This article was published on April 27, 2025, at 11:26 a.m. on the ChosunBiz MoneyMove site.
As the franchise fee return lawsuits engulf the franchise industry, private equity fund (PEF) managers with a restaurant portfolio are on high alert. The issue began with a lawsuit in the pizza sector but has since spread across the industry, including chicken, ice cream, and cafes, indicating that a quick resolution may not be possible. Consequently, funds with a food and beverage (F&B) portfolio have urgently begun internal reviews, while potential buyers are watching the situation closely and taking a breath.
According to investment banking (IB) and legal sources on the 27th, private equity fund managers with restaurant franchise portfolios are conducting internal reviews in preparation for franchise fee lawsuits. Some are reportedly taking proactive steps by appointing major domestic law firms to respond to the issue. A source in the industry noted, “Several franchisees owned by the funds have already filed lawsuits for the return of unjust enrichment,” adding that “the scope of the anticipated fallout is widening.”
The franchise fee refers to the amounts paid by the franchisee to the franchisor on a regular or irregular basis in exchange for goods supplied by the franchisor, which exceed the appropriate wholesale price. Simply put, a chicken franchise's headquarters purchases a raw material, such as whole chicken, for 10,000 won and supplies it to the franchisee for 12,000 won, meaning the 2,000 won received is the franchise fee.
Franchisees cannot know whether the franchise fee is at a reasonable level, and furthermore, the franchise agreement does not contain that information, leading to courts consistently ruling in favor of franchisees. However, due to legal amendments, provisions regarding the franchise fee became a mandatory component of the franchise agreement starting in July of last year.
In South Korea, the lawsuits over franchise fees began to intensify following the Korea Pizza Hut incident. In 2020, franchisees of Korea Pizza Hut filed a lawsuit against the head office for the return of unjust enrichment. In the first trial, the court ruled that the franchisor must return 7.5 billion won to the franchisees, and in the second trial, the return amount was increased to 21 billion won. Currently, Korea Pizza Hut has appealed, and the case is pending in the Supreme Court.
A source in the private equity fund sector with an F&B portfolio stated, “After the Korea Pizza Hut incident, we conducted a comprehensive review of our internal portfolio as a precaution,” adding, “I know some funds have already appointed major law firms like Kim & Chang and Bae, Kim & Lee to prepare a response.” The current lawsuits regarding franchise fees involve over ten entities, including Lotte Super, Lotte Fresh, Baskin-Robbins, Kyochon Chicken, Fura Chicken, BBQ, and Goobne Chicken. BHC, owned by MBK Partners, and Two Some Place, owned by the Carlyle Group, are also in the process of litigation.
In the law firm sector, there is competition to handle the franchise fee lawsuits, seen as a lucrative opportunity this year. A lawyer specializing in fair trade cases stated, “This lawsuit isn't being pursued by a handful of franchisees but is a class action involving hundreds, making the potential success fee significant compared to the difficulty,” explaining that law firms focusing on plaintiff lawsuits are meeting with franchisee representatives to prepare for litigation, while others are striving to take the case by reducing the retainer fee in negotiations with franchise headquarters.
In the industry, there are forecasts that, given the risks of contingent liabilities exposed by franchise fee lawsuits, current F&B listings will have to be withdrawn. Since there are no potential buyers for the management rights of companies involved in the class action, and even if a sales process is initiated, they would have to endure significant discounts in valuation, making it highly likely the deals will fall through.
A source in the industry stated, “If a precedent in the Korea Pizza Hut case is established in the Supreme Court, subsequent lawsuits could increase explosively,” noting that “typically, litigation takes 2 to 3 years from the first trial to the appellate court, so the likelihood of prolonged lawsuits is high, and since the collection of franchise fees, which are a core source of revenue for franchisors, may be legally blocked, there will inevitably be an impact.”