DIFFERENTIAL FRANCHISE FEES AND UNJUST ENRICHMENT: KEY TAKEAWAYS FROM A RECENT KOREAN SUPREME COURT DECISION

In a recent decision, the Supreme Court of Korea addressed whether differential franchise fees1  collected by a franchisor (“Franchisor”) from franchisees (“Franchisees”) were charged absent a contractual provision or mutual agreement and, if so, whether such fees constituted unjust enrichment subject to restitution (“Case”).2  In the Case, the Supreme Court held that the Franchisor was obligated to return the differential franchise fees as unjust enrichment.

This marks the first time the Supreme Court has ruled on unjust enrichment issues arising from the collection of differential franchise fees.

Given that the Court’s holding was rendered based on the specific contractual provisions in the particular franchise agreement and factual circumstances of the Case, it may not apply uniformly to other franchise relationships. Outcomes in similar disputes may vary depending on the specific language of the franchise agreement at issue, the structure of the relevant supply transactions, the underlying factual record, and the manner in which the parties framed and substantiated their claims in litigation.

We provide below a summary of the facts and procedural history of the Case, the key holdings of the Supreme Court’s decision, and the practical implications for franchisors.

I. FACTS AND PROCEDURAL HISTORY; KEY HOLDINGS OF THE SUPREME COURT

1. Facts of the Case

• Pursuant to the amendment to, and implementation of, the Enforcement Decree of the Fair Transactions in Franchise Business Act (“Franchise Act”), franchisors were required, beginning in 2019, to disclose information regarding differential franchise fees in their franchise disclosure documents (“FDD”).
• Meanwhile, the Franchisor (defendant in the Case) did not disclose any information regarding differential franchise fees in its FDDs until 2018. In its 2019 FDD, the Franchisor stated, in substance, that no differential franchise fees had been incurred during the immediately preceding fiscal year. Beginning in 2020, the Franchisor included disclosures regarding differential franchise fees in accordance with the requirements set forth in the Enforcement Decree of the Franchise Act.
• The ingredients subject to the differential franchise fees were supplied to the Franchisees (plaintiffs in the Case) by the Franchisor, following procurement from third-party suppliers. Payments for such supplies flowed from the Franchisees to the Franchisor and, in turn, from the Franchisor to the suppliers. With respect to certain ingredients, the Franchisor incorporated differential franchise fees into the prices charged to the Franchisees.
•  The Franchisees brought claims against the Franchisor seeking restitution for unjust enrichment, alleging that, from 2016 through 2022, the Franchisor received payments as differential franchise fees without legal basis.

2. Procedural History of the Case

• The lower courts (i.e., the Seoul Central District Court and the Seoul High Court) found that the franchise agreements in the Case did not include a provision stipulating a contractual basis for the collection of differential franchise fees and that an implied agreement could not be established between the parties. On that basis, the lower courts held that the Franchisor was obligated to make restitution for unjust enrichment, although their decisions differed as to the scope of restitution.
• The Seoul Central District Court ordered the Franchisor to make restitution of the amounts collected from 2019 to 2022, when the rate of differential franchise fees was disclosed in the FDD, and dismissed the Franchisees’ claims for the earlier period from 2016 to 2018 on the basis that the differential franchise fees for that period had not been disclosed in the FDD and were not otherwise sufficiently substantiated.3
• On appeal, the Seoul High Court expanded the scope of restitution to include amounts collected during the period from 2016 to 2018, which had not been recognized by the Seoul Central District Court.4

3. Key Issues; Key Holdings of the Supreme Court

Key issues are as follows:

• Issue 1. Whether a valid agreement to pay differential franchise fees was formed between the Franchisees and the Franchisor through the execution of the franchise agreements and the supply of ingredients.
• Issue 2. Whether the amount of restitution recognized by the Seoul High Court was excessive on the ground that the amount of unjust enrichment was overstated such that ordering restitution in that amount would contravene principles of equity and fairness.

A. The Supreme Court’s Holding on Issue 1

i. Meeting of the minds

The Supreme Court held that differential franchise fees, by their nature, impose an economic burden on the Franchisees and may constitute “franchise fees” under the Franchise Act. Because such fees concern essential and material terms of a franchise agreement, the Court concluded that the Franchisor may collect differential franchise fees only where the parties have reached a specific mutual agreement (i.e., meeting of the minds) with respect to the payment of differential franchise fees.

