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More franchisees join revolt over Steak n Shake menu pricing

May 1, 2013

More Steak n Shake franchisees are revolting over the company’s policy that prohibits restaurants in the chain from setting their own menu prices.

Three franchise owners filed suit last month against Indianapolis-based Steak n Shake, including two on the same day—April 22—in U.S. District Court in Indianapolis.

They argue the company continues to force its franchisees to abide by the menu policy even after a federal appeals court sided last year with a fellow franchise owner that first challenged the practice.

“Steak n Shake’s royalties are calculated as a percentage of a franchisee’s revenue, not profits, which explains why Steak n Shake wants to increase customer volume through the sale of lower-priced food without concern as to whether franchisees actually make a reasonable profit,” the franchisees argue in their lawsuits.

Reached by phone, Steak n Shake lawyer Tonya Sallee declined to discuss the suits, citing company policy that prohibits commenting on pending litigation.

The dispute over pricing started in 2010, when Springfield, Ill.-based Stuller Inc. brought its complaint against Steak n Shake in a federal court in Illinois. Stuller operates five Illinois Steak n Shake restaurants under franchise agreements with predecessors that date back to 1939, making it the oldest Steak n Shake franchise in the country.

The court granted Stuller a preliminary injunction to stop Steak n Shake from forcing menu prices on franchisees.

Steak n Shake appealed. But last August, the 7th Circuit Court of Appeals affirmed the Illinois federal court’s ruling in Stuller’s favor.

Yet, even after the failed appeal, the three franchisees suing Steak n Shake argue that the company “has held steadfast in its ongoing, and system-wide, breach of those [franchise] agreements by continuing to force its franchisees to abide by the policy.”

They argue in their suits that Steak n Shake’s executive leadership, led by CEO Sardar Biglari, decided that it would set menu prices contrary to existing language in the franchise agreements that says otherwise.

Steak n Shake shareholders elected Biglari CEO in 2008, and the company now is operated by San Antonio-based holding company Biglari Holdings Inc.

The three franchisees who filed suits last month against Steak n Shake are Georgia-based People Sales & Profit Co., Missouri-based Druco Restaurants Inc. and Pennsylvania-based Scott’s S&S Inc. In total, they operate eight Steak n Shake restaurants in the three states.

They’re seeking a permanent injunction to bar Steak n Shake from mandating company-wide menu prices and from terminating their franchise for refusing to comply with the pricing policy. They also are suing for breach of contract and fraud.

One of the lawyers representing them, Richard Shevitz of Indianapolis-based Cohen & Malad LLP, said more lawsuits could be forthcoming.
 
Steak n Shake operates 501 restaurants, including 87 franchised locations.

In its fiscal first quarter ended Dec. 19, Steak n Shake reported revenue of $163.2 million, a 1.7-percent increase from the same time in 2011.

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