410 bhc franchisees seek repayment of KRW 106.3 billion in supply margins, with contractual agreement at issue

A total of 410 franchisees of South Korean fried chicken chain bhc are seeking KRW 106.3 billion from the franchisor in ongoing lawsuits over supply margins. The disputes follow a Supreme Court ruling involving Pizza Hut Korea in January this year. For those following South Korea’s franchise market, it is increasingly important to distinguish between distribution margins included in the prices of ingredients and other supplies, and contractual agreements to pay those margins.

Three bhc lawsuits: claims are not established liabilities

According to a report by New Daily Economy on 20 October, bhc franchisees are pursuing three lawsuits for repayment of supply margins. In the respective cases, 314 franchisees are seeking KRW 81.7 billion, 57 are seeking KRW 16.6 billion, and 39 are seeking KRW 8 billion. Together, the cases involve 410 franchisees and claims totalling KRW 106.3 billion.

The combined claims amount to 64.6% of bhc’s operating profit of approximately KRW 164.5 billion last year. This comparison helps put the financial scale of the litigation into perspective. However, the sums claimed are amounts the plaintiffs are asking to recover. They should not be treated as court-confirmed repayment obligations or debts the franchisor is already required to pay.

The three lawsuits also differ in the number of participants and the amounts claimed. The combined figure therefore cannot reliably indicate how much any individual franchisee might receive, nor does it establish that all participating franchisees traded on identical terms. The key point confirmed by the report is that several lawsuits are under way, with total repayment demands exceeding KRW 100 billion.

The size of the claims is not the only issue for the franchise sector. At the heart of the disputes are the basis on which franchisees have paid margins earned by the franchisor through supplying goods, and whether both sides specifically agreed to those terms. That is why the contractual relationship needs to be examined alongside the figures.

The Pizza Hut ruling did not prohibit distribution margins themselves

In these disputes, the Korean term chaek gamaenggeum—often translated as ‘differential franchise fees’—refers to distribution margins collected by the franchisor when supplying ingredients and other materials. Franchisees are seeking repayment of these sums, with the central issue being whether there was an agreement to pay them. The fact that a margin arose from supplying goods must be distinguished from the existence of an agreement to pay that margin.

The spread of litigation was prompted by the Supreme Court’s ruling involving Pizza Hut Korea in January this year. The court upheld a lower-court judgment ordering the repayment of approximately KRW 21.5 billion in supply margins to franchisees. The issue was not the margins themselves, but the absence of a specific agreement to pay them.

The ruling should therefore not be interpreted as a blanket prohibition on franchisors earning distribution margins from goods they supply. The Supreme Court did not find that collecting such margins was unlawful in itself. Reporting only that repayment was ordered risks overlooking the question of agreement that underpinned the decision.

Nor can the repayment amount or outcome in the Pizza Hut case simply be applied to the bhc lawsuits. The value of the claims currently reported and the extent of any repayment a court may eventually order are separate matters. A final judgment involving another brand does not establish who will win the bhc cases or how much, if anything, will be payable.

When franchisors and franchisees discuss these issues, it is useful to separate two questions: ‘Is there a distribution margin?’ and ‘Is there a specific agreement to pay it?’ Combining the two can blur the distinction between dissatisfaction with supply prices and the contractual basis for a repayment claim.

Mom’s Touch dispute centres on disclosure of cost data

Similar disputes are under way at other foodservice brands. According to the same report, 201 franchisees of Mom’s Touch are seeking repayment of approximately KRW 49.8 billion. At the first hearing in August, the parties disputed the submission of cost data needed to calculate the supply margins.

This case shows that, alongside the existence of an agreement, the evidence needed to calculate the sums claimed can be a major issue in litigation. A claimant’s headline figure does not reveal the full basis of the calculation. Understanding the claim more accurately requires examining which records were used and how the amount attributed to supply margins was calculated.

However, the dispute over cost data in the Mom’s Touch case should not be presented as a development in the bhc proceedings. Although the numbers of participating franchisees and the amounts claimed have been reported for both brands, these are separate lawsuits. Disputes carrying the same label do not necessarily follow the same course on each issue.

For those following the franchise sector, it is important to track the claims and court decisions in each case separately rather than treating several cases as if they shared a single outcome. In particular, filing a lawsuit, amending a claim, presenting arguments at a hearing and receiving a final judgment are distinct stages. When reading coverage, it is sensible to establish which stage is being reported.

Franchisors and franchisees should check contracts and calculation methods

For franchisors and franchisees prompted by these lawsuits to review their contracts, the starting point is to organise the records they hold. It is advisable to examine franchise agreements and supplementary agreements alongside documents explaining supply terms and records of actual transactions. The purpose is not to prejudge either party’s liability, but to distinguish what was agreed from what happened in practice.

Franchisors should identify which documents explain the supply margins and record an agreement to pay them. Franchisees can compare the contracts they signed with their actual supply transactions. The legal effect of those documents, and the prospects of a repayment claim, need to be assessed in light of the circumstances of each case. Conclusions should not be drawn from reported claim values alone.

When reviewing the amounts, it is more useful to record what the calculation covers and the basis used than simply to note the total repayment demanded. As the dispute over cost data at Mom’s Touch demonstrates, the basis of a calculation is a question that must be examined separately from whether there was an agreement. Obtaining the relevant records does not, by itself, establish an obligation to repay.

The practical lesson is straightforward. Before treating a claim as a confirmed loss or an expected payout, both franchisors and franchisees should first check the documents recording any agreement to pay supply margins and the evidence supporting the calculation.