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Steak n Shake facing new suit over mandatory menu pricing

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Another Steak n Shake franchise owner is suing the company over its controversial practice that prohibits restaurants in the chain from setting their own menu prices, even after a federal appeals court sided with a franchisee.

St. Louis-based Druco Restaurants Inc., which operates two Steak n Shake locations in Missouri, filed suit against the locally based chain April 3 in U.S. District Court in Indianapolis.

Druco is seeking a permanent injunction to bar Steak n Shake from mandating company-wide menu prices and from terminating Druco’s franchise for refusing to comply with the pricing policy.

Druco argues that it has suffered financially because the policy prohibits franchisees from increasing menu prices while, at the same time, they’re forced to pay higher food costs resulting from a Steak n Shake distribution agreement.

Steak n Shake eliminated its own distribution operations in June 2010 and contracted with another company, Sygma, to be the single distributor of products to company-owned and franchised restaurants, significantly increasing food costs, Druco said in the filing.

“By virtue of its mandate that Sygma is the exclusive supplier of all products to franchisees, together with its policy requiring all franchisees to follow set menu pricing on every item on their menu, Steak n Shake effectively controls both the buy and sell prices for every food item sold by franchisees,” Druco argued.

Druco’s federal suit follows a similar complaint brought by fellow franchisee Stuller Inc. in November 2010.

Springfield, Ill.-based 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.

A U.S. District Court in Illinois granted Stuller a preliminary injunction, similar to what Druco is seeking, 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.

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 policy and higher fuel and food costs.

Yet, even after the Illinois court's judgment "that Steak n Shake has no material evidence to support its contention that its franchise agreements give it the right to enforce the policy, Steak n Shake has held steadfast in its ongoing, and system-wide, breach of those agreements by continuing to force its franchisees to abide by the policy,” Druco said in its complaint.

Steak n Shake is operated by San Antonio-based holding company Biglari Holdings Inc. Calls to the company seeking comment on Druco’s lawsuit were not returned.

Druco is represented locally by lawyers of Cohen & Malad LLP.

Besides asking for the injunction, Druco is suing Steak n Shake for breach of contract and fraud.
 

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