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Stuller, Inc v. Steak N Shake Enterprises

July 12, 2012

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 Thursday, 12 July, 2012 04:08:18 PM Clerk, U.S. District Court, ILCD

OPINION

This matter is before the Court on Plaintiff Stuller, Inc.'s Motion for Summary Judgment (d/e 92) and the Motion for Summary Judgment (d/e 93) filed by Defendants Steak N Shake Enterprises, Inc. and Steak N Shake Operations, Inc. (hereinafter SNS)*fn1 . The Motions are fully briefed, and, on June 1, 2012, the Court heard oral argument.

For the reasons that follow, Plaintiff's Motion for Summary Judgment, seeking summary judgment on Count I or, in the alternative, Count III, is GRANTED IN PART and DENIED IN PART. Defendants' Motion for Summary Judgment on all counts is DENIED. Plaintiff is entitled to judgment in its favor on Count I. Questions of fact remain regarding Count II. Finally, because Count III was pled in the alternative to Counts I and II, Count III is dismissed.

I. OVERVIEW

SNS operates and grants franchises to operate Steak N Shake restaurants nationwide. Plaintiff is the franchisee of five Steak N Shake restaurants, four in Springfield, Illinois (Wabash, North Dirksen, South Dirksen, and Prairie Crossing) and one in Jacksonville, Illinois. 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 in the country.

In November 2010, Plaintiff filed suit against SNS. In December 2010, Plaintiff filed the First Amended Complaint. In the First Amended Complaint, Plaintiff alleges that in June 2010, SNS adopted a policy (the "Policy") requiring all franchisees to "follow set menu and pricing (with the exception of breakfast items), and to offer all company promotions as published." Am. Compl. ¶ 12 (d/e 10). According to Plaintiff, this Policy is contrary to "long-standing 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. Am. Compl. ¶ 1. Plaintiff further alleges that, when Plaintiff refused to implement the Policy, SNS sent default notices threatening to terminate Plaintiff's franchises. Am. Compl. ¶ 17.

In Count I, Plaintiff seeks a declaratory judgment that Plaintiff was not required to comply with the Policy under the terms of the franchise agreements (Agreements) and applicable law. Plaintiff also asked for injunctive relief to stop SNS from enforcing the Policy. In Count II, Plaintiff alleged SNS breached the implied covenant of good faith and fair dealing by attempting to force Plaintiff to adopt the Policy.

In Count III, pled in the alternative to Counts I and II, Plaintiff alleges that, if SNS can impose the Policy on Plaintiff, then SNS violated the Illinois Franchise Disclosure Act (IFDA) (815 ILCS 705/1 et seq.) because the disclosure statements provided to Plaintiff by SNS prior to entering into and renewing the franchises (1) did not provide that SNS was entitled to set maximum or minimum prices or require Plaintiff to participate in all promotions and (2) provided that franchisees could set their own prices. Am. Compl. ¶¶ 62, 63.

On June 22, 2011, this Court granted Plaintiff's Renewed Motion for Preliminary Injunction. See d/e 69. The Court enjoined SNS from forcing Plaintiff to implement the Policy and from taking any adverse action against Plaintiff for refusing to adopt the Policy. In its Opinion, this Court found the Agreements ambiguous with respect to whether price was part of the "System" as that term is defined in the Agreements. This Court also found Plaintiff had shown a likelihood of success on the merits and met the other factors for a preliminary injunction.

SNS has now moved for summary judgment on all three counts.

Plaintiff has moved for summary judgment on only Counts I and, in the alternative, Count III.

SNS asserts that, even if the Court finds the Agreements ambiguous, all of the admissible extrinsic evidence shows that Plaintiff is obligated to implement maximum prices and promotions as part of the franchise system. SNS points to (1) the use of the term "System" in the franchise industry; (2) the removal of Plaintiff's right to set prices from the 1972 and 1978 License Agreements; and (3) the fact that, in the 1990s, Plaintiff's right to set prices was discussed by the parties and was not specifically included in the 1995 or subsequent Agreements. (The parties focus on the 1995 negotiations because pricing was not addressed by the parties in connection with the Agreements signed in 2000, 2005, and 2006. See Defendant's Response, p. 39, n. 11 (d/e 96); Tonya Sallee Dep. p. 116 (d/e 92-1) (noting that pricing was not discussed when Sallee personally handled the Jacksonville, North Dirksen, and Wabash Agreements executed in 2005 and 2006)).

