2024 — or 955 brands — collected so-called “difference franchise fees,” or supply markups, from franchisees.
The practice spans sectors from restaurants and services to retail. The fees are embedded in the cost of mandatory supplies, such as ingredients and materials, that franchisors require franchisees to purchase. Because the items are sold at a markup, franchisees often pay more than prevailing wholesale prices.
Under current standard franchise contracts, only initial franchise fees and royalties are explicitly defined. There is no clear provision addressing supply markups arising from the distribution of raw and subsidiary materials, leaving room for disputes between franchisors and franchisees.
Restaurant franchise owners in South Korea typically need about two years and seven months to recoup their initial investment, with the majority continuing to pay fees to headquarters well beyond the startup phase. (Image created by AI/ChatGPT)
The legal uncertainty deepened last month when the Supreme Court ruled, in a case involving Korea Pizza Hut, that franchisors must obtain explicit contractual consent to collect such markups. Without clear agreement in the contract, the court held, the fees could constitute unjust enrichment.
In response, Seoul officials have urged the Fair Trade Commission to revise standard franchise agreements across 13 industries to explicitly include provisions governing supply markups.
The proposed amendments call for a clear definition of the fees, disclosure of whether they are collected, details on calculation methods and rates, and clarification of cost-sharing structures and conditions for changes.
“Supply markups are a significant cost component in franchise operations,” a city official said. “It is essential that they be fully explained and clearly agreed upon at the contract stage.”
The ruling has left franchisors reassessing long-standing business practices, while franchisees weigh the possibility of seeking redress — setting the stage for broader changes in one of South Korea’s most dynamic sectors.
M. H. Lee (mhlee@koreabizwire.com)
