IBJNews

Steak n Shake loses appeal over franchisee’s pricing

Back to TopCommentsE-mailPrintBookmark and Share

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.

ADVERTISEMENT

  • Gave?
    S&S - the franchisor - didn't "give" anything. The franchisee pays for the marketing, signage, etc. as determined by the franchise agreement. This isn't a case of biting the hand that feeds.
  • S & S
    When biglari took over it was clear he thinks of himself over and above the great STEAK AND SHAKE chain. He needs to return the office to Indianapolis, NOT San Antonio texas who could care less about a great established INDIANA company. Let the franchisees operate as they always have: do it the S&S way!
  • Who Wins?
    This is more interesting than it appears, on the surface - what "power" does the franchise have, now? What can the franchisee do, on their own? Where is the line really drawn? Does S&S now have the "right" to withhold support and services from the franchisee, in retaliation? What will they do in this case? It could be an interesting precedent - did the courts make the "right decision"? It's easy to say "yes, they stood up for the little guy" - but, the franchisor gave them all the support, the setups, the signage, the advertising - hmmmm....

    Post a comment to this story

    COMMENTS POLICY
    We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
     
    You are legally responsible for what you post and your anonymity is not guaranteed.
     
    Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in IBJ editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
     
    No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
     
    We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
     

    Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

    Sponsored by
    ADVERTISEMENT

    facebook - twitter on Facebook & Twitter

    Follow on TwitterFollow IBJ on Facebook:
    Follow on TwitterFollow IBJ's Tweets on these topics:
     
    Subscribe to IBJ
    1. I took Bruce's comments to highlight a glaring issue when it comes to a state's image, and therefore its overall branding. An example is Michigan vs. Indiana. Michigan has done an excellent job of following through on its branding strategy around "Pure Michigan", even down to the detail of the rest stops. Since a state's branding is often targeted to visitors, it makes sense that rest stops, being that point of first impression, should be significant. It is clear that Indiana doesn't care as much about the impression it gives visitors even though our branding as the Crossroads of America does place importance on travel. Bruce's point is quite logical and accurate.

    2. I appreciated the article. I guess I have become so accustomed to making my "pit stops" at places where I can ALSO get gasoline and something hot to eat, that I hardly even notice public rest stops anymore. That said, I do concur with the rationale that our rest stops (if we are to have them at all) can and should be both fiscally-responsible AND designed to make a positive impression about our state.

    3. I don't know about the rest of you but I only stop at these places for one reason, and it's not to picnic. I move trucks for dealers and have been to rest areas in most all 48 lower states. Some of ours need upgrading no doubt. Many states rest areas are much worse than ours. In the rest area on I-70 just past Richmond truckers have to hike about a quarter of a mile. When I stop I;m generally in a bit of a hurry. Convenience,not beauty, is a primary concern.

    4. Community Hospital is the only system to not have layoffs? That is not true. Because I was one of the people who was laid off from East. And all of the LPN's have been laid off. Just because their layoffs were not announced or done all together does not mean people did not lose their jobs. They cherry-picked people from departments one by one. But you add them all up and it's several hundred. And East has had a dramatic drop I in patient beds from 800 to around 125. I know because I worked there for 30 years.

    5. I have obtained my 6 gallon badge for my donation of A Positive blood. I'm sorry to hear that my donation was nothing but a profit center for the Indiana Blood Center.

    ADVERTISEMENT