1.

Case History

Plaintiffs initiated a lawsuit against Defendant, demanding the reimbursement of margin-based fees collected by Defendant from 2016 to 2022, arguing that such conduct amounted to unjust enrichment of Defendant without legal grounds.

On June 3, 2022, the Seoul Central District Court ruled in favor of Plaintiffs (“First Instance Decision”):
 

• Defendant’s conduct amounted to unjust enrichment based on the absence of legal grounds for receiving margin-based fees under the Franchise Agreements, and the absence of Plaintiffs’ implicit consent for such conduct.

• However, the First Instance Decision only required Defendant to reimburse for the amount collected since 2019, when Defendant’s Disclosure Statement started specifying rates for margin-based fees, while dismissing the claims for the amount collected between 2016 and 2018, when the there was no evidence on Defendant’s rates for margin-based fees.
   

On September 11, 2024, the Seoul High Court again ruled in favor of Plaintiffs (“Lower Court Decision”):
 

• Defendant’s conduct amounted to unjust enrichment because there was no explicit or implicit agreement between Plaintiffs and Defendant in this case.

• Under the Fair Franchise Transactions Act (the “FFTA”) and its Enforcement Decree, a franchisees’ consent must be obtained for receiving margin-based fees.

• The Lower Court Decision expanded the scope of reimbursement to include amount collected between 2016 and 2018; this was not recognized in the First Instance Decision, and if a franchisor collected unfair margin-based fees before its Disclosure Statement started specifying rates for margin-based fees, the reimbursement amount for that time period can be calculated based on later data.
   

Defendant appealed the Lower Court Decision to the Supreme Court, which issued its decision on January 15, 2026, to dismiss the appeal, upholding the Lower Court Decision in its entirety (“Supreme Court Decision”).
 

2.

Key Issues and the Supreme Court’s Decision
 

(1)

Recognition of Unjust Enrichment

The Supreme Court Decision confirmed that a significant portion of the margin-based fees collected by Defendant amounted to unjust enrichment because there was no explicit or implicit agreement with Plaintiffs on margin-based fees.

1) Need for agreement on margin-based fees

The Supreme Court Decision made clear that:

• margin-based fees are a type of franchise fees regulated under the FFTA; and

• payment of franchise fees is an essential and important part of franchise agreements.

Therefore, in accordance with the general legal principle of contract formation, the Supreme Court ruled that there must be a specific agreement, either explicit or implicit, with franchisees for the franchisor to collect margin-based fees.

2) Absence of agreement in this case

Defendant argued that there was an agreement with Plaintiffs on the payment of margin-based fees based on the provision on supplying products in the Franchise Agreements, but the Supreme Court dismissed the argument for the following reasons:

• Absence of product supply agreement: There was no product supply agreement for ingredients/items reached with Plaintiffs; the Franchise Agreements failed to include Defendant among the counterparties to disputes arising in the course of such supply, disqualifying Defendant as a party to the product supply agreement.

• Absence of a written agreement: The Franchise Agreements require “any amendment to the terms and conditions to be made by a written agreement between the parties.” Therefore, even if the supply of ingredients/items and collection of margin-based fees occurred in the manner alleged by Defendant, there was no written agreement, and thus difficult to demonstrate that a product supply agreement was reached with terms and conditions that were different from those of the Franchise Agreement.
   

Furthermore, the Supreme Court held that even if Plaintiffs and Defendant executed a product supply agreement, there was no implicit agreement made on the payment of margin-based fees.

