Franchisees – Say No To Uniform Pricing and Promotion Mandates

After Steak N Shake Enterprises, Inc. (“SNS“) entered into 5 franchise agreements (the “Franchise Agreements“) with Stuller, SNS adopted a policy (the “Policy“) requiring franchisees to “follow set menu and pricing …, and to offer all company promotions as published.” Stuller refused to comply with the Policy because, Stuller said, compliance was not required under the Franchise Agreements and mandating compliance was contrary to the company’s long standing policy, as stated in SNS’ FDD, of allowing franchisees to set their own pricing. SNS threatened to terminate the Franchise Agreements, but the district court granted Stuller a preliminary injunction. On appeal, SNS argued it could set a pricing and promotions policy to maintain a uniform “System”. But, neither the definition of “System” in the Franchise Agreement, nor the operating manual stated uniform pricing or mandated promotions were intended parts of the “System”. According to the 7th Circuit Court of Appeals, “While the Illinois Franchise Disclosure Act (“IFDA“) provides that a marketing plan or system can include specification of price [or promotions], it does not require [they] be part of the franchise agreement.”

SNS also argued that pricing and promotions were, by law, required elements of a franchisor’s “System” under the IFDA. In rejecting this argument, the court held that while price and promotions may be part of a franchisor’s “System,” neither will be unless intended by the parties to the franchise agreement. The court found that here, since they were not included in the definition of “System” in the Franchise Agreements and because of SNS’s long standing policy of allowing franchisees to set their own pricing, they were not intended as part of the “System.” The court said SNS would likely violate the terms of its franchise agreements if it enforced the Policy and upheld the lower court’s injunction prohibiting SNS from terminating Stuller’s 5 Franchise Agreements.

Illinois franchisees will likely take another look at their franchise agreements and operations manuals to see whether price and promotions are specifically listed or required as part of their franchisor’s “System”.

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