A federal appeals court on Wednesday is set to hear oral arguments in a case involving an Illinois franchisee of Steak n Shake that successfully sued the restaurant chain over its mandatory menu and pricing policies.

Stuller Inc. filed its lawsuit in November 2010 against the Indianapolis-based chain after it said the company and its parent, Biglari Holdings Inc., adopted a policy forcing franchisees to follow set menu and pricing options.

Steak n Shake sent default notices to several restaurant owners—including the chain’s original franchisee, Springfield-based Stuller, which opened its first restaurant in 1939.

Stuller, which operates five Steak n Shake restaurants in central Illinois, argued to a federal court that the new policy violated long-standing company practices allowing franchisees to set their own prices.

The federal court agreed, saying Steak n Shake cannot force Stuller to use its pricing policy nor take action against the franchise for setting its own prices.

Steak n Shake appealed the decision, which will be considered by the federal appeals court in Chicago.

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.

The pricing policy coincided with Sardar Biglari’s arrival as Steak n Shake CEO. He began buying company shares in 2007 and took over just a year later.

He slammed the brakes on new store construction, arguing that the chain’s restaurant prototype cost too much to build and that the expansion was hurting shareholder value.

He also revamped store operations and the menu, halting a 14-quarter streak of declining same-store sales. Since then, the chain has posted 17 straight quarterly increases in same-store sales.

Steak n Shake parent Biglari reported fiscal second-quarter earnings on Friday and posted a smaller profit of $4.5 million for the quarter ended April 13, compared with $5.6 million in the year-ago period.

Quarterly revenue grew 5 percent, to $221.7 million.

Steak n Shake’s same-store sales increased 4.8 percent on higher customer traffic. Profit for the Biglari subsidiary increased to $13 million from $9.5 million during the same period last year while revenue grew 5.2 percent, to $217.9 million.

Steak n Shake operates 493 restaurants, including 79 that are franchised.