• Standard applied 

With respect to essential and material terms of a franchise agreement, the Court explained that an agreement may be deemed to have been formed only if the parties have either (i) reached a specific mutual agreement on such terms, or (ii) at least, agreed on objective standards and methods by which those terms can be determined in the future.

ii. Implied agreement 

The Supreme Court reiterated the principle that courts should exercise caution in recognizing the formation of an implied agreement where such agreement would operate to the detriment of franchisees, citing its earlier decision in the so-called, “Admin Fee” case.

• Standard applied 

In determining whether an implied agreement has been formed, the Court explained that a comprehensive assessment is required, taking into : (1) the relative social and economic positions of the franchisor and the franchisees; (2) the circumstances surrounding the execution of the franchise agreements and their overall terms; (3) whether the franchisees were provided with sufficient information based on which they could express an intention to enter into such an implied agreement; (4) whether there were any special circumstances justifying the franchisor’s decision not to expressly set forth the relevant terms in the franchise agreements, notwithstanding potential legal uncertainty or exposure to regulatory sanctions; (5) the extent of the disadvantage suffered by the franchisees as a result of such contractual arrangement; and (6) prevailing commercial practices.

iii. Application to the Case 

The Supreme Court affirmed the Seoul High Court’s finding, which was based on the following reasons, that no explicit or implied agreement to collect differential franchise fees had been formed between the parties.

• First, under the franchise agreements, the Franchisees were required to procure ingredients exclusively from suppliers designated by the Franchisor, and the Franchisor was expressly excluded from liability for disputes that may arise in connection with such supply transactions. In addition, the franchise agreements provided that any modification to their terms could be made only by a written agreement executed by both the Franchisor and the Franchisee. In light of these provisions, the Court found that it would be difficult to conclude that a new supply agreement on terms different from those set forth in the franchise agreements had been formed between the parties in the absence of a separately executed written agreement.

Second, the Court observed that the Franchisees were required to use only the ingredients designated by the Franchisor and could not choose the counterparty or the price. As a result, the Court viewed the relevant transactions as different from ordinary arm’s-length transactions.

Against this backdrop, the Court found it difficult to characterize the differential franchise fees as mere “distribution margins” arising from independent supply transactions. The Court further concluded that the mere fact that the Franchisees purchased supplies and paid the corresponding prices was insufficient to establish that the Franchisees had voluntarily agreed to pay differential franchise fees.5

While the Supreme Court noted that certain aspects of the Seoul High Court’s reasoning were not entirely appropriate, it nevertheless affirmed the Seoul High Court’s ultimate conclusion. The Supreme Court did not specify which aspects of the reasoning it viewed as inappropriate.

• The Supreme Court’s decision should not be understood to mean that franchisors may never receive differential franchise fees in any franchise relationships. Rather, the Court’s conclusion was limited to the specific language of the franchise agreements at issue and the particular factual circumstances of the Case, under which neither the formation of a supply agreement nor an agreement to pay differential franchise fees could be recognized.

B. The Supreme Court’s Holding on Issue 2

The Supreme Court held that the Seoul High Court’s calculation of the amount of restitution was neither unreasonable nor contrary to principles of equity and fairness.

The Seoul High Court calculated the amount of restitution attributable to differential franchise fees by applying the differential franchise fee rates disclosed in the FDDs to the Franchisees’ annual sales. With respect to the period from 2016 to 2018, where no differential franchise fee rates were disclosed in the FDDs, the Seoul High Court derived the applicable rates back-calculating from the 2019 rate disclosed in the 2020 FDD, taking into account the increase in differential franchise fee rates from 2019 to 2020.

In its press release, the Supreme Court further elaborated on its reasoning, noting that the Seoul High Court appropriately considered the following in its calculation: (i) the Franchisor’s failure to comply with court orders to submit relevant documents necessary to calculate the differential franchise fee rates, (ii) indications that the Franchisor had collected differential franchise fees in 2018, and (iii) the absence of any material change in the structure or manner of transactions between the parties from 2016 through 2021, including no meaningful differences in the number of franchise outlets or average annual sales amount per outlet. The Supreme Court further observed that the calculation methodology adopted by the Seoul High Court was reasonable and was not calculated in a manner favorable to the Franchisees.

