Court Opinion

ID: 4032932
Source: CourtListenerOpinion
Date Created: 2016-09-12 16:01:15.882953+00
Date Added: 2024-06-11T07:45:59.629019
License: Public Domain

FILED
                                                                      United States Court of Appeals
                     UNITED STATES COURT OF APPEALS                           Tenth Circuit

                            FOR THE TENTH CIRCUIT                         September 12, 2016
                        _________________________________
                                                                          Elisabeth A. Shumaker
                                                                              Clerk of Court
STEAK N SHAKE ENTERPRISES, INC.;
STEAK N SHAKE LLC,

      Plaintiffs-Counterclaim
      Defendants - Appellees,

v.                                                          No. 16-1010
                                                (D.C. No. 1:13-CV-01751-RM-CBS)
GLOBEX COMPANY, LLC;                                         (D. Colo.)
SPRINGFIELD DOWNS LLC;
CHRISTOPHER BAERNS; LARRY
BAERNS; KATHRYN BAERNS;
CONTROL, LLC,

      Defendants-Counterclaimants -
      Appellants.
                     _________________________________

                            ORDER AND JUDGMENT*
                        _________________________________

Before HOLMES, BALDOCK, and MORITZ, Circuit Judges.
                  _________________________________

      This appeal arises out of the termination of certain franchising and licensing

agreements. The former franchisees/licensees, their member, and their individual

guarantors appeal from the district court’s grant of summary judgment to the

      *
        After examining the briefs and appellate record, this panel has determined
unanimously to honor the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
submitted without oral argument. This order and judgment is not binding precedent,
except under the doctrines of law of the case, res judicata, and collateral estoppel. It
may be cited, however, for its persuasive value consistent with Fed. R. App. P. 32.1
and 10th Cir. R. 32.1.
franchisor and the licensor on the parties’ competing claims of breach of contract.

Exercising jurisdiction under 28 U.S.C. § 1291, we affirm.

                                  BACKGROUND

      This dispute involves multiple parties on each side. On the franchisor’s side

stand the franchisor, Steak n Shake Enterprises, Inc., and the owner and licensor of

the Steak n Shake trademark, Steak n Shake, LLC (collectively, “Steak n Shake”).

On the franchisees’ side, there are Globex Company, LLC and Springfield Downs,

LLC, who contracted as franchisees to establish Steak n Shake restaurants in

Colorado. Control, LLC is the sole member of Globex and Springfield Downs.

Christopher Baerns, Larry Baerns, and Kathryn Baerns are the principals and owners

of Control and are individual guarantors of the companies’ obligations. (Globex,

Springfield Downs, Control, and the Baernses collectively will be referred to as

“Franchisees.”)

      In September 2012, Steak n Shake and Franchisees entered into franchise and

license agreements for Steak n Shake restaurants in Sheridan, Colorado, and

Centennial, Colorado. Each franchise agreement provided that

              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
      (including the maximum, minimum, or other prices [Steak n Shake]
      specifies for menu items and mandatory promotions); uniformity of food
      and beverage specifications, preparation methods, quality and appearance;
      and uniformity of facilities and service.
Aplt. App., Vol. V at 1023, 1111. Franchisees expressly agreed “to comply with the

entire System, as revised from time to time by [Steak n Shake].” Id. at 1023, 1111.

                                           2
They further agreed “to serve, sell or offer for sale all of the (and only the) food and

beverage products and merchandise that . . . are listed in the then-current standard

menu or menus specified by [Steak n Shake]” and “not to deviate from [Steak n

Shake’s] standards, specifications and procedures for serving or selling the same

(including, to the fullest extent the law allows, the maximum, minimum, or other

prices for products and services offered and sold by Steak n Shake Restaurants and

mandatory promotions) without [Steak n Shake’s] prior written consent.” Id. at

1036-37, 1124-25.

      Under Section 11.1(A)(iii) of the franchise agreements, Steak n Shake could

terminate the agreements immediately upon written notice, with no opportunity to

cure, if “Franchisee knowingly sells products for a price in excess of any maximum

prices established by [Steak n Shake] from time to time or knowingly fails to offer a

mandatory promotion.” Id. at 1057-58, 1145-46. Under Section 11.1(B)(i) of the

franchise agreements, Steak n Shake could terminate the agreements with notice and

a thirty-day cure period if “Franchisee fails to operate the Restaurant in compliance

with the standards prescribed by [Steak n Shake].” Id. at 1061, 1149.

