Steak ‘n Shake Operator Can Duck Corporate Edict

CHICAGO (CN) - America's oldest Steak 'n Shake operator can continue its current business model while fighting a new corporate pricing structure, the 7th Circuit ruled.

Stuller Inc. owns five Steak 'n Shake franchises in Illinois. The company and its predecessors have operated the restaurants since 1939, during which time it has set its own menu prices.

In June 2010, however, Steak 'n Shake required all franchises to follow a set pricing and promotions policy. Stuller refused, citing its existing franchise agreements, and filed suit. The franchisee sought injunctive relief and alleged breach of contract and violations of the Illinois Franchise Disclosure Act.

Though Steak 'n Shake initially agreed not to enforce the pricing policy during litigation, the company later changed its mind and threatened to close Stuller's locations if it did not comply. Stuller moved for preliminary injunction.

At the heart of the dispute, Stuller says that the pricing policy will hurt its bottom line. In its complaint, Stuller alleged that implementation of the pricing policy would reduce its yearly bottom line by $913,000, forcing it out of business.

Steak 'n Shake, by contrast, introduced evidence that the pricing policy had increased sales for other franchisees. The company also denied that any compliant franchisees had been forced out of business.

U.S. District Judge Sue Myerscough, over a magistrate judge's determination, found that Stuller would suffer irreparable harm if Steak 'n Shake closed its locations.

The chain had argued that any injury Stuller would suffer would be self-inflicted because it could easily avoid termination by simply complying with the pricing policy.

In support, Steak 'n Shake cited the 7th Circuit's 2003 ruling in Second City Music, Inc. v. City of Chicago, in which the court refused to grant a preliminary injunction to a company challenging city licensing restrictions because acquiring a license while litigation was ongoing would be harmless.

"Injury caused by failure to secure a readily available license is self-inflicted, and self-inflicted wounds are not irreparable injury," that opinion states. "Only the injury inflicted by one's adversary counts for this purpose."

But the 7th Circuit rejected this argument, finding that such an interpretation of Second City Music is overbroad.

"[Second City Music] does not give a categorical legal rule that a self-inflicted injury cannot be irreparable harm," Judge Daniel Manion wrote for a three-member panel.

"The better understanding of Second City is that the question of whether an injury is readily avoidable and truly self-inflicted if not avoided - and thus not irreparable harm - depends on the particular circumstances of the case," Manion added.

Thus Stuller's claims of severe financial harm must be considered when evaluating whether a preliminary injunction is appropriate, the court determined. Because Myerscough's analysis appeared sufficient, the court deferred to her decision.

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