Seventh Circuit Rejects Steak n Shakes’ Motion to Stay n Compel
While we were busy with the virtual symposium, we got a bit behind on reporting on cases. This one is from late August.
Three Steak n Shake (SNS) franchisees brought suit against SNS seeking a declaratory judgment that, under the terms of their franchise agreements, they may set their own prices and are not required to participate in corporate promotions. The case resulted from a corporate takeover in 2010, after which SnS initiated new pricing policies that plaintiff franchisees claim adversely affected their businesses.
The franchisees’ agreements with SNS provided that the latter “reserve[d] the right to institute at any time a system of nonbinding arbitration or mediation.” One month after plaintiffs filed suit, SNS introduced an arbitration policy requiring franchisees to engage in nonbinding arbitration at SNS’s request. Pursuant to that policy, SNS filed a motion in the District Court to stay proceedings and compel arbitration. The District Court denied the motion, finding the arbitration agreement “illusory” because one-sided and unenforceable. In addition, the District Court found that the new arbitration policy could not apply retroactively to claims that had already been filed and that the Federal Arbitration Act (FAA) did not apply to non-binding arbitration.
In Druco Restaurants, Inc. v. Steak N Shake Enterprises, Inc., the Seventh Circuit agreed with the District Court’s first ground for decision and did not reach its alternative grounds. Applying Indiana law, the Seventh Circuit found the arbitration agreement illusory. The Court noted that SNS was free to exercise or not exercise its right to arbitration at whim. The company also retained complete discretion to determine venues where and procedures under which arbitration would take place. Where so much is uncertain, the Seventh Circuit noted, the agreement is vague, indefinite and unenforceable.