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Stuller, Inc v. Steak N Shake Enterprises

June 21, 2011

STULLER, INC., PLAINTIFF,
v.
STEAK N SHAKE ENTERPRISES, INC. AND STEAK N SHAKE OPERATIONS, INC., DEFENDANTS.



The opinion of the court was delivered by: Sue E. Myerscough, U.S. District Judge:

E-FILED

Wednesday, 22 June, 2011 03:26:17 PM

Clerk, U.S. District Court, ILCD

OPINION

This matter is before the Court on the Report and Recommendation (d/e 55) entered by United States Magistrate Judge Byron G. Cudmore on April 28, 2011. The Report and Recommendation recommends this Court deny Plaintiff Stuller, Inc.'s Renewed Motion for Preliminary Injunction (the Motion) (d/e 17).

Plaintiff timely filed Objections to the Report and Recommendation (d/e 56) on May 12, 2011. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72(b). On May 13, 2011, Defendants, Steak N Shake Enterprises and Steak N Shake Operations, Inc., also timely filed Objections to the Report and Recommendation (d/e 58). For the reasons that follow, this Court ADOPTS IN PART and REJECTS IN PART the Report and Recommendation and GRANTS Plaintiff's Renewed Motion for Preliminary Injunction.

I. STANDARD OF REVIEW

This Court reviews de novo any part of the Report and Recommendation to which a proper objection has been made. See 28 U.S.C. § 636(b)(1)(C); Fed.R.Civ.P. 72(b). Upon review of the Report and Recommendation, this Court may accept, reject, or modify the recommended disposition, receive further evidence, or recommit the matter to the magistrate judge with instructions. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72(b)(3).

II. BACKGROUND

The parties are familiar with the facts of the case. Those facts, and a summary of the evidence presented at the hearing on the Motion, are fully set forth in the "Statement of Facts" section of the Report and Recommendation, which this Court adopts. To summarize, Plaintiff is a franchisee of five Steak N Shake restaurants. Plaintiff, through its predecessors, has operated Steak N Shake restaurant franchises in Central Illinois since 1939, making it the longest standing Steak N Shake franchise. Defendants operate and grant franchises to operate Steak N Shake restaurants nationwide.

Plaintiff alleges that in June 2010, Defendants adopted a policy (the "Policy") requiring all franchisees to follow set menu and pricing (with the exception of breakfast items) and offer all company promotions as published. According to Plaintiff, this Policy was contrary to "longstanding custom, practice, policy, agreement, and representation," that franchisees could set their own prices for menu items, maintain "custom menus," and choose whether to follow promotions. Plaintiff further alleges that, when Plaintiff refused to implement the Policy, Defendants sent default notices threatening to terminate Plaintiff's franchises.

In November 2010, Plaintiff filed suit against Defendants. In December 2010, Plaintiff filed the First Amended Complaint. Count I seeks a declaratory judgment that the Agreements do not permit Defendants to set prices or require Plaintiff to participate in all promotions as published and Plaintiff is not subject to default or termination for refusing to adopt the Policy. Counts II and III allege breach of contract and violations of the Illinois Franchise Disclosure Act (IFDA) (815 ILCS 705/1, et seq.), respectively.

In January 2011, Plaintiff filed the instant Motion. In the Motion, Plaintiff asks the Court to restrain Defendants from: (1) forcing Plaintiff to implement the Policy while this case is pending; or (2) taking any adverse action against Plaintiff for refusing to adopt the Policy.

A. The Hearing on the Renewed Motion for Preliminary Injunction On March 14 and 15, 2001, the Magistrate Judge held an

evidentiary hearing on the Motion. To summarize, Plaintiff presented evidence that, for 70 years, Plaintiff had set its own prices and decided whether to participate in Defendants' promotions. In fact, the 1972 and 1978 franchise agreements expressly reserved to Plaintiff the right to set prices. Such language was removed from later agreements and was not contained in the Agreements at issue here.

In 2007, Plaintiff decided to adopt the highest tier of corporate pricing to save money on custom menus. Thereafter, in 2008, Plaintiff suffered a loss of $538,446.98, due to the new pricing, increased fuel costs, and increased food costs. Wilma Stuller, the President and sole shareholder of Plaintiff, made a cash infusion into the business. Plaintiff also decided to raise prices by 10%, over Defendants' recommendation not to do so. Ms. Stuller testified Plaintiff did not lose customers due to the price increase.

Plaintiff also presented evidence attempting to show that following Defendants' Policy would put Plaintiff out of business. Derek Bruno, Plaintiff's comptroller, testified Plaintiff would experience a 6 to 7 percent drop in net sales if it followed Defendants' Policy, which would put Plaintiff out of business. Plaintiff asserted Defendant ran a similar calculation before implementing the Policy--a comparison of items sold at the Plaintiff's price versus items sold at the new Policy price--and estimated Plaintiff would experience at 6.5 percent drop in sales. See Plaintiff Exhibit 36.

