Steak n Shake Enters., Inc. v. Globex Co.

• Decision Date: 23 June 2015
• Docket Number: Civil Action No. 13–cv–01751–RM–CBS
• Citation: 110 F.Supp.3d 1057
• Parties: Steak n Shake Enterprises, Inc., and Steak n Shake, LLC, Plaintiffs, v. Globex Company, LLC, Springfield Downs, Inc., Christopher Baerns, Larry Baerns, Kathryn Baerns, and Control, LLC, Defendants.
• Court: U.S. District Court — District of Colorado

110 F.Supp.3d 1057

Steak n Shake Enterprises, Inc., and Steak n Shake, LLC, Plaintiffs,

v.Globex Company, LLC, Springfield Downs, Inc., Christopher Baerns, Larry Baerns, Kathryn Baerns, and Control, LLC, Defendants.

Civil Action No. 13–cv–01751–RM–CBS

United States District Court, D. Colorado.

Signed June 23, 2015

Fredric Adam Cohen, Marlen Cortez Morris, Cheng Cohen, Chicago, IL, Kimberly Briggs Still, Wheeler Trigg O'Donnell, LLP, Denver, CO, for Plaintiffs.

Alaina B. Siminovsky, Robert F. Salkowski, Robert Zarco, Zarco Einhorn Salkowski & Brito, PA, Miami, FL, David James Meretta, Scott Thomas Kannady, Brown & Kannady, LLC, Denver, CO, for Defendants.

ORDER

RAYMOND P. MOORE, United States District Judge

THIS MATTER is before the Court on Plaintiffs' Motion for Summary Judgment (the "Motion") (ECF No. 81), seeking judgment in their favor on all claims and counterclaims filed in this case arising from the termination of franchise, license, and area development agreements related to two Steak n Shake restaurants operated by Defendants Globex Company, LLC and Springfield Downs, LLC.¹ Exercising subject matter jurisdiction pursuant to 28 U.S.C. §§ 1331, 1332 and 1367, after consideration of the Motion, Response, Reply, the court file, and the applicable statutes, rules and case law, and for the reasons stated herein, the Court grants Plaintiffs' Motion, vacates the trial date, and sets a status conference for 1:00 p.m. on Thursday, July 16, 2015.

I. PROCEDURAL HISTORY

Plaintiffs Steak n Shake Enterprises, Inc. and Steak n Shake, LLC (collectively, "Plaintiffs" or "Steak n Shake") filed this action seeking injunctive relief and damages arising from the termination of: (A) written franchise and license agreements between Steak n Shake Enterprises, Inc., as franchisor, and Steak n Shake, LLC, as licensor, and Defendants Globex Company, LLC and Springfield Downs, LLC (collectively, "Franchisees"), and their individual guarantors Defendants Christopher Baerns, Larry Baerns, Kathryn Baerns (collectively, "Guarantors" or the "Baerns"); and (B) a written area development agreement between Steak n Shake Enterprises, Inc. and Defendant Control, LLC. (ECF No. 10.) In their Amended Complaint, Plaintiffs asserted the following five claims for relief: (1) Count I—Trademark Infringement under 15 U.S.C. § 1114(1) ; (2) Count II—Unfair Competition under 15 U.S.C. § 1125(a) ; (3) Count III—Breach of Contract—Specific Performance; (4) Count IV—Breach of Contract—Damages; and (5) Count V—Breach of Guaranty—Damages. Defendants, in response, filed eight counterclaims: (1) Count I—Declaratory Judgment—Franchise and License Agreements; (2) Count II—Injunctive Relief; (3) Count III—Breach of Contract—Franchise and License Agreements; (4) Count IV—Breach of Duty of Good Faith and Fair Dealing; (5) Count V—Breach of Contract—Area Development Agreement; (6) Count VI—Fraud; (7) Count VII—Colorado Consumer Protection Act, C.R.S. § 6–1–101 et seq. ; and (8) Count VIII—Intentional Interference with Prospective Economic Advantage.

By Order ("Order") dated September 3, 2013, based on the evidence and arguments then before the Court after an evidentiary hearing, the Court granted in part and denied in part Plaintiffs' Motion for Preliminary Injunction. (ECF No. 48.) After conducting discovery, Plaintiffs moved for summary judgment on all claims and counterclaims. In their Response, Defendants withdrew their claim based on the Colorado Consumer Protection Act (Count VII). (ECF No. 87, page 15.) In addition, in the Final Pretrial Order, Defendants represented their claim for injunctive relief (Count II) is moot in light of the Order granting Plaintiffs injunctive relief. (ECF No. 94, p. 9 n.1.) Accordingly, those counterclaims are no longer at issue.

II. FACTUAL BACKGROUND

A. Defendants Become Steak n Shake Franchisees

Steak n Shake is a brand of restaurants franchised by Plaintiffs.² Defendant Kathryn Baerns ("Mrs. Baerns") had fond childhood memories of Steak n Shake and when the Baerns family decided to go into business, they decided on Steak n Shake. In applying to become franchisees, in about September 2011,³ each of the Baerns submitted a "Request for Consideration" to Steak n Shake, representing they each had extensive experience in the food brokerage business and/or restaurant business. And, in connection with their application—and, ultimately, decision—to do business with Plaintiffs, Defendants were represented by counsel.