Plaintiff asserts that the undisputed extrinsic evidence demonstrates SNS does not have the right to enforce the Policy under the Agreements. Plaintiff points to: (1) the disclosure documents provided to Plaintiff before entering the Agreements; (2) the negotiation of the 1995 Agreements; (3) the parties' course of performance; (4) the parties' course of dealing; and (5) trade usage.

II. LEGAL STANDARD ON SUMMARY JUDGMENT

Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); see also Fed.R.Civ.P. 56(c). A moving party must show that no reasonable fact-finder could return a verdict for the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986); Gleason v. Mesirow Fin., Inc., 118 F.3d 1134, 1139 (7th Cir. 1997).

The movant bears the burden of establishing that there is no genuine issue of material fact. Celotex Corp., 477 U.S. at 323. If the movant meets this burden, the non-movant must set forth specific facts demonstrating that there is a genuine issue for trial. Fed.R.Civ.P. 56(e); Anderson, 477 U.S. at 252. The evidence is viewed in the light most favorable to the non-movant and "all justifiable inferences are to be drawn in his favor." Anderson, 477 U.S. at 255.

Here, the parties have filed cross-motions for summary judgment. "[Co]ntract interpretation is often a question of law well suited for disposition on summary judgment." Zemco Mfg., Inc. v. Navistar Intern. Transp. Corp., 270 F.3d 1117, 1129 (7th Cir. 2001). "However, when a contract contains ambiguities that the parties must explain through extrinsic evidence, the trier of fact . . . must resolve the conflicting interpretations of the agreement." Id. "If there is a dispute as to the interpretation of the extrinsic evidence, this becomes a genuine issue of material fact for a jury and is thus inappropriate for summary judgment." Markin v. Chebemma Inc., 526 F. Supp. 2d 890, 895 (N.D. Ill. 2007).

If, however, the extrinsic evidence is uncontroverted, the court decides the issue as a matter of law. Marusiak v. Adjustable Clamp Co., 2005 WL 2420370, at *7 (N.D. Ill. 2005).

III. FACTS

Currently, five franchise agreements (Agreements) govern the relationship between the parties, including (1) the July 18, 2006 Wabash Agreement*fn2 (d/e 92-6); (2) the July 18, 2006 Jacksonville Agreement*fn3 (d/e 92-5); (3) the January 27, 2000 Prairie Crossing Agreement*fn4 (d/e 92-3); (4) the January 26, 2005 North Dirksen Agreement*fn5 (d/e 92-4); and (5) the February 1, 1995 South Dirksen Agreement*fn6 (d/e 92-2). To a large extent, this case turns on the language in the Agreements that gives SNS the right to revise "the System" from time to time and the agreement by Plaintiff that it will comply with the entire System, as revised from time to time. SNS construes the System as including price and promotions while Plaintiff does not.

The following is a chronological recitation of the facts, starting with the 1972 and 1978 License Agreements and ending with the implementation of the Policy at issue in this lawsuit. Thereafter, evidence submitted regarding SNS's current standard unit franchise agreement and custom and practice in the industry is set forth.

A. The 1972 and 1978 License Agreements for the Wabash, Jacksonville, and Seventh & South Grand Locations Prior to February 1, 1995, Plaintiff or its predecessor-in-interest*fn7 was the franchisee of three Steak N Shake restaurants. The three License Agreements that existed prior to February 1, 1995 included (1) the 1972 Wabash License Agreement; (2) the 1972 Seventh and South Grand License Agreement; and (3) the 1978 Jacksonville License Agreement.

The 1972 and 1978 License Agreements provided, in part, that:

LICENSEE shall diligently operate the licensed business during the term of this agreement, and in such operation shall comply with the terms of this agreement and such rules and procedures as LICENSOR may from time to time prescribe, including but not limited to the rules and procedures set forth in the Steak n Shake Manager's Guide (a copy of which will be delivered to the LICENSEE within 10 days of the execution of this agreement), together with all amendments and supplements thereto. * * * In no event however may such amendments or supplements act or modify or amend any specific term or provision set forth in this document. * * * The parties recognize that LICENSOR itself is engaged in the operation of Steak n Shake restaurants, and that the Manager's Guide and amendments and supplements thereto are and will be used in connection with all such restaurants as well as licensed restaurants. Such guides contain references to pricing of merchandise, and may from time to time contain other restrictions which LICENSOR may properly impose with respect to its own operations but with which it may not have the right to require LICENSEE to comply. In such respects, such guide and amendments and supplements are and are intended to be only suggestions and recommendations of the LICENSOR which it considers might be of benefit to LICENSEE. LICENSEE shall make its own determinations with respect to such items, and specifically shall establish and determine in its sole discretion the prices to be charged for products sold or offered for sale in the licensed restaurant.