      When Franchisees entered into the franchise agreements, they understood that

Steak n Shake offered certain mandatory promotions, such as “4 Meals Under $4.”

With such promotions, the restaurant charged a fixed meal price for a combination of

items, generally a sandwich and fries. Customers who did not want a meal, but only

the sandwich or the fries, would pay a higher “à la carte” price for that item. In

                                            3
May 2013, Steak n Shake rolled out a new $4 Menu that greatly increased the number

of meals priced under $4.

       Even before the new $4 Menu, Franchisees had been unhappy with their

restaurants’ profitability—they were losing money. In November 2012,

Christopher Baerns had sent a letter to Steak n Shake proposing price increases for

gourmet burgers. Getting no response, he then spoke with several Steak n Shake

representatives about the need to raise prices. In January 2013, Mr. Baerns sent

Steak n Shake a letter stating that his two choices were to close the restaurants or to

implement his own pricing structure. He stated that Franchisees intended to offer

menu items at à la carte prices instead of the meal prices. Steak n Shake made no

written response to this letter.

       The adoption of the new $4 Menu caused the Franchisees to implement their

à la carte plan. As of May 1, 2013, Franchisees’ dining rooms rang up items in the

Point of Sale (POS) systems at the à la carte price unless a guest specifically

requested the new $4 Menu pricing. Thus, for example, a sandwich and fries that

were listed as $3.99 on the new $4 Menu were sold at Franchisees’ restaurants for

$5.08 ($3.29 for the sandwich and $1.79 for the fries). Franchisees’ restaurants did

not display the new $4 Menu marketing items, and Franchisees’ operating manager

testified that he removed marketing materials such as drive-through boards, flip

cards, and window clings. Franchisees did not insert the new $4 Menu provided by

Steak n Shake into the regular lunch and dinner menus, as required by the Summer

2013 promotions guide. Instead, Franchisees used their own altered menus that

                                           4
reflected the higher prices for meals caused by using à la carte pricing. In addition,

Franchisees’ drive-throughs offered only one choice of drink—the “large” size,

charged at a large-size price but served in a regular-size cup. Soon Steak n Shake

began receiving complaints that the Sheridan and Centennial restaurants were

overcharging customers.

      On May 16, Elvin Leonardo, Steak n Shake’s Manager of Standards

Assessment, visited the two restaurants. Mr. Leonardo found that Franchisees were

serving $4 Menu items but charging their own pricing. They were not displaying

new $4 Menu marketing materials, were using different menus than those provided

by Steak n Shake, and were ringing up items in the POS systems at the à la carte

price rather than the meal price. On May 23 and 24, Steak n Shake disabled the

à la carte functionality of the Franchisees’ POS systems.

      At the beginning of June, Kyle Whitney, Steak n Shake’s Franchise Director,

visited the restaurants. He reported that the Sheridan restaurant was not providing

the new $4 Menu to customers and the Centennial restaurant was not displaying the

new $4 Menu extender board or window clings at its drive-through.

      On June 18, Steak n Shake e-mailed a notice of default to Franchisees’

attorney. Steak n Shake advised Franchisees that they were in default of the

franchise and licensing agreements for (1) failing to offer the new $4 Menu, (2) using

menus other than Steak n Shake’s approved menus, (3) altering marketing materials,

and (4) charging prices greater than Steak n Shake’s menu prices. Steak n Shake

offered an opportunity to cure, giving Franchisees until June 20 to offer the new

                                           5
$4 Menu to all patrons at all times and to display all marketing materials related to

the new $4 Menu in compliance with the Summer 2013 promotions guide.

      On June 19, Christopher Baerns sent a letter to Steak n Shake denying the

allegations of the June 18 notice. The next day, June 20, he sent pictures of the

drive-throughs. But Steak n Shake responded that the picture of the Sheridan

drive-through did not show the $4 Menu extender board, as required, and Franchisees

had to place the $4 Menu inside the regular lunch and dinner menus, display a $4

Menu window cling, and require servers to wear $4 Menu buttons. The picture of the

Sheridan drive-through also showed that regular-size drinks still were blacked-out.

      On June 21, Mr. Whitney visited the two restaurants. He reported to

Steak n Shake that the Sheridan restaurant was not offering the new $4 Menu to

customers, that he could not find any $4 Menus in the restaurant, and that no $4

Menu marketing materials were displayed. He attached pictures supporting that

report. On his way back to the airport, Mr. Whitney also briefly visited the

Centennial restaurant. There he saw neither the $4 Menu extender board at the

drive-through nor the $4 Menu inserts in the regular menus.

