108 Ediya Coffee franchisees sue over disputed rebate fees

By Olivia Hart

What do Ediya Coffee franchisees seek?

Legal sources cited on the 21st said 108 Ediya Coffee franchisees, including a plaintiff surnamed Choi, filed a claim for unjust enrichment against headquarters at Seoul Central District Court on April 23. YK Law Firm represents the franchisees, while Lee & Ko represents Ediya Coffee, which submitted its response on July 3.

The filing currently seeks 1 million won (approximately $750) from each plaintiff. The plaintiffs plan to obtain headquarters’ ingredient and material purchase prices, plus its supply prices to stores, during litigation. That “explicit partial claim” sets only a starting amount, not the full amount they may seek.

The franchisees sought a negotiated settlement through last month but did not reach one. YK Law Firm said it continues settlement talks separately from the litigation. The parties enter litigation without a negotiated settlement, leaving the final demand open.

How are the rebate fees disputed?

Under South Korea’s Franchise Business Act, rebate fees count as a type of franchise fee. BigGo Finance defines them as headquarters’ markup when ingredients, materials and products are supplied to stores above a fair wholesale price. It said headquarters earns the profit by buying goods and passing them to stores at the higher price.

The plaintiffs say their franchise agreements contain no clause authorizing rebate payments. They nevertheless paid for more than a year according to the rebate-to-revenue ratio in Ediya Coffee’s disclosure document. Their argument is that disclosure and payment did not create a contractual basis for the charge.

Ediya Coffee’s disclosure document put the average 2021 rebate payment at 12.17 million won (approximately $9,200) per franchise. That equaled 6.8% of average revenue per store, according to the document. The unresolved issue is whether a disclosed ratio establishes consent to pay.

How did Pizza Hut Korea shape the claims?

In January, the Supreme Court upheld a partial victory for 94 Pizza Hut Korea franchisees. It required the company to return about 21.5 billion won (approximately $16.2 million) in rebate fees.

The court did not hold rebate fees categorically illegal. Instead, it made the existence of a specific payment agreement the legal test. In the Pizza Hut case, it recognized neither an express nor an implied agreement.

BigGo Finance called the January ruling the catalyst for disputes spreading across South Korea’s restaurant franchise industry. The precedent sets a contract-based test rather than a blanket ban on rebates.

How far has the dispute spread?

YK Law Firm also represents Mega MGC Coffee franchisees, who initially sought 1 million won each when their suit was filed in April. After using headquarters data and other evidence, they applied to the court on the 6th of this month. At the amendment, 290 plaintiffs sought 61.7 billion won (approximately $46.5 million) in total.

BigGo Finance reported that 201 Mom’s Touch franchisees filed suit seeking the return of about 49.8 billion won (approximately $37.5 million). Related proceedings involve Zicoba, Duzim, BBQ, Goobne Chicken, bhc and Baskin-Robbins, among others.

Some Emart24 store operators have recently begun recruiting participants for a lawsuit seeking rebate fees as unjust enrichment. Some franchisees of The Venti are reportedly preparing lawsuits, although the report gave no filing dates or claimed amounts. The claims now span coffee, restaurants and convenience stores, but their transaction structures differ.

Can Ediya Coffee avoid the Pizza Hut precedent?

BigGo Finance cited analysts who said the Pizza Hut ruling does not apply directly to convenience stores. They cited differences in product-supply and profit-sharing arrangements between convenience stores and restaurant franchises. Emart24 said it disclosed its cost structure through its disclosure document and franchise agreements and established a contractual basis.

Ediya Coffee also says its operating structure differs from Pizza Hut’s and that it will fight the suit. A company official said, “There are differences from the Pizza Hut case, including in our operating structure, and we will faithfully explain the relevant facts and respond diligently in the legal proceedings.”

YK Law Firm attorney Hyun Min-seok said, “Rebate fees that a franchisor collected from franchisees without an agreement are unjust enrichment without legal cause, and it is appropriate to return them to the franchisees that paid them.” That is the plaintiffs’ legal theory, not a court finding.

BigGo Finance reported that rebate fees account for a significant share of headquarters’ revenue, although it supplied no percentage. A broad restitution order could weigh on franchisors’ earnings and store-opening strategies; proof of a contractual basis and franchisee consent could limit the impact.

An industry official said, “What matters is whether there was a basis in the franchise agreement and a specific agreement regarding rebate fees,” adding, “Because transaction structures differ by brand, legal judgment will be needed on a case-by-case basis.” The next rulings will test brand-specific contracts and pricing records, not impose one universal rebate rule.