Specifically, the Supreme Court held that, because franchisors often have a significant advantage over franchisees in terms of access to information or bargaining power, franchise agreements are generally executed in the form of standardized contracts. The FFTA thus requires franchisors to provide prospective franchisees with a franchise agreement containing key terms and conditions prior to the execution of the franchise agreement. As such, acknowledgement of an implicit agreement between the franchisor and franchisees on a matter that is unfavorable to franchisees made in the process of executing the franchise agreement should be based on a careful decision made by comprehensively taking into account:
 

• socioeconomic status of the franchisor and franchisees;

• background and overall content of the execution of the franchise agreement;

• whether sufficient information was provided to allow franchisees to express their intention to execute such implicit agreement;

• special circumstances in which the franchisor did not specify the details of the agreement in the franchise agreement at the risk of disadvantages such as legal uncertainty or imposition of administrative fines,

• degree of disadvantages suffered by franchisees as a result; and

• other customary trade practices (Supreme Court Decision 2017Da248803, 248810 rendered on June 15, 2018).
   

In light of such legal principles, the Supreme Court held that an implicit agreement on the payment of margin-based fees cannot be recognized because:
 

• (i) Plaintiffs purchase of designated ingredients/items from Defendant is different from ordinary product transactions because Plaintiffs has no say in selecting the products, suppliers or prices;

• (ii) the margin-based fees cannot be seen as the distribution margin of a product transaction unrelated to the Franchise Agreements; and

• (iii) it is difficult to deem that Plaintiffs had the intention to voluntarily pay the margin-based fees solely based on the product transaction and the payment of the product price.
   

(2)

Scope of reimbursement

The Supreme Court also upheld the Lower Court Decision in terms of the scope of reimbursement for unjust enrichment, to include margin-based fees collected before 2019, when the Disclosure Statement started specifying rates for margin-based fees, by calculating the reimbursement amount for that time period based on later data.

In particular, the Supreme Court Decision found there was no reason to deem that the Lower Court Decision’s method of estimating the difference in franchise fees was unreasonable or contrary to the ideology of fairness and justice, considering that:
 

• (i) Defendant failed to comply with the document production order on the materials related to the margin-based fees;

• (ii) Defendant seems to have also received margin-based fees in 2018; and

• (iii) there was no change in transaction structure and form between Plaintiffs and Defendant from 2016 to 2021, and there was no difference in the number of franchise stores or the average annual sales per franchise store.
   

3.

Significance and Implications of the Supreme Court Decision

The Supreme Court Decision is highly significant in that it established a requirement to execute a written agreement between the franchisor and franchisees for the collection of margin-based fees. Therefore, franchisors need to re-examine whether their franchise agreements currently specify grounds for margin-based fees (e.g., regarding fee collection, calculation method, items), and, if not, to make sure such grounds are specified in their franchise agreements before receiving margin-based fees.

The Supreme Court Decision also reaffirmed that whether franchisees implicitly agreed to a provision in the franchise agreement that is unfavorable to the franchisees should be made with careful consideration, comprehensively taking into account all circumstances. In other words, the Supreme Court Decision does not categorically deny that there could be an implicit agreement regarding margin-based fees, but instead clarifies that such determination should be made case-by-case. Therefore, in similar lawsuits going forward, recognition of unjust enrichment may vary greatly depending on recognition of implicit agreement.

In particular, the Supreme Court Decision held that recognition of an implicit agreement should be made based on comprehensive consideration of
 

• (i) the socio-economic status of the franchisor and franchisees;

• (ii) the background and overall content of the franchise agreement;

• (iii) whether sufficient information was provided to the franchisees to express their intent to enter into such implicit agreement;

• (iv) whether there are any special circumstances that caused the franchisor to not specify the details of the implicit agreement in the franchise agreement even at the risk of disadvantages, e.g., legal uncertainty or imposition of administrative fines;

• (v) the degree of disadvantages suffered by the franchisees due to the terms and conditions of the agreement; and

• (vi) other customary trade practices.
   

As circumstances may vary for each franchisor and franchisee, it will be necessary for franchisors to more carefully prove that there was an implicit agreement on the receipt of margin-based fees based on the above factors.

In addition, considering that the Supreme Court Decision upheld the Lower Court Decision that expanded the scope of reimbursement to include unjust enrichment from 2016 to 2018 in consideration of the fact that the Defendant failed to comply with the document production order, in similar lawsuits going forward it will also be necessary to faithfully explain the scope of reimbursement for unjust enrichment.