See 1972 Wabash and Seventh & South Grand License Agreements, § 4.09 Operating Standards (d/e 95-1; 95-2) (emphasis added); see also 1978 Jacksonville License Agreement, § 4.09 Operating Standards (d/e 95-3) (substantially the same language with some differences in capitalization and punctuation). The initial term of the agreements was 20 years for the Wabash and Jacksonville agreements and 15 years for the Seventh & South Grand locations. All three agreements contained an option for a five-year renewal and thereafter a second renewal period of five years. See License Agreements, §5.02.

B. The Negotiation of the 1995 Agreements

In early 1993, Harold Stuller, the former president of Plaintiff (now deceased), and James Richmond, the former Vice-President of Franchising for SNS, began negotiating new franchise agreements for the three existing restaurants operated by Plaintiff. The parties also began discussing a development agreement under which Plaintiff would open additional restaurants.

In the 1990s, SNS was changing direction and began "doing some new franchises." Richmond Dep. p. 66 (d/e 92-7) (agreeing with question asked). SNS developed a standard unit franchise agreement and an addendum. Richmond Dep. p. 75. The purpose of the addendum was to "carve out any special provisions to any of those agreements, but particularly for old franchisees that we were working with to get--get more consistent with the new system." Richmond Dep. p. 130.

On April 23, 1993, Richmond sent a memorandum to Alan Gilman, the then-President of SNS, reviewing a number of issues pertaining to Plaintiff's Agreements. The issues included Richmond's recommendation on issues of area development, the length of the agreements, marketing contributions, hours of operation, and menu offerings. The April 23, 1993 memorandum does not mention pricing.

On August 6, 1993, Richmond sent another memorandum to Gilman suggesting to Gilman the positions SNS should take on the following issues: menu offerings, marketing contributions, remodels, length of the agreements, and area development. Again, the August 6, 1993 memorandum does not mention pricing but does note that "[t]he requirement to participate in ADI wide marketing programs will be strengthened."

On or about August 16, 1993*fn8 , Richmond sent Gilman a memorandum reporting on a meeting that occurred between Richmond and Harold and Wilma Stuller. The memorandum states, in part, as follows:

The following items were tentatively agreed to:

1. Stuller will adopt the Steak n Shake menu effective with our next revision, which we expect to issue this fall, subject to the following: (c) Stuller is free to establish his own pricing. (By law, all franchisees may set their own prices*fn9 .)

See d/e 93-3.

Despite Richmond's reference in the August 16, 1993 memorandum to a tentative agreement having been reached, negotiations continued. Richmond testified that the August 16, 1993 memorandum was the parties' final agreement on the issue of pricing. SNS disputes this, asserting that nearly every issue listed in the August memorandum was renegotiated. Richmond also testified that the parties did not intend to change the existing relationship regarding pricing when they negotiated the 1995 contracts. Richmond Dep. p, 148.

At one point during the negotiations, Plaintiff proposed an amendment to Section 3.03 of the Agreements related to "Installation of Equipment and Furnishing." Plaintiff suggested the paragraph include the following language; "Provided, however, that the COMPANY acknowledges that all current practices of the Franchisee as of the date hereof are acceptable to the COMPANY." The language ultimately provided as follows: "Provided, however, that the COMPANY acknowledges that all current equipment utilized by the Franchisee as of the date hereof is acceptable to the COMPANY."

The negotiations that began in March 1993 culminated with the parties signing an Area Development Agreement dated January 23, 1995 and four Franchise Agreements dated February 1, 1995, with Addenda. Three of those franchise agreements replaced the existing franchise agreements for the Wabash, Jacksonville, and 6th & Ash locations. The fourth 1995 agreement was for the South Dirksen location that Plaintiff planned to build and open during 1995. The 1995 South Dirksen agreement remains in effect.

All of the franchise agreements signed in 1995 were standard form SNS agreements with addenda modifying the provisions of the standard form of the SNS franchise agreement. The express language in the 1972 and 1978 License Agreements providing that Plaintiff "shall establish and determine in its sole discretion the prices to be charged for products sold" is not included in the 1995 Agreements or addenda.

