Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—10th Cir.: Steak n Shake franchises properly terminated, (Sep 12, 2016)

By Michael Menzhuber, J.D., LL.M.

A federal district court did not err in finding that franchise agreements to operate two Steak n Shake restaurants were properly terminated, according to the U.S. Court of Appeals in Denver. The appellate court found that reasonable minds could not dispute that the franchisees’ failure to offer a mandatory promotional menu entitled Steak n Shake to terminate the franchises under the franchise agreements (Steak n Shake Enterprises, Inc. v. Globex Company, LLC, September 12, 2016, Baldock, B.).

Globex Company, LLC, Springfield Downs, and their principal owners entered in franchisee agreements to operate two Steak n Shake restaurants. The franchise agreements provided that the franchisees must comply with Steak n Shake’s menus and menu pricing. Steak n Shake later terminated the franchise agreements after it discovered that the restaurants were: (1) serving meals from the Steak n Shake’s $4 promotional menu but at higher prices; and (2) missing all advertising materials that disclosed the $4 promotional meals. A district court subsequently granted summary judgment in favor of Steak n Shake’s claims of trademark infringement, unfair competition, and breach of contract.

The appellate court determined that, because the franchisees were not afforded a thirty-day cure period, the issue was whether reasonable minds could differ on: (1) whether the franchisees breached their obligations under the franchise agreements; and (2) whether Steak n Shake breached the franchise agreement by invoking termination under section 11.1(A)(iii) which allowed immediate termination.

The franchisee’s argument as to why they did not violate the franchisee agreements’ pricing provisions was unconvincing because they admitted to charging customers for promotional $4 menu items at a higher price unless customers specifically requested the $4 promotional menu pricing. Therefore, Steak n Shake was entitled to invoke section 11.1(A)(iii) due to the franchisees’ failure to offer the $4 promotional menu, the appellate court concluded.

It was undisputed that the franchisees created their own menus and offered the $4 promotional menu only to customers who requested it. The franchisees argued that they in fact offered the promotion because they furnished an approved $4 promotional menu to requesting customers. The appellate court, however, agreed with the district court that the franchisees were only "honoring" and not "offering" the $4 promotional menu items.

The appellate court also found that the franchisees knowingly failed to offer the $4 promotional menu because they: (1) altered Steak n Shake approved menus to reflect their a la carte pricing; (2) did not insert the $4 promotional menus in the regular lunch and dinner menus as required; and (3) removed the $4 menu marketing materials from the restaurant. Thus, no reasonable mind could dispute that the franchisees knowingly failed to offer a mandatory promotion and that Steak n Shake properly terminated the franchise agreements under section 11.1(A)(iii).

The case is No. 16-1010.

Attorneys: Kimberly Briggs Still Berve (Wheeler Trigg O'Donnell LLP) for Steak n Shake Enterprises, Inc. and Steak n Shake LLC. Alaina B. Siminovsky (Zarco Einhorn Salkowski & Brito, PA) and David James Meretta (Brown & Kannady, LLC) for Globex Co., LLC, Springfield Downs, LLC and Control LLC.

Companies: Steak n Shake Enterprises, Inc.; Steak n Shake LLC; Globex Co., LLC; Springfield Downs, LLC; Control LLC

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