      On July 3, Steak n Shake terminated the franchise and license agreements for

cause, effective immediately. Steak n Shake then filed suit in the district court to

preclude Franchisees from continuing to operate as Steak n Shake restaurants. As

relevant to this appeal, Steak n Shake claimed breach of contract and breach of

guaranty, and Franchisees counterclaimed for breach of contract and breach of the

implied covenant of good faith and fair dealing. The district court determined that

                                           6
Franchisees had breached the franchise agreements and Steak n Shake’s termination

was proper under Section 11.1(A)(iii). It entered summary judgment in favor of

Steak n Shake on its breach of contract claims and on Franchisees’ contract and

implied covenant counterclaims. This appeal concerns only this summary judgment

with regard to the franchise agreements, not the disposition of the parties’ other

claims and counterclaims.

                                    DISCUSSION

      We review a grant of summary judgment de novo, viewing the record and the

reasonable inferences from it in the light most favorable to Franchisees, the

non-moving parties. See ClearOne Commc’ns, Inc. v. Nat’l Union Fire Ins. Co. of

Pittsburgh, 494 F.3d 1238, 1243 (10th Cir. 2007). Summary judgment is appropriate

when “the movant shows that there is no genuine dispute as to any material fact and

the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). “[W]e

review the district court’s interpretation and determination of state law de novo.”

ClearOne Commc’ns, Inc., 494 F.3d at 1243.

      Franchisees argue that the district court erred in granting summary judgment

because generally it is a question of fact whether a party has materially breached an

agreement. They assert that there are genuine issues of material fact as to whether

they even committed the alleged offenses cited in the notice of default. They also

assert that the district court erred in applying Section 11.1(A)(iii), which allowed

immediate termination, rather than Section 11.1(B)(i), which required Steak n Shake

to give notice and a thirty-day opportunity to cure.

                                           7
      As the district court recognized, “where reasonable minds could not differ on

an issue, the question becomes one of law for the court.” Aplt. App., Vol. IV at 992

(citing Thorne v. Bauder, 981 P.2d 662, 664 (Colo. App. 1998), and T & W Bldg. Co.

v. Merrillville Sport & Fitness, Inc., 529 N.E.2d 865, 866 (Ind. App. 1988) (further

citations omitted)).1 Because Franchisees were not afforded a thirty-day cure period,

the issue is whether reasonable minds could differ on (1) whether Franchisees

breached their obligations under the franchise agreements and (2) whether

Steak n Shake breached the franchise agreements by invoking termination under

Section 11.1(A)(iii), which allows immediate termination if “Franchisee knowingly

sells products for a price in excess of any maximum prices established by [Steak n

Shake] from time to time or knowingly fails to offer a mandatory promotion.” Id.,

Vol. V at 1057-58, 1145-46.

I.    Overcharging

      The district court held that Franchisees violated the franchise agreements, and

therefore Steak n Shake was entitled to terminate them under Section 11.1(A)(iii),

because Franchisees had knowingly overcharged for various items. Franchisees

contend that they did not charge prices exceeding Steak n Shake’s maximum prices

because they “complied with the a la carte price specification afforded to them by

Steak n Shake under the mandated POS system.” Aplt. Br. at 22. “[Franchisees] did

      1
        Before the district court, the parties disputed whether Colorado or Indiana
law should apply to their contract claims. They do not raise this argument on appeal,
however, and we need not decide which state’s law to apply because both states’ laws
are consistent with regard to the relevant issues.
                                          8
not knowingly charge prices that exceeded the maximum prices set by Steak n Shake

because the maximum prices set by Steak n Shake are indeed the very prices used by

[Franchisees], to wit, the a la carte pricing.” Id. at 23.

       Franchisees’ arguments as to why they did not violate the agreements’ pricing

provisions are unconvincing. Appellants admit that they charged customers for meals

at à la carte prices unless they specifically requested the new $4 Menu pricing. The

effect was that customers paid more for their meals than the price that Steak n Shake

had authorized—the new $4 Menu established a price of $3.99 for certain

combinations of items, but Franchisees sold those items for $5.08. True,

Steak n Shake permitted single items to be sold at the higher, à la carte price. But no

reasonable mind could believe that the existence of à la carte prices, applicable when

customers purchased items singly, allowed Franchisees unilaterally to increase the

price of a meal. As the district court observed, “[t]he $4 menu provided for $3.99

meals, not a $5.08 combination of a la carte items which the Franchisees sold in the

guise [of] meals.” Aplt. App., Vol. IV at 989. Further, the new $4 Menu aside, the

record also indicates that in their drive-throughs, Franchisees offered only a “large”

drink, at a large-size price, but provided in a regular-size cup. This obviously

constituted charging a price exceeding Steak n Shake’s maximum price for a

regular-size drink. And for substantially the reasons discussed by the district court,

no reasonable mind could conclude that Franchisees acted other than “knowingly.”

