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Steak n Shake loses appeal over franchisee’s pricing

August 24, 2012

A longtime Steak n Shake franchisee who sued the chain after it insisted on setting prices for menu items prevailed again Friday as the 7th Circuit Court of Appeals affirmed an Illinois federal court’s ruling in the franchisee’s favor.

The U.S. District Court for the Central District of Illinois granted franchisee Stuller Inc. a preliminary injunction to stop implementation of a policy Steak n Shake announced in 2010 in which the company set prices for all menu items at its company-owned and franchise stores.

“The record contains sufficient evidence to find, as a threshold matter, that Stuller would suffer irreparable harm if it was forced to implement Steak n Shake’s pricing policy. Specifically, Stuller has presented evidence that the policy would be a significant change to its business model and that it would negatively affect its revenue, possibly even to a considerable extent,” 7th Circuit Judge Daniel Manion wrote for the unanimous panel.

Springfield, Ill.-based Stuller operate five Illinois Steak n Shake restaurants under franchise agreements with predecessors that date back to 1939, making it the oldest franchise in the country, according to Manion’s opinion. “In all that time, Stuller has had the ability to set menu prices,” he wrote.

Stuller sued when Steak n Shake said it would terminate the franchises if Stuller refused to adopt a new policy of uniform prices and promotions. It won the injunction while the court considers Stuller’s request for a declaratory judgment that it wasn’t required to comply with the policy. Stuller also accused Steak n Shake of breach of contract and violation of the Illinois Franchise Disclosure Act.  

In its appeal, Indianapolis-based Steak n Shake argued that the injunction should not have been granted, citing the court’s ruling in Second City Music, Inc. v. City of Chicago that stated “Injury caused by failure to secure a readily available license is self-inflicted, and self-inflicted wounds are not irreparable injury.”

“Steak n Shake misreads our decision in Second City,” Manion wrote.

“We acknowledge that Steak n Shake contests the validity and strength of the evidence presented by Stuller, but that argument goes to the ‘sliding scale analysis’ conducted by a court in deciding to grant or deny a preliminary injunction, and not to Stuller’s threshold requirements. In addition, if Stuller implemented Steak n Shake’s policy and subsequently prevailed on the merits of its case, it would be difficult to reestablish its previous business model without a loss of goodwill and reputation. Because this is harm that cannot be ‘fully rectified by the final judgment after trial,’ it is irreparable,” the court ruled.

In its argument, Stuller said that in 2008, after the franchise adopted Steak n Shake's pricing policy, it lost $538,446 due to the new pricing, and higher fuel and food costs.

The franchisee increased prices 10 percent to make up for the shortfall, despite Steak n Shake’s recommendation not to do so, according to court documents.

Steak n Shake argued that the 48 franchised restaurants that adopted the policy in 2009 increased sales an average of 7 percent and customers an average of nearly 10 percent.

The company maintained that no franchise went out of business because of the policy.

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