Ex-proprietors of a group of Steak ‘n Shake restaurants must stop operating the former franchises under a new name after agreements between the Indianapolis-based restaurant chain and the ex-franchisees went south.
Chief Judge Tanya Walton Pratt of the U.S. District Court for the Southern District of Indiana entered a temporary restraining order Wednesday in favor of Steak ‘n Shake Enterprises Inc. and Steak ‘n Shake LLC. The order prohibits iFood Inc., Shashi K. Rattan and Chandru C. Gurnani from operating restaurants known as “Sean’s Shack” at three former Steak ‘n Shake franchises.
Steak ‘n Shake entered an area development agreement with iFood in 2011 allowing iFood to open 10 franchise locations across North Carolina and Virginia. At the same time, Rattan and Gurnani entered into franchise and license agreements to operate a full-service Steak ‘n Shake in Raleigh, North Carolina. The parties later executed additional agreements to open two franchises in Raleigh and Vienna, West Virginia, as well as one franchise in Garner, North Carolina
The agreements between the parties included a noncompete clause prohibiting the franchisees from owning or operating a competing business within five miles of the franchised locations for two years if the agreements were terminated. A competing business included any restaurant deriving at least 25% of its revenue from the sale of ground beef sandwiches, or offering both ground beef sandwiches and ice cream products, regardless of volume.
According to Pratt’s Wednesday order, the franchisees breached the agreements by failing to open restaurants on the established schedule, failing to pay required royalties and fees, failing to maintain the repair and appearance of the franchises and failing to buy food and equipment from approved vendors. Steak ‘n Shake officially terminated the agreements on July 12, then filed a trademark infringement and breach of contract suit on July 28.
By Aug. 20, the franchisees had completed all Steak ‘n Shake debranding and were instead operating the Raleigh and Garner locations as Sean’s Shack. Steak ‘n Shake argued that doing so violated the noncompete agreement, and the district court agreed.
“The Court is persuaded that the noncompetition provision is reasonable and thus enforceable,” Walton Pratt wrote. “First, the noncompete provision is supported by a protectable interest; namely, that Plaintiffs could choose to ‘refranchise’ in Raleigh and Garner, North Carolina. Even though there are apparently no Steak n Shake locations in the geographic region at this time, Plaintiffs clearly saw the potential for those restaurants in the area and may wish to reestablish locations there now that those operated by Defendants have closed.
“Second, the geographic scope of the noncompete provision is not unreasonably broad when, again, Plaintiffs may elect to reenter that market, and the barred territory is constrained to ‘within five (5) miles of the Authorized Location or any then-existing Steak n Shake or Steak n Shake Signature Restaurant,’” Walton Pratt continued.
“… Third, the noncompete provision was not otherwise overly broad. … Paired with the fairly limited geographic restraint, Defendants would not be unreasonably precluded from working in the restaurant industry, and the noncompete provision is reasonable with respect to the legitimate interest of the employer, restrictions on the employee, and the public interest.”
The court rejected the defendants’ argument that Steak ‘n Shake was the first party to materially breach the agreements by failing to provide the franchisees with training, advertising and marketing support. The franchisees “fail to point to any portions of the franchise agreements indicating that Plaintiffs were contractually obligation to visit these locations to provide operational guidance, training, and assistance or conduct advertising or marketing in the Raleigh market,” Walton Pratt wrote.
Additionally, the chief judge determined Steak ‘n Shake would suffer irreparable harm absent a TRO, pointing again to the possibility of refranchising.
“The Court finds that Plaintiffs will suffer irreparably injury, primarily because Plaintiffs’ ‘ability to re-franchise the area will be compromised if a former franchisee is allowed to operate in the area under a different name,’” the court held.
However, the court found Steak ‘n Shake’s trademark infringement claims are “likely mooted” because the debranding process was completed in August.
The TRO will remain in effect for 14 days. A hearing on Steak ‘n Shake’s motion for a preliminary injunction is scheduled for Sept. 8.
Steak ‘n Shake is represented in the case by Indianapolis lawyers with Krieg DeVault LLP, while the defendants are represented by Greensfelder Hemker & Gale PC in St. Louis. Counsel for both parties said their clients do not comment on pending litigation.