       Franchisees further argue that, because Steak n Shake disabled the à la carte

functionality of their POS systems on May 23 and 24, they were not out of

                                             9
compliance with pricing when Steak n Shake issued the June 18 notice and

opportunity to cure. Ultimately, however, we need not decide whether Steak n Shake

was entitled to terminate the agreements under Section 11.1(A)(iii) based on

Franchisees’ pricing, even after such pricing was corrected, because Steak n Shake

certainly was entitled to invoke Section 11.1(A)(iii) due to Franchisees’ failure to

offer the new $4 Menu promotion.

II.   Offering the New $4 Menu and Marketing Materials2

      The district court found it undisputed that Franchisees created their own menus

and offered Steak n Shake’s new $4 Menu only to guests who requested one. The

court held that such conduct did not comply with the requirements of Steak n Shake’s

new $4 Menu promotion, so that Steak n Shake could terminate the franchise

agreements under Section 11.1(A)(iii) for Franchisees’ knowing failure to offer a

mandatory promotion.

      Franchisees argue that they in fact offered the new $4 Menu promotion, by

furnishing an approved $4 Menu (and honoring the prices thereon) if a customer

specifically requested it. We agree with the district court that “[s]uch ‘offer’ does

not comply with the requirements under the Summer Promotion.” Aplt. App.,

Vol. IV at 987. Franchisees rely on sales figures showing some sales of $4 Menu

      2
         Franchisees argue that the failure to display marketing materials is grounds
for termination only under Section 11.1(B)(i), not Section 11.1(A)(iii), and thus a
thirty-day cure period would be required. We discuss the marketing materials in
conjunction with Franchisees’ failure to offer the new $4 Menu, however, because
the failure to display marketing materials is relevant to whether Franchisees
knowingly failed to offer a mandatory promotion, and thus whether Steak n Shake
had grounds for immediate termination under Section 11.1(A)(iii).
                                           10
items. But the drastically lower volume of such sales—during a particular three-day

period, three $4 meals per day at each of Franchisees’ restaurants, compared to an

average of fifty-four $4 meals per day at each corporate restaurant—leads to only one

reasonable inference, that Franchisees were not offering the new $4 Menu, but were

only begrudgingly honoring that menu when customers insisted on it.

      Further, the undisputed material facts lead to the undeniable conclusion that

Franchisees “knowingly” failed to offer the new $4 Menu promotion. For example,

communications among Franchisees not only discussed how to raise prices with the

fewest chances of customers noticing, but also indicated that kitchen staff were

trained not to make dining-room orders that were rung up as meals rather than as

à la carte items. Franchisees altered Steak n Shake’s approved menus to reflect their

à la carte pricing. They did not insert the new $4 Menus in the regular lunch and

dinner menus as required by the Summer 2013 promotions guide, and they removed

new $4 Menu marketing materials from the restaurants. As Franchisees’ manager

admitted, essentially he “got rid of everything . . . in both of [the] stores that would

have alerted a customer to the fact that [Franchisees] were supposed to be offering

$4 meals.” Aplt. App., Vol. II at 412. At the least, the failures to display all required

marketing materials continued even after Steak n Shake’s June 18 notice.3 And

      3
        Franchisees disputed this fact, but their response—that they displayed all
marketing materials available to them, and that they ordered the other marketing
materials on June 24, 2013—established that they in fact were not displaying all
required marketing materials as of June 21.
                                            11
Mr. Whitney reported, with corroborating pictures of the Sheridan location, that the

$4 Menu was not being advertised at the restaurants on June 21, 2013.

      In short, in light of the evidence of record, no reasonable mind could dispute

that Franchisees knowingly failed to offer a mandatory promotion, and that

Steak n Shake therefore properly terminated the franchise agreements under

Section 11.1(A)(iii). The district court appropriately granted summary judgment to

Steak n Shake.

                                  CONCLUSION

      The district court’s judgment is affirmed.

                                           Entered for the Court

                                           Bobby R. Baldock
                                           Circuit Judge

                                         12