Steak n Shake Sues Varnson for Kidnapping Its Web Site; Hijacking Image Library

Steak n Shake has sued its agency, The Varnson Group, for allegedly kidnapping its web site and holding hostage its promo images, photos, and coupon templates in a $449,000 billing dispute.

The rift represents one of the fastest meet-and-break-ups between an ad agency and a client in recent years.

Steak n Shake wants its advertising material returned -- including control of its web site, which it claims has been hijacked by Varnson. Varnson, in response, wants the $449,000 it says it is owed in billings.

According to documents in the case (which can all be downloaded here), Varnson began working for Steak n Shake in September. They signed a retainer agreement that gave the agency the following compensation:

  • For November 2008: $25,000 in cash, $30,000 in stock.
  • Per month for 2009 and 2010: $178,333 in total, with $95,000 of that in stock.
In return, Varnson began working on all aspects of the business, producing 16 TV spots for the fast food chain and moving some its employees in SNS HQ.

Trouble began at the end of January. The client sent Varnson a "Notice of Contract Termination" dated Feb. 3, 2009 -- just four months after the agency had won the business.

There was also a delay in the payment of January's bill to the agency, according to a letter filed with the lawsuit. Payment due Jan. 31 didn't go through until Feb. 19 due to an incorrect bank routing code supplied by Varnson.

SNS wants its "Advertising Digital Asset Library" back from Varnson, which it claims contains pretty much all its visual advertising assets and much of its coupon business. It also wants control of SteaknShakeValueVault.com, which it says Varnson still controls. And the company claims no money is due to Varnson

Varson employees have also been banned from the SNS building, even the ones who left personal items there.

Lastly, the client is demanding that the agency meet a May 5 deadline to complete new TV creative, make a media buy and complete an new web site.

In response, Varnson describes why this relationship allegedly fell apart so fast: Despite the retainer agreement, SNS began immediately talking to other agencies, such as JWT, Empower Media, Zimmerman, and ID Media, Varnson claims. Chief Alan Varnson claims SNS CEO Sardar Biglari had no intention of honoring their agency of record contract and began talking to competing shops almost before the ink was dry.

As of March 2, SNS has a balance due of $449,000 with the shop, Varnson claims.

The Indianapolis Business Journal notes:

The rift between Steak n Shake and the agency ... couldn't come at a worse time for the restaurant chain. The company has reported 13 consecutive quarters with same-store sales declines, including a 7.4-percent drop in November.
The value of the stock has fared rather better. It started at $2.93 around the beginning of the relationship but now trades at around $8.47.

Hat tip to Tribble.