Ms. Stuller personally guaranteed the five mortgages on the stores, which total $7.5 million. Some of the debt is due to Defendants asking Plaintiff to rebuild or remodel two stores. Plaintiff chose to rebuild those stores. Plaintiff also rebuilt a third restaurant by choice.

Defendants presented evidence showing the net sales and customer count data from franchisees who had complied with the Policy. For example, Defendants presented evidence showing that the 48 franchise restaurants that adopted the Policy in November 2009 had an average annual increase in net sales of 7.06 percent and an average increase in customer count of 9.75 percent when comparing 2010 data to 2009 data.

No franchise went out of business after following the Policy. As of the date of the hearing, only one other franchise--located in Las Vegas, Nevada--had refused to follow the Policy. That Las Vegas franchise had been following the Policy but stopped in approximately March 2011.

B. The Report and Recommendation

The Report and Recommendation outlined the parties' respective positions and concluded that, on the evidence presented to date, the Agreements were silent or ambiguous regarding whether Defendants can require Plaintiff to follow the Policy. The Report and Recommendation found that the statement in Item 19 of the Uniform Franchise Offering Circular (UFOC*fn1 )--which stated "Franchisees are free to set consumer prices different from prices on [Defendant]-owned restaurant menus and several do so"-- did not resolve the issue of whether Defendants could require Plaintiff to follow the Policy. The integration clause limited incorporation of representations in the UFOC to those required by the IFDA, and the IFDA did not mandate the incorporation of that representation into the Agreements.

The Report and Recommendation found that because the Agreements were ambiguous, extrinsic evidence could be considered. That evidence was conflicting, however, because, beginning in 1995, the Agreements deleted the express authority of Plaintiff to set its own prices but additional evidence supported the position that Plaintiff could set its own prices, including that: (1) until Defendants sought to implement the Policy, Plaintiff continued to set its own prices even after the change in the Agreements in 1995; (2) Plaintiff implemented the 10 percent increase in 2008, despite Defendants' recommendation that Plaintiff not do so; and (3) Item 19 of the UFOC stated that many franchisees set their own prices. Therefore, the Report and Recommendation concluded Plaintiff had "some prospects of success on the merits." Report, p. 31.

The Report and Recommendation also found, however, that Plaintiff failed to demonstrate it had no adequate remedy at law or that it would suffer irreparable harm if the injunction were not granted. Specifically, if the injunction were not granted, Plaintiff could comply with the Policy during the pendency of the case or lose the franchise. If Plaintiff chose to lose the franchise, the loss would be self-inflicted, and "courts are not sympathetic to requests for an injunction to avoid an injury that is self-inflicted." Report, at 31.

The Report and Recommendation further found that Plaintiff failed to demonstrate that following the Policy would force it out of business or would impose irreparable harm during the pendency of the case. The Report and Recommendation noted that "compensatory damages are generally an adequate remedy at law for economic losses." Report, p. 32. To show lack of an adequate remedy at law, Plaintiff needed to show that compliance with the Policy would put it out of business. To show irreparable harm, Plaintiff had to show that "it would be irreparably harmed by the losses it would suffer if it were required to follow the Policy from the date that the District Court would adopt this Report and Recommendation until the conclusion of the trial on the merits." Report, at 33.

The Report and Recommendation concluded that Plaintiff's comptroller Bruno--who testified that Stuller would experience a 6 to 7 percent reduction in net sales if it followed the Policy--overstated the decline in net sales because of the way he calculated the affect of coupons and other discounts. Bruno also assumed that lower prices and sales promotions would not effect the volume of Stuller's business. The Report and Recommendation found Bruno's opinions inconsistent with the experience of other franchisees who have complied with the Policy.

The Report and Recommendation also recognized Plaintiff's argument that its restaurants currently operate at a very high capacity and would not experience any increase in sales from lowering prices. The Report and Recommendation found, however, that Plaintiff did not demonstrate that it was unique from the other franchisees. Moreover all of the other franchisees who had complied with the Policy had stayed in business and not experienced dire financial consequences.

The Report and Recommendation rejected Plaintiff's argument that its experience in 2008-when it adopted corporate pricing and lost money--demonstrates it would go out of business if it adopted the Policy. Although the records showed a loss of $538,446.98 in 2008, Plaintiff was still able to pay its rent--which covered the mortgages plus an additional $80,000 paid to Stuller--Ms. Stuller's salary of $469,126.72, and a dividend of $257,625.28.

C. Objections to the Report and Recommendation

Plaintiff raises several objections to the Report and Recommendation. Plaintiff objects to the findings on likelihood of success on the merits, irreparable harm, and inadequate remedy at law. Plaintiff further objects that the Report and Recommendation ...


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