II. IMPLICATIONS AND PRACTICAL CONSIDERATIONS FOR FRANCHISORS

1. Implications

Based on the Supreme Court’s decision and its press release, the Case demonstrates that the specific factual circumstances, the precise contractual language, and the manner in which the Case was litigated played a crucial role in shaping the ultimate outcome. 

In particular, the Court’s analysis underscores that, in disputes involving differential franchise fees, the key factor is not whether such fees may be collected, but rather how the collection of such fees is structured and articulated in the relevant franchise agreements.

The Supreme Court’s consideration of the Franchisor’s failure to comply with court orders to submit relevant documents for calculating the restitution amount may, depending on the circumstances of a particular case, make franchisors actively submit more materials in litigations involving unjust enrichment. At the same time, the Case suggests that where a franchisor is able to adequately substantiate the structure of its differential franchise fees and the underlying cost components, the scope and calculation of restitution may vary on a case-by-case basis.

2. Practical Considerations for Franchisors

In light of the Supreme Court’s decision, franchisors are advised to reassess their overall policies regarding the collection of variable franchise fees, including differential franchise fees, and should be mindful of the following considerations.

A. Clearly Define the Contractual Framework for Differential Franchise Fees

• Where a franchisor intends to collect differential franchise fees, the contractual basis, specific items, and clear calculation methodology should be expressly set forth in the franchise agreements.
• Disclosure in the FDD alone may not be sufficient. Broad or abstract language—such as provisions permitting the collection of “related costs”— may be challenged and may not be enforceable in a dispute.
• Foreign franchisors should exercise caution when adopting master franchise agreements for use in Korea and should ensure that such agreements are appropriately tailored to reflect Korea-specific legal requirements and practices. 

B. Clearly Define the Franchisor’s Role to Justify the Collection of Related Fees

• To the extent the franchisor provides substantive services—such as logistics management, quality control, assumption of inventory risk, or inspection—contracts should clearly describe these functions as part of the franchisor’s role and articulate that the fees collected represent legitimate consideration for such services.

C. Ensure Transparent Disclosure and Informed Consent

• Franchisors should provide clear and transparent information regarding the nature and calculation of differential franchise fees not only to prospective franchisees, but also to existing franchisees.
• Franchisors should implement procedures to confirm that franchisees have been adequately informed of, and have consented to, the relevant fee structures.

D. Maintain Systematic Internal Documentation

• To prepare for potential disputes, franchisors should maintain systematic and well-organized internal records supporting the calculation and composition of differential franchise fees and related costs, including documentation substantiating the underlying cost components.
  
   

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[Korean version]

1. Under the Enforcement Decree of the Franchise Act, “differential franchise fees,” one of the items required to be disclosed in the franchise disclosure document, are defined as amounts paid by a franchisee to a franchisor, in excess of a reasonable wholesale price for goods or services that the franchisor requires or recommends the franchisee to purchase from the franchisor or from a supplier designated by the franchisor in the course of operating the franchise business.

2. Supreme Court of Korea Decision No. 2024Da294033, rendered on January 15, 2026.

3. Seoul Central District Court, Decision No. 2020Gahap607773, rendered on June 3, 2022

4. Seoul High Court, Decision No. 2022Na2024467, rendered on September 11, 2024

5. A recent, comparable Supreme Court decision is worth noting. In a separate and unrelated case involving a different franchisor, while the franchisees (plaintiffs) alleged that the franchisor (defendant) had unjustly enriched itself by unilaterally increasing the supply prices of ingredients supplied to the franchisees, the Court held that implied consent or ratification could be recognized. In reaching this conclusion, the Court took into account, among other things, that the franchisees continued to receive supplies at the increased prices without raising objections to the price increase and proceeded to engage in subsequent negotiations regarding a further price increase on the premise that the initial price increase was valid (Supreme Court of Korea Decision No. 2025Da217179, rendered on January 29, 2026).