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Franchisees Defeat Arbitration Requirement with Steak n Shake

Tuesday, November, 18, 2014

After a 2010 alteration of franchise terms that forced all franchisees in the Steak n Shake system of stores to adhere to the pricing, suppliers, and promotion policies of corporate Shake n Steak, several franchisees sued for violation of their franchise terms.  Shake n Steak sought to compel arbitration under the terms of the franchise agreement, but the 7th Circuit Court of Appeals in Indiana has ruled against the corporation and allowed the franchisees to take their claims to court.


The franchise agreements all clearly contained arbitration agreements, albeit using slightly altered language in each depending on where and when they were executed.  The court ruled that the promise of arbitration was “illusory” in this case because the language allowed Steak n Shake to impose arbitration at its discretion in terms of what was at issue and when or where the dispute was taking place.


The ruling found that because the franchisees could not predict under what circumstances Steak n Shake would choose arbitration over litigation, the clause was unenforceable, because Steak n Shake could theoretically alter the circumstances and procedure for arbitration at any time, for any reason.  This uncertainty meant that franchisees could initiate litigation but Steak n Shake could impose arbitration at any time – say, if it perceived the litigation going against it.


This is the latest in a series of successful challenges to arbitration clauses that were not based on the legality of binding arbitration itself (which has been clearly supported) but rather on the wording and structure of the clauses, which should be a wakeup call to any company seeking to rely on binding arbitration for their disputes.