1.

Case History 

Plaintiffs initiated a lawsuit against Defendant demanding the return of unjust enrichment gained by increasing the supply price of key ingredients and items on two occasions since 2020. Plaintiffs contended that the price increases had no legal or contractual basis, or were carried out through deceptive means.
 

• First Instance Decision: The Seoul Central District Court ruled in favor of Defendant, dismissing Plaintiffs’ claims in their entirety in recognition of Defendant’s right to determine the supply price and the legitimacy of its business decisions.

• Lower Court Decision: Plaintiffs appealed the First Instance Decision, expanding their claims, but the Seoul High Court again ruled in favor of Defendant, dismissing Plaintiffs’ appeal and additional claims in their entirety.

• Supreme Court Decision: Plaintiffs appealed the Lower Court Decision, but the Supreme Court conclusively ruled in favor of Defendant, dismissing Plaintiffs’ appeal and affirming Defendant’s final victory.
   

2.

Key Issues and the Courts’ Decisions
 

(1)

Existence of substantive need for price increases: The Courts recognized that Defendant’s two price increases were legitimate due to the existence of objective factors, including increases in labor costs, logistics costs, raw material prices.
 

(2)

Compliance with contractual procedures: The Courts recognized Defendant’s second price increase as legitimate as Plaintiffs had been consulted, in accordance with the contractual procedures.
 

(3)

Recognition of franchisees’ ex post facto or implicit agreement: The Court Decisions recognized the validity of Defendant’s first price increase, despite the absence of strict compliance with contractual requirements or procedures as Defendants clearly indicated the supply structure of the key ingredients in the franchise agreement and had consultations with Plaintiffs prior to price increases; as such Plaintiffs were deemed to have given ex post facto or implicit agreement by maintaining transactions with Defendant for an extended period after prices increased.
 

3.

Significance and Implications of the Supreme Court Decision

This case is significant as the Supreme Court Decision recognized the legitimacy of Defendant’s supply price increases based on a Defendant’s reasonable level of consultation with Plaintiffs, in contract with the Supreme Court’s decision in a recent litigation involving another F&B franchisor, where the franchisor was ordered to reimburse franchisees for unjust enrichment from the collection of margin-based fees without the franchisees’ prior agreement.

In particular, the Supreme Court Decision made clear that there was ex post facto or implicit agreement by Plaintiffs for Defendant’s first price increase, signifying that ex post facto or implicit agreement by franchisees for the franchisor’s supply price increases may be recognized, even if there were procedural deficiencies in the process of implementing the franchise agreement or there was no prior agreement on the matter, if the franchisees thereafter maintained their legal relationship with the franchisor without specific objection. Going forward, we anticipate that subsequent cases will carefully examine whether there had been ex post facto or implicit agreement, and outcomes may vary depending on the specific evidence and facts.

Accordingly, franchisors engaged in similar disputes are advised to re-examine the relevant facts and evidence. Further, franchisors hoping to increase or adjust their supply prices are advised to (i) closely examine their franchise agreements and disclosure statements, (ii) carefully explain to franchisees the substantive reasons for the price increases, and (iii) engage in good faith discussions, including collecting opinions and feedback from franchisees.

Franchisors are also advised to continue monitoring the pending cases before the courts on this topic as well as any further guidance or rulings from the KFTC.