[비즈한국] Companies sometimes make decisions that are difficult to explain by money alone. Understanding the laws or systems hidden behind these decisions can help clarify the deeper context. "Useful Business Laws (BizTips)" introduces clues to help understand business flows.
In any field or transaction, legal disputes are unlikely if the deal is mutually beneficial to all parties. Of course, since the causes of disputes are rarely simple, legal issues can arise if one party engages in deceptive practices or breaks trust, or if someone is swayed by subjective emotions like feelings of betrayal.
However, if a transaction is profitable, it can be difficult to persuade others if you raise an issue with it. For example, if you file a complaint with the relevant authorities claiming unfair practices in a transaction, but you continue to profit from that same transaction, you will likely be asked by the official in charge, "Why did you report this? Are you trying to break the deal?" This is a natural question for a third party to ask, so there is no need to feel offended.
In other words, if a deal is mutually beneficial, it is common to accept slightly unreasonable terms or try to continue the trade by proposing negotiations. Some might call this "maintaining the code of the martial arts world." However, if it becomes difficult to make a profit due to changes in market structure and external conditions, the likelihood of minor issues escalating into legal disputes increases. Such disputes easily turn into life-or-death struggles that only end when one side falls.
A series of lawsuits surrounding a recent pizza franchise is no different. Those of a certain age will remember when pizza was considered a luxury food during their childhood. I remember visiting a pizza place for the first time at a friend's birthday party in elementary school; everything, including the salad bar, felt magical. However, as time passed, Korea's income levels rose, and competition in the pizza market intensified with the entry of new, low-priced pizza franchises. Adding the shrinking fast-food market due to the "well-being" trend, the performance of Pizza Franchise A also steadily declined.
It wasn't just the franchise headquarters that were struggling; the franchisees were likely in the same boat. Furthermore, since Pizza Franchise A is a famous overseas brand, the initial investment costs for franchisees would have been much higher than other franchises. With cost recovery proving difficult due to market conditions, a dispute between the franchisees and the headquarters was somewhat inevitable.
The legal disputes between the franchisees and Pizza Franchise A reported in the media are as follows. First, there was the "admin fee" dispute. Pizza Franchise A collected a monthly fee from franchisees called an "admin fee." According to the headquarters, this was in exchange for administrative support such as purchasing agency, marketing, and IT support. The headquarters had been collecting a percentage of sales since 2003, and since 2012, they obtained an agreement to collect 0.8% of sales as an admin fee, which reportedly amounted to several million won per month.
The Korea Fair Trade Commission (KFTC) viewed it as unfair that the franchise headquarters did not include the admin fee provisions in the franchise agreement and imposed the fees without the franchisees' prior consent, issuing corrective orders and fines. The court also deemed the KFTC's actions lawful in an administrative lawsuit.
Additionally, the franchisees filed a lawsuit for the return of unjust enrichment, seeking the return of all admin fees paid to the headquarters. The Supreme Court ruled that only the portion of the admin fees collected without a written agreement was unjust, and upheld the franchisees' claim for that part. In other words, while the franchisees requested the return of all admin fees, arguing that both the collection of fees and the post-hoc agreements used to justify them were unfair, the Supreme Court determined that the headquarters had established a basis for the fees through those agreements, thus dismissing the portion of the claim for the period after the agreements were signed.
The franchisees argued that they felt aggrieved because they had no choice but to agree to the headquarters' demands for the agreements, but regardless, the admin fee dispute concluded with the Supreme Court's ruling.
Next, a "margin-based franchise fee" (gap-based franchise fee) case occurred against the same franchise. Under the Franchise Business Act, if a franchisee pays the headquarters an amount that exceeds a reasonable wholesale price for goods supplied, that excess portion is classified as a type of franchise fee, often called a "margin-based franchise fee."
The 2018 amendment to the Enforcement Decree of the Franchise Business Act required companies to disclose whether margin-based franchise fees are paid and their ratios in their disclosure documents. This amendment has significant implications in the field. Paying such fees is a common practice in the domestic franchise industry, but because the information was not disclosed, franchisees were previously unaware of the details or even the existence of these fees. Once the disclosure requirements made the existence of these fees known, franchisees began to meticulously examine whether there was a basis for the payments and whether the amounts were reasonable.
In any case, Pizza Franchise A included the scale of margin-based franchise fees and the ratio of average fees paid per store relative to average revenue in their 2020 and 2021 disclosure documents, in accordance with the amended regulations. Consequently, the franchisees filed a lawsuit for the return of unjust enrichment, claiming that Pizza Franchise A had collected these fees without any legal or contractual basis.
The court of first instance ruled that there were no explicit contractual provisions regarding margin-based franchise fees, no awareness that a margin was added to the price of goods, and no reason for franchisees to agree to pay them, ordering the return of approximately 7.5 billion won in fees for 2019-2020.
The appellate court upheld the franchisees' claims for similar reasons, further expanding the period to 2016-2022 and ordering the return of an even larger amount (21 billion won). The court's bold decision may have been influenced by the history of the admin fee dispute that occurred prior to this case.
According to reports, Pizza Franchise A filed for rehabilitation procedures after the appellate court's ruling. Whether the franchisees will actually receive the money as ordered by the court will be determined by the progress of the rehabilitation proceedings. Looking at the series of disputes, it is disheartening to see the hardships faced by all parties due to the worsening market conditions, rather than simply taking the side of either the franchisees or the headquarters.