Steak n Shake can’t force arbitration with disgruntled franchisees

September 2, 2014

The 7th Circuit Court of Appeals on Friday affirmed that Steak n Shake Enterprises Inc. cannot compel several of its franchisees to engage in nonbinding arbitration regarding claims brought by the franchisees in federal court. Steak n Shake tried to force arbitration after the restaurants already sued over the requirement all restaurants must adhere to company pricing and promotions.

Franchisees in Missouri, Georgia and Pennsylvania sued the Indianapolis-based restaurant after changes were enacted in 2010 following a corporate takeover. Prior, franchisees could set their own prices and decide what company promotions to follow. After the takeover, Steak n Shake enacted a new pricing and promotion policy requiring all franchisees to adhere to company pricing on every menu item and to participate in all corporate promotions.

These franchisees sued, claiming the terms of their franchise agreements allow them to set their own prices and decide whether to participate in promotions. A month after the lawsuits were filed, Steak n Shake adopted an arbitration policy requiring the franchisees to engage in nonbinding arbitration at the company’s request. It then asked for a stay of the proceedings.

The District Court denied the motion for a stay and to compel arbitration. Although the agreements contained a clause in which Steak n Shake reserved the right to institute at any time a system of nonbinding arbitration or mediation, the court found any agreement to arbitrate was illusory.

The 7th Circuit agreed in Druco Restaurants Inc. v. Steak N Shake Enterprises, Inc., et al.,13-3489, 13-3490, 13-3491.

“… Steak n Shake was free to exercise or not exercise the arbitration clause at its whim. The company also retained the discretion to determine the circumstances and procedures under which arbitration may take place, including deciding which types of claims will be subject to arbitration,” Judge Ilana Rovner wrote. “Indeed, nothing in any franchise contract precludes Steak n Shake from instituting a new system of nonbinding arbitration at any time, changing the rules and procedures as the company sees fit. Under Indiana law, such a clause is illusory because performance is entirely optional with the promisor.”


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