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Federal Judge Grants Steak 'n Shake Motion to Stay

DSCN0212 INDIANAPOLIS – After Steak ‘n Shake appealed a federal court’s decision that it could not compel non-binding arbitration in combined franchisee lawsuits, the Indiana district court has now granted the stay.

In its appeal, Steak ‘n Shake requested that the trial court stay proceedings until the appeal could be decided. The court granted the stay, saying the franchisees had not shown any good reason for the trial court to proceed while the Seventh Circuit determined whether the trial court had jurisdiction over the claims in the first place.

The three franchisees filed separate lawsuits last April and May seeking declaratory judgment regarding whether a menu pricing and promotions policy of Steak ‘n Shake constitutes grounds for termination of their franchise agreements. They allege breach of contract, fraud, and violations under their respective state franchise laws.

Last August, the court granted the franchisees’ request to consolidate the lawsuits: Druco Restaurants, Inc. v. Steak ‘n Shake; Scott’s S&S, Inc. v. Steak ‘n Shake;  and People Sales & Profit Company, Inc. v. Steak ‘n Shake. Franchisees are represented by Greensfelder, Hemker & Gale, and Steak ‘n Shake Enterprises, Inc. is represented by Cheng Cohen.

After the franchisor tried to stop the legal actions and compel arbitration, the trial court concluded that the franchise agreements contained only “nonbinding” arbitration provisions. For that reason, the court said the store owners were not controlled by the mandatory stay provisions of the Federal Arbitration Act.

The issue has been split among many circuit courts of appeals, and has not been addressed by the Seventh Circuit. Because the nonbinding nature of the franchise agreements’ arbitration provision was an issue of first impression, the district court felt the reasoning against asserting simultaneous jurisdiction with the court of appeals was all the more compelling.

On another ground, the district court found that the dispute resolution provision in the franchise agreements was illusory—based on something not proven—and was unenforceable because there was no limit on Steak ‘n Shake’s ability to avoid arbitration and/or its promise to arbitrate on a whim. That meant performance by the franchisor was entirely optional, which cannot form the basis of a valid contract.

Thirdly, the court found that even if the dispute resolution provision was not illusory, the arbitration policy could not be applied retroactively to already pending lawsuits, unless expressly reserving such a right.

District Judge Larry J. McKinney explains in his order to stay that the franchisees argued that “the Court’s decision that non-binding arbitration is not subject to the FAA (Federal Arbitration Act) does not divest this Court of jurisdiction over the case while an appeal is pending.” He states, “Moreover, the franchisees contend that SNS is merely trying to delay resolution of the franchisees’ claims and raise litigation costs; therefore, the proceedings here should move in parallel to the appellate proceedings.”

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