Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: Franchisee challenges policy permitting Steak ‘n Shake to set menu prices, (Jan 5, 2015)

By Edward L. Puzzo, J.D.

A Steak ‘n Shake franchisee has filed a lawsuit in the federal district court in Indianapolis, challenging the franchisor’s policy change rescinding the franchisee’s rights to set menu prices and requiring adherence to all franchisor-generated promotions. The four-count complaint alleges that this policy change was neither permitted by franchise agreements executed prior to 2010, nor was disclosed in franchise disclosure documents (Eastern Shore Restaurants, Inc. v. Steak N Shake Enterprises, Inc., January 2, 2015).

Eastern Shore Restaurants, operating franchises in Alabama and Florida, entered into its franchise agreement in 2007. Eastern Shore alleges that for about 70 years, until a 2009 change in franchisor management, Steak ‘n Shake franchisees always had the right to set prices that differed from company-owned restaurants menu pricing, as well as the right to offer custom menus specific to their locale and to opt out of franchisor-generated promotions. These rights were included in the Uniform Franchise Offering Circulars (UFOCs) – also known as Franchise Disclosure Documents (FDDs) – provided to potential franchisees. The pre-2010 UFOC also did not state that the franchisor reserved the right to take away the franchisee’s right to set its own prices, Eastern Shore alleges. The franchise agreement did permit the franchisor to modify its Operating Standards Manual, but that Manual was limited to products, services, and standards for both. It did not cover menu pricing.

Eastern Shore alleges that the motive behind the policy change was that Steak ‘n Shake’s royalties are calculated as a percentage of a franchisee’s revenue, not profits. Therefore, a policy aiming to increase customer volume by offering lower-priced food would be advantageous to the franchisor “without concern as to whether franchisees actually make a reasonable profit.” Under a change mandating the exclusive use of one particular supplier for all restaurant products, at prices negotiated by the franchisor, the franchisees also lost control over a major portion of their costs. With franchisees lacking control over menu prices and a major component of its costs, Steak ‘n Shake’s policy change damaged franchisee profitability, Eastern Shore alleges.

Declaratory judgment, breach of contract. The complaint seeks a declaratory judgment that Steak ‘n Shake does not have the contractual right under its franchise agreement with Eastern Shore to set menu prices nor to require participation in all promotions, and further seeks a permanent injunction against franchise termination as a remedy for non-compliance with the Steak ‘n Shake’s policy changes. The complaint also alleges that the franchisor’s efforts to enforce its policy change, by Point-of-Sale system updates and other means, was a breach of the franchise agreement.

Fraud, unfair practice. The complaint further alleges that the 2007 UFOC provided to Eastern Shore by Steak ‘n Shake contained the statement: “Franchisees are free to set consumer prices different from prices on company-owned restaurant menus and several do so.” Eastern Shore alleges that this was a false statement of material fact constituting fraud, and that forcing Eastern Shore to adopt a policy in direct contravention of that statement was an unfair and deceptive act in violation of the Florida Deceptive and Unfair Trade Practice Act.

The complaint sought a declaratory judgment and permanent injunction against the franchisor’s setting of maximum or minimum prices, actual damages, punitive damages, attorney fees, and costs of suit.

The case is Civil Action No. 1:15-cv-00007-WTL-TAB.

Attorneys: Wayne C. Turner (Bingham Greenebaum Doll LLP) for Eastern Shore Restaurants, Inc.

Companies: Eastern Shore Restaurants, Inc.; Steak ‘n Shake Enterprises, Inc.; Biglari Holdings, Inc.

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