Shortly after several franchisees filed suit against the franchisor Steak n Shake regarding new pricing policies, Steak n Shake adopted an arbitration policy requiring franchisees to engage in “nonbinding arbitration” at Steak n Shake’s request.
The Seventh Circuit, agreeing with the district court, refused to enforce the arbitration policies because they were illusory. Druco Restaurants, Inc. v. Steak N Shake Enterprises, Inc., Nos. 13-3489, 13-3490, 13-3491 (7th Cir. Aug. 29, 2014) (click here for a copy of the decision). The franchise agreements contained a clause reserving the “right to institute at any time a system of nonbonding arbitration.” Arbitration clauses did not appear in the franchise agreements; Steak n Shake implemented an arbitration policy only after the franchisees had filed lawsuits in court. Because Steak n Shake was free at its whim to implement or change or cancel its arbitration policy, the Seventh Circuit found the arbitration policy was illusory. Additionally, the Seventh Circuit held that the company’s purported option to implement an arbitration policy was too vague and indefinite to be enforceable. It was not clear which claims could be subject to arbitration or in what manner the disputes would be resolved.
Because the agreements were not enforceable, the Seventh Circuit found it unnecessary to address whether nonbinding arbitration falls under the scope of the Federal Arbitration Act.