By December 2, 2011, Control, LLC entered into an Area Development Agreement ("ADA") with Plaintiffs to develop a stated number of franchised Steak n Shake restaurants. In about June 2012, Tom Caruso of COLO SS, LLC asked Defendants if they would be interested in purchasing his existing Steak n Shake restaurants located in Centennial and Sheridan, Colorado. In September 2012, Franchisees acquired Mr. Caruso's existing franchised Steak n Shake restaurants in Centennial (a/k/a Store 5301) and Sheridan (a/k/a Store 5302). In connection with the acquisition, the ADA was amended and, as amended, reflected that Control's obligation to develop the first two restaurants was satisfied by the acquisition of the Sheridan and Centennial restaurants. In addition, Franchisees entered into franchise and license agreements (the "Franchise Agreements" and "License Agreements") with Plaintiffs for the operation of the existing Steak n Shake restaurants. The Baerns personally guaranteed (the "Guaranties") each of Franchisees' obligations under their respective Franchise and License Agreements, and agreed to post-termination covenants not to compete.

Prior to entering into the ADA and License and Franchise Agreements, Defendants were aware that Plaintiffs offered a 4 Meals Under $4 promotion, where meals were priced at $3.99.

B. Steak n Shake's $4 Menu and the 2013 Summer Promotion, and the Letters of Default and Termination

After their September 2012 acquisition of the existing restaurants from COLO SS Inc., Defendants began operating the two Steak n Shake restaurants. On November 27, 2012, Mr. Baerns sent James Valentino, Plaintiffs' Vice President of Franchise Support, an email requesting Plaintiffs to consider price changes for certain food items in order to "increase profitability," to which Mr. Valentino did not respond. In about January 2013, Plaintiffs increased the price of some Steak n Shake menu items, including some a la carte items, and Mr. Baerns decided to do the same—that is, to increase the price of certain menu items, but without Plaintiffs' authorization. On January 24, 2013, Mr. Baerns sent an email to, among others, Defendants Larry Baerns ("Baerns Sr.") and Mrs. Baerns, requesting their approval to send a letter to Plaintiffs, outlining three proposals, the third of which was to ring up items a la carte, including meals which were to be sold as meals. In response, Baerns Sr. stated: "Why in your opinion would we not be in violation of the franchise agreement if we implemented Proposal 3?" (ECF No. 90–7.)

By email dated January 27, 2013, Mr. Baerns wrote to Plaintiffs stating they had ignored him "for months" and that he had "submitted requests and proposals regarding pricing for several months, all of which have still not been responded to, to this day." (ECF No. 88–11.) In that email, Mr. Baerns advised Plaintiffs that Franchisees were, as of Monday, February 18, 2013, "going to effectively change our pricing, while keeping with the current pricing structure. We will be training and implementing a new system, where all items will be rung up a la carte." (ECF No. 88–11.)

Defendants, however, apparently did not do so in February. Instead, in about February through April 2013, Mr. Baerns was trying to determine how to raise prices and still utilize Plaintiffs' point of sale (POS) system. Mr. Baerns sent several emails communicating possible options to, among others, Mark Clark, Defendants' Director of Operations. Among the actions proposed by Mr. Baerns—and ultimately taken by Franchisees—were:

(1) at the restaurants' drive-thru, increase prices by changing the cup size of a large drink from a 44–ounce cup to a 28–ounce cup (regular cup size) and calling it a large. Thus, at the drive-thru, every combo meal would be rung up with a large drink—adding $0.50 to each combo meal—but, unbeknownst to the guests, they would receive a regular size drink;

(2) in the dining room, charge a la carte pricing for under $4 meals, thereby increasing the price of the under $4 meals from $3.99 to $5.08; and

(3) print new menus by modifying Steak n Shake's online under $4 menu to change its price from $3.99 to $5.08 in anticipation of going a la carte pricing on the under $4 meals.

Franchisees took these actions without notifying Plaintiffs. In fact, Mr. Baerns sent an e-mail, about which Mr. Clark testified, stating:

...May 1st is the date we decided to go live with this....

* * *

...We will also be coming up with contingency plans, trying to anticipate any and all things that Steak 'n Shake may do to derail this. Once we examine these and come up with plans, we will let you know. Any suggestions or recommendations would be welcome.

The one thing that hasn't been quite decided yet is whether to let Steak 'n Shake know about it prior to going forward. We could let them know that it is going into place and give them 1 more chance to set up a tiered pricing structure. The reason we may not let them know is in the hopes that it takes a month or more for them to notice, thus keeping the subsidy checks coming....

(ECF No. 82–12 (emphasis added), No. 82–8.) Mr. Clark did not ask Plaintiffs for approval because he knew it would not be forthcoming.

Also on or about the same time period, Plaintiffs decided to roll out a new promotion (the "Summer Promotion") that expanded the original 4 Meals Under $4 menu to include additional meals to be offered for sale at $3.99, and that introduced the Bleu Ribbon Steakburger meal. In preparation for the roll out, on April 5, 2013, Plai...