A District Court in Indiana this week ruled that Steak n Shake breached its contract with its former advertising agency, Georgia-based The Varnson Group.

Steak n Shake signed a $4.36 million, 26-month contract with Varnson in November 2008, but fired the firm less than three months later for undisclosed reasons. 

The two firms sued each other after the breakup, with Varnson claiming Steak n Shake failed to live up to the contract agreement and the restaurant chain claiming the now-defunct ad agency refused to return proprietary materials.

Steak n Shake signed a contract with Varnson on Nov. 1, 2008, that would pay the ad agency $178,333 per month, court documents said.

The contract stipulated that the deal could be cancelled by Steak n Shake at any time, but that the agreement would continue for 90 days after the Indianapolis-based restaurant chain gave termination notice to Varnson officials.

Attorneys for Varnson contended that the contract stipulated that the ad firm would be paid through the entirety of that 90-day period and that Steak n Shake failed to render that payment after it terminated the deal in February 2009.

“We find entirely unconvincing Steak n Shake’s attempt to argue that Varnson earned only that portion of the monthly Scope of Service fee that corresponded with the services performed during that particular month,” the court ruling stated.

The summary judgment issued this week did not stipulate the amount of damages that would be awarded to Varnson. That amount must be determined by a trial unless the two sides settle.

If the court ruling finds Varnson must be paid the full amount for the entire 90-day period, Steak n Shake could have to cough up more than $500,000 for damages and legal fees.

However, if the case does go to trial, Varnson could be found liable for not returning Steak n Shake marketing materials in a timely manner after the contract was terminated. But damages for that offense are likely to be no more than $7,750.

Money paid to Varnson isn't likely to go into the pockets of principals of the agency, which declared bankruptcy and went out of business in the year after Steak n Shake pulled its business. Most or all of the damages, said Varnson representatives, would go to settle its outstanding debt.

If the case goes to trial, that wouldn’t likely be until the first half of next year, said Peter S. Kovacs, an attorney in the Indianapolis office of Stewart & Irwin, who was appointed by a bankruptcy court in Georgia to represent the Varnson Group trust.

Attorneys representing Steak n Shake could not be reached for comment Wednesday morning.

“It’s impossible to say if this case will be settled, but most cases like this do get settled,” Kovacs said. “So, I wouldn’t be surprised if the court directed the two sides to get together and try to hammer out a settlement.

Steak n Shake signed an $18 million advertising contract with New York-based Kirshenbaum Bond Senecal & Partners early last year.