Steak 'n Shake legal battle addresses franchisee autonomy

Denver-area Steak ‘n Shake franchisees filed counterclaims this week after the franchisor sought to terminate licensing rights last month in a dispute over pricing.

Steak ‘n Shake, the Indianapolis-based division of Biglari Holdings Inc. of San Antonio, has faced increasingly restive franchisees. The counter suit filed this week by Aurora, Colo.-based franchisees Larry and Kathryn Baerns and their son, Christopher Baerns, alleges fraud, breach of franchise agreement contract and pricing policies.

Steak ‘n Shake had sued the Baernses in early July, seeking to terminate the franchise and licensing, claiming they refused, among other things, to comply with mandatory pricing and fully with a $4 value menu promotion. A receptionist at the Biglari headquarters in San Antonio said no one would be available to comment on the case.

The franchisees, through a lawyer’s representative, said they could not talk about the case. But Pete Webb, a spokesman for their law firm, Brown & Kannady LLC of Denver, said, “The terms of the franchise agreement, as the franchisees assert, make it difficult for them to accurately gauge their profit picture.”

The legal issues at hand surround “how much autonomy the franchisees are allowed to have in managing their business and serving their customers, especially menu pricing and offering a la carte items,” the law firm said In a separate statement.

“This mirrors what we’ve seen in a lot of other jurisdictions,” said Webb, adding that such issues include a dispute over pricing policy and the depth of the franchise agreements.

Earlier this year, three individual franchise groups filed suit against Steak ‘n Shake in U.S. District Court in Indiana. Druco Restaurants Inc. in Missouri, People Sales & Profit Co. in Georgia and Scott's S&S Inc. in Pennsylvania separately filed complaints that allege price fixing, breach of contract and fraud. The franchisees claim their contract documents allow them to set some prices and the franchisor does not have the right to set prices on every menu item.

Those cases are pending a judge’s ruling on Steak ‘n Shake’s request for a mandatory non-binding arbitration policy that has been opposed by the franchisees.

One of Steak ‘n Shake’s oldest franchisees, Stuller Inc. of Illinois, had filed a similar pricing suit and won a 7th Circuit Court of Appeals decision in August 2012. Stuller operated five Steak ‘n Shake units.

The Baernses’ Colorado case involves units in Centennial and Sheridan that have opened in the past two years as part of what eventually became a 13-unit development agreement. In counterclaims filed this week, the Baernses and their company alleged Steak ‘n Shake LLC and operating division Steak ‘n Shake (SNS) Enterprises “wrongfully terminated” their license and franchise agreements.

They also said that franchise documents presented in March 2011 represented that the net profit from Steak ‘n Shake corporate-operated restaurants was 21.5 percent of net sales in restaurants that did volumes of more than $2 million, and that company representatives said that they “would easily achieve a 25-percent net profit margin.”

In addition, the filings claim that on April 5, 2013, SNS Enterprises announced it expanded its “4 Meals Under $4” promotion to include 20 or more meals, which the franchisees said was “a significant decrease in pricing, despite the fact that the new menu neither was tested in a sufficient number of locations, nor was tested for a sufficient amount of time.”

The franchisees also claim SNS Enterprises implemented a change in the point-of-sale system that prevented their restaurants “from selling individual menu items to their customers, despite repeated requests from customers to be able to purchase individual menu items.”

Meanwhile, lawyers for the Baernses said “the Steak ‘n Shake restaurants in Denver continue to operate as Steak ‘n Shakes franchises, and are not in any realistic danger of closing.”

Contact Ron Ruggless at [email protected].
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