The Franchise Memorandum

A federal court in Illinois has let stand a franchisee’s complaint about the new menu and pricing policy of its franchisor. Stuller, Inc. v. Steak N Shake Enterprises, Inc., 2011 U.S. Dist. LEXIS 57704 (C.D. Ill. May 31, 2011). Rejecting parts of a federal magistrate judge’s recommendation, the district court denied the franchisor’s motion to dismiss two counts of the complaint. In those two counts, the franchisee is challenging the Steak N Shake franchisor’s new policy that requires franchisees to follow set menu and pricing on some items, and to participate in system promotions. The franchisee alleges that the franchisor formerly allowed franchisees freedom in these areas, but that now default notices have been sent for noncompliance.

In allowing the case to proceed past the initial pleading stage, the court found that the plaintiff franchisee had claimed sufficient “damages” even though no termination has occurred. The issue of whether a non-terminated plaintiff truly has been damaged is best resolved at a later stage, the court held, as long as the franchisee at least has pleaded that it has been damaged. Similarly, the court ruled that the franchisee can for now pursue a claim that the franchisor’s new policy differs from what had been disclosed to the franchisee in the UFOC, which allegedly stated that franchisees were free to set prices and were not obligated to participate in promotions. The court found “premature” the franchisor’s defense that the statute of limitations had expired on any claim based on the UFOC.