Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Colo.: Steak n Shake franchisees were properly terminated for breaching agreements, (Jun 24, 2015)

By Greg Hammond, J.D.

Two Steak n Shake stores have knowingly violated written franchise and license agreements and were properly terminated by Steak n Shake Enterprises, Inc., the federal district court in Denver has decided. Summary judgment was therefore granted in favor of Steak N Shake’s trademark infringement, unfair competition, and breach of contract claims (Steak n Shake Enterprises, Inc. v. Globex Company, LLC, June 23, 2015, Moore, R.).

Steak n Shake’s lawsuit arose from: (1) defendants Globex Company, LLC’s and Springfield Downs, LLC’s alleged breaches of certain written franchise and license agreements, which allowed the franchisees to operate as Steak n Shake restaurants; and (2) Control, LLC’s alleged breach of a written area development agreement that required Control to establish 13 franchised Steak n Shake locations according to an established schedule. In addition, three individual defendants allegedly breached their personal guarantees of the franchisees’ obligations.

The dispute centered around Steak n Shake’s introduction of its 2013 Summer promotion that required all of its franchisees to offer various items to customers off of a new $4 menu. Shortly after the promotion began, Steak n Shake began receiving complaints that the defendants were overcharging customers and not using the $4 menu. An investigator discovered that the defendants were serving the $4 meals from the new menu, but at higher prices. In addition, both restaurants were missing all advertising materials that disclosed the $4 meals.

Steak n Shake terminated the defendants’ franchise and license agreements due to: (1) intentional deviation from menu prices; (2) alteration of marketing materials; and (3) failure to cure the violations outlined in an earlier letter. The area development agreement was also terminated for failure to develop and open a third location by June 2, 2013.

The court previously granted Steak n Shake’s motion for preliminary injunction. Steak n Shake now moves for summary judgment, seeking judgment in favor of all of their claims, including: (1) trademark infringement; (2) unfair competition; (3) breach of contract—specific performance; (4) breach of contract—damages; and (5) breach of guaranty—damages.

Breach of contract. There were three issues with regard to Steak n Shake’s breach of contract claims, according to the court, including: (1) whether the franchisees breached the terms of the franchise agreements; (2) whether the breaches were material and done knowingly; and (3) whether notice and opportunity to cure were required.

The court first found that the defendants materially breached the franchise agreements by failing to offer Steak n Shake’s $4 menu and display marketing materials; printing their own menus without Steak n Shake’s consent; altering marketing materials; and charging prices exceeding Stake n Shake’s menu prices. In addition, the defendants were deemed to have knowingly and materially breached the franchise agreements, as their own evidence demonstrated they debated on whether to notify Steak n Shake of their plans and, in order to sell meals at prices above $3.99 stated in the menus, the defendants had to: alter the menus and print new ones; alter Steak n Shake’s menu boards to increase prices; ring up meals as separate items rather than meals; remove all traces of the $4 promotion; and ring up large drinks with each meal at the drive-thru while serving only regular drink sizes.

The area development agreement was also breached, the court determined, because the defendants failed to open a third restaurant by the scheduled June 2, 2013, deadline. Since the court found in favor of Steak n Shake on the breach of franchise agreements, summary judgment in favor of Steak n Shake was also warranted on the guaranties.

Lastly, the court found that because the defendants knowingly breached the franchise agreement, no 30-day cure period was required. Nevertheless, Steak n Shake offered defendants an opportunity to cure, but they failed to do so within the time allotted.

Trademark infringement, unfair competition. Steak n Shake was also entitled to summary judgment on its trademark infringement and unfair competition claims because the franchise agreements were properly terminated. The court reasoned that the defendants continued to operate the two locations as Steak n Shake restaurants after the franchise agreements were terminated, using the Steak n Shake marks and name, offering the same products and services as authorized Steak n Shake restaurants, and at the same locations as the terminated franchised restaurants, up until the time the court’s preliminary injunction order was issued. Permanent injunctive relief was granted with regard to the trademark and unfair competition claims. However, a permanent injunction was not warranted with regard to a purported covenant not to compete because Steak n Shake now operates the two restaurant locations. The court also concluded that Steak n Shake could raise its request for damages at a future status conference.

Franchisees’ counterclaims. Also before the court were the defendants’ counterclaims for: (1) declaratory judgment concerning the franchise and license agreements; (2) breach of contract—franchise and license agreements; (3) breach of duty of good faith and fair dealing; (4) breach of contract—area development agreement; (5) fraud; and (6) intentional interference with prospective economic advantage.

None of these counterclaims were persuasive. The declaratory judgment and breach of contract claims were premised on alleged wrongful termination of the franchise and license agreements and the area development agreement, which were already found to be validly terminated. In addition, because the franchise and license agreements were lawfully terminated and the defendants’ use of the a la carte function to increase prices set by Steak n Shake violated the terms of the franchise agreements, Steak n Shake did not breach the duty of good faith and fair dealing.

The fraud counterclaim was equally unavailing because: (1) the fraud claim that was based on alleged representations of “profitability” and that the defendants’ profitability numbers were going to be greater than the 21.5 percent as stated in the franchise disclosure documents were barred by the integration and no representation clause contained in the franchise agreement; (2) the statements concerning profitability and projections were “mere puffery” that could not be used as the basis for any misrepresentation claim; and (3) the defendants’ reliance on their own allegations was insufficient to establish a genuine issue of material fact that the franchise disclosure documents were false or misleading.

Finally, the defendants waived their tortious interference counterclaim because they failed to respond to Steak n Shake’s argument that they retained the right to approve any sale or transfer of the franchise agreements.

The case is Civil Action No. 13-cv-01751-RM-CBS.

Attorneys: Fredric Adam Cohen (Cheng Cohen, LLC) for Steak n Shake Enterprises, Inc. and Steak n Shake, LLC. Alaina B. Siminovsky (Zarco Einhorn Salkowski & Brito, PA) for Globex Company, LLC, Springfield Downs, LLC, and Control LLC.

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

Cases: FranchisingDistribution ColoradoNews