C. The Uniform Franchise Offering Circular Prior to signing the 1995 Agreements, SNS provided Plaintiff with a Uniform Franchise Offering Circular (UFOC) (now called the Franchise Disclosure Document but, for clarity, this Court will refer to the document as the UFOC). See 7-Eleven Inc. v. Spear, 2011 WL 2516579, at *4 (N.D. Ill. 2011) (explaining the Federal Trade Commission's (FTC) Franchise Rule and that the "FTC accepts satisfaction of the UFOC Guideline as compliance with the Franchise Rule"). The UFOC contained an "Item 19," which relates to "Earnings Claims."

Item 19, which is an optional provision, sets forth information, both in text and in a table, about historical sales volumes and other data for Steak N Shake restaurants. See, e.g., 7-Eleven Inc., 2011 WL 2516579, at *4 (noting that the Franchise Disclosure Regulations do not require that franchisors disclose earnings information). Item 19 in the UFOCs provided to Plaintiff states, in part:

Any potential franchisee who attempts to estimate from this table his or her own costs and performance must keep in mind that the Table does not reflect the performance of Steak N Shake franchised operations.

Furthermore, there are some differences between the operations of a franchised restaurant and a SNS-owned restaurant. . . . . Franchisees are free to set selling prices different from prices on SNS-owned restaurant menus and several do so. 1994 UFOC, p. 34 (d/e 92-14) (emphasis added) (also noting that two franchise restaurants "currently do not offer breakfast service"). The language cited above was also in the UFOCs provided to Plaintiff before signing the current Agreements. See 1999 UFOC (d/e 92-19); 2004 UFOC (d/e 92-24); 2005 UFOC (d/e 92-25).

D. The 1992 Stennett Agreement In support of its Motion for Summary Judgment, SNS points to an agreement entered into between SNS and another franchisee in 1992.

Specifically, in June 1992, Richmond, on behalf of SNS, signed a unit franchise agreement with Stennett's S'NS, Inc. for a new franchised location in Missouri.

The Stennett Agreement generally provided that (1) SNS had "created and developed a unique restaurant concept" that was expressed in the Operating Standards Manual and referred to as "the System" (recitals); (2) the franchisee would comply with the entire System, as revised from time to time by SNS (section 1.03); and (3) that SNS had the right to add to and modify the Operating Standards manual (section 5.01). See d/e 95-4. The Stennett Agreement does not contain an addendum. Instead, the parties signed a Memorandum of Agreement which modified certain standard provisions of the Stennett Agreement. See d/e 95-5.

For example, the Memorandum of Agreement contained an exception to the 24-hour operation requirement ("For purposes of Section 5.02, the Restaurant may be operated by Franchisee . . . no less than seventeen (17) hours per day) and permitted the operation of a breakfast bar ("Notwithstanding the provisions of Section 4.01 and 5.01(a), Franchisee may operate a breakfast bar or breakfast buffet). See d/e 95-5. The Memorandum of Agreement also contained the following paragraph:

Menu Pricing. Franchisor acknowledges that Franchisee is free to establish menu pricing that may differ from menu pricing used by Franchisor. Franchisee will use his best efforts to maintain pricing that is competitive with similar restaurant operations within Taney County. d/e 95-5.

E. The Current Agreements

As noted above, the current Agreements include the 2006 Wabash Agreement, the 2006 Jacksonville Agreement, the January 2000 Prairie Crossing Agreement, the 2005 North Dirksen Agreement, and the 1995 South Dirksen Agreement. The current Agreements contain, in substantially the same form, the following recital pertaining to the System:

The Company has created and developed a unique restaurant concept, including buildings of distinctive architectural design, decorative color scheme and trade dress, and has standardized methods of preparing and serving certain food products and beverages for on-premises and off-premises consumption in one or more manuals and written or other materials of the Company (the "Operating Standards Manual") as issued and revised from time to time (hereinafter collectively referred to as the "System").*fn10

See Wabash Agreement (d/e 92-6); Jacksonville Agreement (d/e 92-5); North Dirksen Agreement (d/e 92-4); and Prairie Crossing Agreement (d/e 92-3). Section 1.03 of the Agreements, pertaining to Franchisee Obligations, requires that Plaintiff comply with the System:

Franchisee acknowledges that maintaining uniformity in every component of the operation of the System is essential to the success of the entire chain of STEAK N SHAKE Restaurants, including a designated menu; uniformity of food and beverage specifications, preparation methods, quality and appearance; and uniformity of facilities and service. Franchisee agrees to comply with the entire System, as revised from time to time by the Company.*fn11

Id. The Addendum to Section 1.03 of the Agreements provides that the Franchisee is allowed to offer the additional menu items shown in an attached document. Id. The South Dirksen Agreement also provides that the Franchisee may offer Coca-Cola products ...


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